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Washington DOR issues interim guidance on advertising services

by Stephen P. Kranz, Mark Nebergall and Jonathan C. Hague | Sep 19, 2025 | Local Tax, Nationwide Importance, Sales Tax, Washington

The Washington Department of Revenue (DOR) released an Interim Guidance Statement (IGS) on Advertising Services implementing Engrossed Substitute Senate Bill (ESSB) 5814 ahead of the October 1, 2025, effective date. In previous posts, we addressed the passage of ESSB 5814 and the sourcing rules.

The Advertising Services IGS is part of a broader rollout of interim guidance DOR is publishing before the effective date. Previous IGSs include guidance on Custom Website Development; Digital Automated Services (DAS) Exclusions; Information Technology Services; Live Presentations; Investigation/Security/Security Monitoring, and Armored Car Services; Temporary Staffing Services; and Existing Contracts (among others). We view this cadence as a positive sign of the tax policy team’s commitment to provide implementation detail ahead of the effective date of the new taxes.

Two categories the advertising services IGS addresses

In response to industry requests, the IGS addresses both “creative” or pre-dissemination services and “dissemination” services (i.e., advertising services involving the actual dissemination). The IGS states that it is responding to the need for clarity on both types.

Where the sale takes place

The IGS applies the destination-based sourcing statute and frames receipt as first use, guided by the Streamlined Sales and Use Tax Agreement’s concepts of where a purchaser (or donee) can first make use of the result of the service. For disseminated advertising services, including creative services bundled with dissemination, the IGS illuminates that “receipt occurs where the result of the advertising services is first used … which is the location where the advertising services are disseminated.” The IGS continues:

The location of dissemination may be indicated by, but not limited to: instructions as to where advertising will be placed for viewing, actual locations of placement, IP addresses of potential customers’ viewers of advertising, or other similar information about where the advertising is consumed.

For pre-dissemination (creative) services where the seller does not also disseminate, “receipt occurs where the purchaser reviews the advertising or related service prior to dissemination.” If the seller does not know the location of receipt at the time of charge, the IGS walks through the statutory sourcing hierarchy and cautions against “bad faith” address selection. In instances where the full address or ZIP+4 Code cannot be determined with due diligence, the use of Washington “pool codes” is permitted.

Illustrative examples highlighted in the IGS

Disseminated advertising: Washington-only, known viewer locations (Example 1). Source to specific ZIP+4 Codes tied to impressions; where matching isn’t possible, use Washington pool codes.
Disseminated advertising: Washington-only, viewer location unknown at payment (Example 4). Source to the purchaser’s Washington address (not an out-of-state address).
Disseminated advertising: Multijurisdictional, prepaid, viewer location unknown at invoice (Example 5). May source to the purchaser’s address unless the parties agree by invoice time to a reasonable, consistent multijurisdictional allocation.
Creative advertising (advisory only) (Example 7). Source to the purchaser’s review location (g., the client’s marketing office).

Generative AI chatbot service not subject to Indiana sales tax

by Stephen P. Kranz, Michael J. Hilkin and Mark Nebergall | Aug 28, 2025 | Indiana, Local Tax, Nationwide Importance, Sales Tax

In one of the first pieces of administrative guidance addressing the sales tax treatment of generative artificial intelligence (AI) services, the Indiana Department of Revenue (DOR) recently issued a revenue ruling confirming that charges for a generative AI chatbot service are not subject to Indiana sales tax. In reaching its conclusion, the Indiana DOR used the legal framework applicable to examining whether services involving software are subject to taxation (a framework we expect other state DORs to apply when examining services involving generative AI functions).

The Indiana DOR previously issued guidance confirming that software “remotely accessed over the internet . . . is not considered an electronic transfer of computer software and is not considered a retail transaction” subject to Indiana sales tax. In the case of the AI chatbot service, the “software that operates the chatbot is never downloaded onto a customer’s computer” but instead is accessed via a “website or free app.” As such, and consistent with its prior guidance addressing remotely accessed software, the Indiana DOR determined that the AI powering the chatbot service was merely “accessed electronically with no permanent ownership aspect” and therefore was not subject to sales tax.

We anticipate that, like the Indiana DOR, other state DORs will rely on their preexisting guidance addressing the taxability of software to determine the taxability of services involving generative AI functions. This means that, depending on a state’s preexisting law and guidance, state DORs will ask questions such as:

Whether generative AI functions are downloaded or accessed remotely
Whether generative AI functions are directly accessible by a customer or if such functions are used by a service provider in providing their services
Whether and to what extent the generative AI function(s) in a service are the “primary function”/“primary purpose”/“true object” of an underlying transaction.

Fourth Circuit strikes down Maryland’s digital ad tax “pass-through” ban

by Stephen P. Kranz, Mark Nebergall and Jonathan C. Hague | Aug 19, 2025 | Allocation/Apportionment, Constitutional Issues, Maryland, Nationwide Importance, Sales Tax, Tax Base

Maryland’s attempt to stop businesses from telling customers about a controversial tax has hit a constitutional wall. On August 15, 2025, the US Court of Appeals for the Fourth Circuit ruled that the state’s “pass-through” provision in its Digital Advertising Gross Revenues Tax violates the First Amendment.

In Chamber of Commerce et al. v. Lierman, Case No. 24-1727 (4th Cir. Aug. 15, 2025), a unanimous panel held that Maryland’s “pass-through” provision is facially unconstitutional because it restricts how companies can talk about price increases tied to the tax.

The provision at issue

Maryland’s first-of-its-kind digital advertising tax applies to large companies earning more than $100 million in global revenue from online ads. The controversial “pass-through” provision provided that those companies “may not directly pass on the cost of the tax … by means of a separate fee, surcharge, or line-item.” Businesses could still raise prices to cover the tax, they just had to do it without saying so.

The Fourth Circuit’s reasoning

Writing for a unanimous panel, Judge Julius N. Richardson opened the opinion with a striking historical parallel. Just as colonists objected to Britain’s Stamp Act of 1765, which taxed printed materials and chilled political expression, Maryland’s rule targeted modern equivalents: internet companies and their speech about taxation. “We agree,” Richardson wrote. “As much today as 250 years ago, criticizing the government—for taxes or anything else—is important discourse in a democratic society. The First Amendment forbids Maryland to suppress it.”

The Court found that the pass-through provision regulated protected speech – not conduct –because it dictated how companies communicate price changes attributable to the tax, forbidding certain methods while allowing others. This made the provision a content-based restriction subject to heightened constitutional scrutiny.

Maryland argued that the provision was designed to ensure companies bear the tax’s economic and legal burden, but the Court found that justification hollow. Since businesses could still raise prices silently, the law did nothing to prevent cost-shifting. It only restricted speech about it. Accordingly, the Court found that “[t]he pass-through provision of Maryland’s digital advertising tax is unconstitutional in all of its applications.”

What’s next

The Fourth Circuit reversed the district court’s ruling and remanded the case to determine the appropriate remedy, noting that recent Supreme Court of the United States precedent limits the scope of injunctive relief. The broader tax itself remains in effect for now, with separate challenges pending in the Maryland Tax Court.

For businesses, the ruling lifts Maryland’s ban on explicitly itemizing the tax on invoices or contracts and stands as a reminder that states can’t sidestep political accountability by limiting how regulated entities talk about their regulations. For Maryland and other states, the decision sends a clear message: Governments may tax, but they cannot silence the businesses they tax when those businesses tell customers what’s driving prices.

Washington’s advertising services tax: Sourcing rules clear as mud

by Stephen P. Kranz, Mark Nebergall and Jonathan C. Hague | Aug 12, 2025 | Allocation/Apportionment, Constitutional Issues, Nationwide Importance, Sales Tax, Tax Base, Washington

Washington’s sales tax on advertising services takes effect October 1, 2025, and comes in two forms: a tax on digital automated services and a tax on retail sales of advertising services. Both impositions apply to digital advertising services delivered using the internet. This makes Washington an outlier as currently only two other states impose a tax on sales of advertising services: Hawaii and New Mexico.

Washington State is a member of the Streamlined Sales Tax (SST) Governing Board. As an SST member state, it is required to follow – and does follow – the Streamlined Sales and Use Tax Agreement’s (SSUTA) sourcing regime.[1] This sourcing regime uses the familiar hierarchical approach:

If the buyer receives the product at the seller’s business location, the sale is sourced to the seller’s business location.
If the product is not received at the seller’s business location, the sale is sourced to the location where receipt by the purchaser (or the purchaser’s donee, designated as such by the purchaser) occurs, including the location indicated by instructions for delivery to the purchaser (or donee) known to the seller.
If neither apply, the sale is sourced to the location indicated by an address for the purchaser that is available from the seller’s business records (typically the purchaser’s billing address).

As applied to sales of services, the terms “receive” and “receipt,” as used in the sourcing hierarchy, mean “making first use of services.”[2]

As applied to sales of advertising services delivered using the internet, the first rung of the sourcing hierarchy generally would not apply because the first use of the advertising service would not occur at a business location of the purchaser.

The Washington Department of Revenue (DOR) is in the process of developing interim guidance on how sellers are to source sales of advertising services. DOR representatives told us they are taking a close look at whether it is appropriate to source these sales to the location where the advertisement is viewed. They said they are focusing on how to interpret the phrases “receipt by the purchaser” and “known to the seller” in the second rung of the sourcing hierarchy.

In the context of internet advertising, how and where does a purchaser “make first use of” the service?

Internet advertising is a largely automated function capable of serving up millions of advertisements to millions of viewers per minute. Typically, the technology serving the ads is not connected to the service provider’s billing system. Does the second rung of the sourcing hierarchy require such granularity that the sale of the advertising service be sourced to the locations of the myriad ad viewers? Does the supply of each internet ad constitute a separate sale that must be individually sourced? Or does the purchaser make first use of the advertising service at its headquarters? If the answers to the first two questions are “yes,” it would put unbelievable complexity and administrative burden on the seller, make audits unnecessarily time-consuming, and undermine SSUTA’s fundamental [...]

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Maryland sales tax multiple points of use exemptions: Is the juice worth the squeeze?

by Eric D. Carstens, Stephen P. Kranz and Mark Nebergall | Jun 27, 2025 | Allocation/Apportionment, Maryland, Nationwide Importance, Sales Tax, Tax Base

In the waning days of its 2025 session, the Maryland Legislature passed the Budget Reconciliation and Financing Act, and Governor Wes Moore signed it into law.[1] This bill expands the sales tax base to include sales of various data and information technology and cloud computing services.[2] The sales tax rate on these new categories of taxable services is 3% as opposed to the prevailing state-wide tax rate of 6%. Imposition of the tax on sales of these new categories is effective starting July 1, 2025.

Putting aside the unworkable nature of keying the imposition to North American Industry Classification System codes and the obvious Internet Tax Freedom Act preemption of the imposition on web hosting and data storage, the Maryland Comptroller recently issued interim guidance that adds new, unwarranted complexity in the administration of multiple points of use (MPU) exemption certificates.

The new law takes effect July 1, and many taxpayers are scrambling to interpret and implement it. On June 10, the Comptroller issued a bulletin providing guidance on many of its more technical components,[3] which introduces a distinction between installment sales of and subscriptions to the newly taxable categories of services. This distinction has implications for managing MPU exemption certificates.

Included with the guidance are provisions that give buyers of these newly taxable services (if they plan on using the services in more than one jurisdiction) the option of providing the seller with an MPU exemption certificate.[4] Receipt by the seller of an MPU exemption certificate relieves the seller of the obligation to collect and remit Maryland sales tax on the sale, shifting the obligation of paying the use tax to the buyer.[5] The applicable tax the buyer must pay is determined using a reasonable method of apportionment of the use within Maryland as compared to all the locations of use of the service. Relevant headcount is a reasonable method of apportionment.[6] The presentation of an MPU exemption certificate by the buyer to the seller is optional.

In an installment sale context, there is one sale transaction that occurs at the time of contract execution. Buyers electing into the MPU process would need to supply only one certificate to the vendor that would cover all subsequent installment payments under the contract. Subscriptions are treated differently. Many of these newly taxable categories of computer-related services often are sold on a subscription basis. Under the guidance, each subscription payment is considered a separate sale requiring the issuance of a separate MPU exemption certificate for each subscription payment.[7] We told the Comptroller’s staff that requiring a separate MPU exemption certificate for each subscription payment is unnecessary. The staff responded saying that the rigidity of the process they’ve outlined in this context is under consideration and may be updated in subsequent guidance. (Vendors and buyers concerned about the practical implications of the MPU regime outlined are encouraged to contact the authors of this blog post for more details.)