States Continue to Dare Courts to Stop Them from Taxing Digital Ads
Last week, Rhode Island’s House Finance Committee held a hearing on proposed legislation to assess a gross receipts tax on digital advertising revenue. The tax would be structured in much the same way as the Maryland bill that preceded it, with the assessed rate being based on worldwide (not Rhode Island-sourced) digital advertising revenue and a safe harbor so high that it will affect no Rhode Island-based businesses.
Maryland became the first state to pass a digital advertising tax back in 2021. At the time, the tax was hailed as a way for the state to tap into the gold rush of the digital era, and was projected to raise $250 million a year. NTUF warned at the time that it would collect far less and muddle the state in quixotic legal battles for years to come.
That warning has proven correct. The tax is currently only bringing in around $90 million a year, and what it is collecting may have to be refunded anyway.
Ever since being passed over the veto of then-Governor Larry Hogan, Maryland’s tax has been gathering new legal challenges like flies to honey. The list of laws and constitutional provisions Maryland’s tax has likely violated includes:
- The Internet Tax Freedom Act (ITFA) - for taxing digital advertising but not its traditional counterparts
- The Commerce Clause - for taxing businesses based on worldwide advertising revenue, not Maryland-sourced activity
- The Foreign Commerce Clause - for undermining federal-level negotiations with other nations to ban digital advertising taxes
- The Due Process Clause - for apportioning to Maryland income earned elsewhere
- The First Amendment - for targeting the main revenue source of news media for a special tax
Legal battles remain ongoing, though Maryland has already lost a legal challenge (that NTUF filed an amicus brief in support of) to a bizarre provision prohibiting advertising businesses from informing customers that the advertising tax led to price increases.
Given this legal morass that Maryland is currently stuck in, it is bizarre to think that other states might blithely mosey into the same quagmire. Yet that is exactly what has happened.
Utah and Washington Are the Latest to Enact Digital Ad Taxes
In the past year, two new states have adopted Maryland-style taxes on digital advertising: Washington (which is enacting new types of taxes about as fast as someone can finish describing them) and Utah.
Each state has tried to get around ITFA—which bars states from targeting digital goods and the internet for special taxes not levied on traditional counterparts—in its own extremely unconvincing way.
Washington tried to frame its tax as applying to all “digital and nondigital” forms of advertising, before expressly naming every form of non-digital advertising as excluded. Utah tried a different approach, claiming the tax applies to all types of businesses but then defining the taxable activity in such a way that it can only apply to digital advertising.
Both approaches are cute in their own way, but neither is likely to fly in a courtroom.
Digital Ad Taxes Are Bad Policy Too
Yet even if all those pesky legal barriers were swept aside, states should still not be looking to tax digital advertising. It is bad policy that will simply drive advertisers to other states and make it harder for local businesses to advertise.
For one thing, advertising of all types is best left untaxed. It is a business-to-business (B2B) activity, and a cost for the business purchasing advertising space as much as any other business input.
Taxing business inputs leads to what is known as “tax pyramiding,” or imposing taxes upon taxes. This means that end consumers pay sales tax not only on the value of the goods or services they are purchasing, but also on the taxes paid by businesses earlier in the process.
For another, digital advertising taxes ultimately get passed on to local businesses and consumers. Local businesses have to pay more to advertise because the tax makes selling advertising services cost more. Businesses that have to pay more to advertise pass those costs on to residents in the form of higher prices.
Summed up: digital advertising taxes are certain to leave states jumping on the bandwagon stuck in drawn-out legal battles with a high likelihood that any collected revenue will end up having to be refunded later. And, in the meantime, it will be local businesses and consumers that pay.
If it weren’t for California, one would be hard-pressed to find worse ways to raise revenue.