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Washington’s Digital Ad Tax Enacted: Is Litigation Now Inevitable?

by Stephen P. Kranz, Mark Nebergall and Jonathan C. Hague | May 21, 2025 | Allocation/Apportionment, Constitutional Issues, Nationwide Importance, Sales Tax, Tax Base, Washington

On May 20, 2025, Washington Governor Bob Ferguson signed into law Senate Bill (SB) 5814, a sweeping tax bill that expands Washington’s retail sales and use tax to digital advertising services and a range of high-tech and IT services. The new law takes effect for sales occurring on and after October 1, 2025.

As we noted previously, this legislation marks a significant shift in Washington’s tax policy, extending sales tax to categories of traditionally exempt business-to-business services. With enactment, legal challenges – particularly under the federal Internet Tax Freedom Act (ITFA) – are ripe and appear inevitable.

WHAT THE LAW DOES

SB 5814 amends RCW 82.04.050 by redefining “sale at retail” to include “advertising services,” broadly covering both digital and nondigital forms of ad creation, planning, and execution. The law specifically includes:

Online referrals
Search engine marketing
Lead generation optimization
Web campaign planning
Digital ad placement
Website traffic analysis

However, the law expressly excludes services rendered in connection with:

Newspapers (RCW 82.04.214)
Printing or publishing (RCW 82.04.280)
Radio and television broadcasting
Out-of-home advertising (g., billboards, transit signage, event displays)

With these carve-outs, it is difficult to see how anything other than internet advertising remains subject to tax. The structure of the new tax facially discriminates against e-commerce and is barred by ITFA.

ITFA AND THE CERTAINTY OF A LEGAL CHALLENGE

ITFA prohibits states from imposing taxes that discriminate against digital services when comparable offline equivalents are exempt. While SB 5814 purports to cover both digital and nondigital advertising, the exclusions for nondigital forms of advertising cause it to target the digital side of the industry. For example, a digital banner ad will be taxed, whereas a banner towed by an airplane promoting the same product will not.

This distinction mirrors the structure of Maryland’s Digital Advertising Gross Revenues Tax, which has been tied up in litigation since its enactment in 2021. A Maryland trial court found that law facially violated ITFA and federal preemption principles. That litigation continues, and Washington now finds itself on a similar path.

HIGH-TECH AND IT SERVICES ARE NOW TAXABLE

In addition to digital advertising, SB 5814 extends the retail sales tax to high-tech services, including:

Custom website development
IT technical support and network operations
Data processing and data entry
In-person or live-virtual technical training

Like advertising, these intermediate services typically are purchased by businesses in support of operations rather than for end consumption. Taxing their sale introduces tax pyramiding and adds costs that will ultimately be passed on to consumers. For Washington’s tech-driven economy, this change will inflate prices and reduce competitiveness.

Local advertisers and businesses that rely on digital marketing and high-tech services will see these costs rise and lead to higher prices for consumers.

OUTLOOK

While SB 5814 is now law, its enforceability remains far from certain. Taxing digital advertising services while expressly excluding offline media places the new law on a collision course with ITFA. A legal challenge is all but guaranteed.

At the [...]

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Washington’s Digital Ad Tax: A Lawsuit Waiting To Happen?

by Stephen P. Kranz, Mark Nebergall and Jonathan C. Hague | May 1, 2025 | Allocation/Apportionment, Constitutional Issues, Nationwide Importance, Sales Tax, Tax Base, Washington

On April 27, 2025, the Washington Legislature delivered to Governor Bob Ferguson’s desk Senate Bill (SB) 5814, a sweeping tax bill that, among other changes, would expand the state’s retail sales and use tax to sales of digital advertising services and a range of high-tech and IT services. The bill now awaits the governor’s signature, with a decision due by May 20, 2025.

If enacted, the changes would take effect October 1, 2025, marking a significant expansion of Washington’s tax base into areas that have long been exempt, particularly intermediate business services such as digital marketing, data processing, and custom software support.

WHAT THE BILL DOES

SB 5814 amends RCW 82.04.050 by redefining “sale at retail” to include a broad range of services previously excluded from the sales tax. Specifically, it adds “advertising services,” defined as:

All digital and nondigital services related to the creation, preparation, production, or dissemination of advertisements including, but not limited to: layout, art direction, graphic design, mechanical preparation, production supervision, placement, referrals, acquisition of advertising space, and rendering advice…

The definition also expressly includes:

Online referrals
Search engine marketing
Lead generation optimization
Web campaign planning
The acquisition of advertising space in the internet media
Website traffic analysis for determining the effectiveness of an advertising campaign.

However, the bill expressly excludes advertising services rendered in connection with newspapers (as defined in RCW 82.04.214); printing or publishing (RCW 82.04.280); radio and television broadcasting; and out-of-home advertising such as billboards, transit displays, and signage at events.

With that list of exclusions, it’s hard to imagine what advertising services other than internet advertising services are left to tax. This focus on internet advertising creates a prima facie discriminatory tax on electronic commerce barred by the federal Internet Tax Freedom Act (ITFA).

ITFA AND THE CERTAINTY OF A LEGAL CHALLENGE

ITFA prohibits states from imposing “discriminatory taxes on electronic commerce.” A tax is discriminatory if it applies to digital services but not similar offline equivalents.

While SB 5814 expressly includes both digital and non-digital advertising services, the carve-outs for traditional formats such as print, TV, and radio effectively leave out non-digital advertising. As the bill itself states, services connected to newspapers, publishing, and broadcast media are not taxable. This distinction creates a classic ITFA problem:

A digital banner ad campaign will be taxed.
A newspaper ad or radio spot promoting the same product will not.

This kind of structural bias has been challenged before. Maryland’s Digital Advertising Gross Revenues Tax (the first of its kind in the United States) was enacted in 2021 and quickly faced multiple lawsuits on ITFA and other grounds. In 2022, a Maryland trial court struck down the law as unconstitutional, citing ITFA violations and federal preemption (although the decision was later reversed on procedural grounds). That litigation continues while the stack of taxpayer refund claims on the Maryland Comptroller’s desk grows taller.

Washington faces a similar outcome. SB 5814’s facial discrimination against digital advertising is precisely the kind of unequal [...]

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New Mexico Proposes Regulations Addressing Gross Receipts Tax Treatment of Digital Advertising Services

by Eric D. Carstens, Stephen P. Kranz, Michael J. Hilkin, Mark Nebergall and Jonathan C. Hague | Aug 11, 2022 | Allocation/Apportionment, Constitutional Issues, Local Tax, Nationwide Importance, New Mexico, Sales Tax, Tax Base, Transaction Taxes

On August 9, 2022, the New Mexico Taxation and Revenue Department published proposed regulations addressing the gross receipts tax (New Mexico’s version of a sales tax) treatment of digital advertising services. The Department states the proposed regulations do not reflect a change in policy but instead ensure the rules are consistent for all advertising platforms.

While the proposed regulations provide some clarity regarding the taxation of digital advertising services under preexisting rules, they introduce several inconsistencies and other gaps, particularly with respect to the finer details of the sourcing provisions. For example, we believe the proposed regulations leave ambiguity regarding whether gross receipts from the provision of digital advertising services should be sourced to:

The purchaser’s address
The server’s location
The viewer’s location

Separately, the proposed regulations would allow a deduction for gross receipts from national or regional advertising. However, the deduction is not allowed if the purchaser is incorporated in or has its principal place of business in New Mexico. While this significantly narrows the base for the tax, it injects complexity by requiring that the seller know the state in which its purchaser is incorporated or has its principal place of business, information not likely available in the context of internet-based advertising platforms.

Collectively, these inconsistencies and lack of clarity could lead to future compliance issues, which we hope will be mitigated as part of the Department’s regulatory approval process.

The Department scheduled a public hearing on the proposed rules for September 8, 2022, at 10:00 am MDT, which also is the due date for submission of written comments. The proposed regulations would be effective upon publication in the New Mexico Register, which could happen as soon as October 11, 2022 (or thereabout).

Please contact the McDermott Will & Emery State & Local Tax team if you have any questions about the potential impact of these proposed regulations on your company. In the meantime, we will be monitoring the regulation approval process and participating in next month’s public hearing.

Maryland Attorney General’s Office Says Taxpayers May Inform Customers of Increased Charges Resulting from Digital Advertising Tax

by Stephen P. Kranz, Michael J. Hilkin and Eric D. Carstens | May 3, 2022 | Constitutional Issues, Maryland, Nationwide Importance

In a brief filed on April 29, 2022, the Maryland Attorney General’s Office (Attorney General) agreed that the “pass-through prohibition” of the state’s digital advertising tax “does not purport to impose any restriction on what the taxpayer may say to the customer, or anyone else, about” increased billing charges because of the tax.

Last year, Maryland lawmakers enacted a first-of-its-kind digital advertising tax on the annual gross receipts from the provision of digital advertising services. The tax only applies to companies with annual gross revenues of $100 million or more. Shortly thereafter, Maryland lawmakers added a pass-through prohibition, which provides that “[a] person who derives gross revenues from digital advertising services . . . may not directly pass on the cost of the [tax] to a customer who purchases the digital advertising services by means of a separate fee, surcharge, or line-item.”

In litigation brought by McDermott Will & Emery in Maryland federal court, several leading trade associations have challenged the pass-through prohibition on the basis that it violates the First Amendment of the US Constitution by regulating how sellers may communicate their prices on invoices, billing statements and the like. However, in a brief seeking dismissal of the litigation, the Attorney General claimed that the pass-through prohibition does not regulate speech but instead only prohibits the “conduct of directly passing through to a customer” the tax burden.

Highlighting what it agrees to be the limited scope of the pass-through prohibition, the Attorney General states as an “example” that if a “taxpayer wishes to inform [a] customer that [an] invoiced charge is higher than it might otherwise be due to the imposition of the digital ad tax, the taxpayer is free to communicate that or any other message.” (Emphasis added). Further, the Attorney General agrees that “if the taxpayer wants to use the invoice as an opportunity to engage in political speech, the taxpayer is free to express its displeasure with the tax and identify who bears political responsibility for [the] new tax.”

Consistent with this position, the Attorney General does not dispute that the digital advertising tax may be reflected in the amounts charged to customers. Instead, the Attorney General argues that the pass-through prohibition is a “prohibition against direct, as opposed to indirect, pass-through of the tax cost,” which is intended to ensure that the taxpayer’s “annual gross revenues” subject to the tax “reflect the full amount of revenues received from customers, undiminished by any tax costs that the taxpayer might otherwise have preferred to pass directly to the customer.”

The parties are scheduled to file additional briefs in the case on May 13, 2022. The case is Civil No. 21-cv-410 (D. Md., filed February 18, 2021). Sarah P. Hogarth, Paul W. Hughes, Michael B. Kimberly and Stephen P. Kranz, partners in McDermott’s Washington, DC, office, represent the plaintiffs.

The Digital Advertising Tax Trend Continues: New York Introduces Another Bill

by Stephen P. Kranz and McDermott Will & Emery | Apr 15, 2020 | Nationwide Importance, New York, Sales Tax, Transaction Taxes

On April 13, S. 8166 was introduced in the New York Senate, which would expand the sales tax base to include receipts from the sale of digital advertising services. The bill would dedicate the revenue raised to student loan relief.

As introduced, “digital advertising services” would be broadly defined as “advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services which markets or promotes a particular good, service, or political candidate or message.” (With the exception of the added last clause, the definition of “digital advertising services” is identical to the definition in the digital advertising tax legislation recently passed by the Maryland General Assembly. The definition differs from the previously introduced New York digital ads tax (S. 8056) in that it is not limited only to targeted advertising.) “Digital interface” would also be defined very broadly as “any type of software, including a website, part of a website, or application, that a user is able to access.”

If enacted, the law would take effect on the 30th day after enactment, and would sunset five (5) years after the effective date.

New State Digital Ad Taxes? Will Maryland’s Take Effect? Which States Will Follow? Litigation Guaranteed!

by Diann Smith and Stephen P. Kranz | Mar 25, 2020 | Allocation/Apportionment, Constitutional Issues, Maryland, Nationwide Importance, Tax Base, Transaction Taxes

On March 18, 2020, Maryland legislature sent a massive new tax on digital advertising services to Governor Hogan for consideration. The tax imposes a rate of up to 10% on annual gross revenue in the state derived from digital advertising services. This tax is on a sliding scale based on companies’ global revenues and would take effect with tax year 2021. There are many legal problems with the legislation, including the violations of the Internet Tax Freedom Act, the Commerce Clause and the First Amendment. Other states have considered and are considering similar proposals. It is imperative that companies know how broadly this new tax will apply.

Click below to watch our recent webinar on this new tax. We discuss the legal challenges that can be made and how to protect your company from the unlawful reach of such laws.