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

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 Trend Developing? Another Digital Advertising Tax Proposal

On January 14, LB 989 was introduced in the Nebraska Legislature, which would impose sales and use tax on “the retail sale of digital advertisements.” The bill defines “digital advertisement” as “an advertising message delivered over the Internet that markets or promotes a particular good, service, or political candidate or message” (see pages 5-6 of the bill). The definition is a sweeping one, but the exact scope is unclear as the terms used are not further defined. It is also unclear how a taxable digital advertising transaction would be sourced if the proposed legislation is enacted.

The digital advertising tax proposed in the bill would have an effective date of October 1, 2020. Nebraska’s state sales tax rate is 5.5%, with local sales taxes up to an additional 2%.

Similar to Maryland’s SB 2 proposal, because Nebraska would tax digital advertising but not tax non-digital advertising, the proposed tax raises a series of legal concerns (above and beyond the obvious policy concerns).  For example, the tax would be a “discriminatory tax” prohibited by the Permanent Internet Tax Freedom Act (PITFA). The proposal also raises serious First Amendment (singling out digital commercial speech for tax) and Equal Protection (lack of rational basis for tax only on digital advertising) issues.

Practice Note: If enacted, LB 989 would create an uncharted and sweeping tax on digital platforms and advertisers. While this bill will have an uphill battle in 2020 (for example, Nebraska has a short, 60-day legislative session this year and Nebraska has a filibuster rule) the repeated introduction of digital advertising tax bills early in 2020 state legislative sessions may be the start of an alarming trend of legally suspect tax proposals that we are keeping a close eye on.  Businesses impacted by the Maryland and Nebraska digital advertising tax proposals are encouraged to contact the authors to discuss these legislative developments further.




BREAKING NEWS: Maryland Proposes (French) Tax on Advertising – Digital Platforms and Advertisers Beware!

On January 8, SB 2 was introduced to establish a new digital advertising gross revenue tax of up to 10% on “annual gross revenues of a person derived from digital advertising services in the state.” This uncharted new tax would make Maryland the first state or locality in the United States to impose a targeted tax on the gross revenue of digital advertising services.

The bill defines “in the state” as appearing on the user’s device located in the state (determined based on either the user’s IP address or reasonable knowledge). “Digital advertising services” is 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.” The definition uses the word “includes” rather than “means,” enabling the definition to be read even more broadly. “Digital interface” is defined as “any type of software, including a website, part of a website, or application, that a user is able to access.”

The tax applies at a sliding scale:

  • 2.5% for person with global annual gross revenues of $100 million or more
  • 5% for person with global annual gross revenues of $1 billion or more
  • 7.5% for person with global annual gross revenues of $5 billion or more
  • 10% for person with global annual gross revenues of $15 billion or more

The bill would require quarterly estimated tax payments and an annual return and provides that willful failure to file a digital advertising gross revenues tax return is a misdemeanor subject to a $5,000 fine and 5 years’ imprisonment.

The bill is co-sponsored by Senator Thomas Miller (D), the outgoing Senate President, and Senator William Ferguson (D), the incoming Senate President. Maryland legislative leaders have been hinting at new taxes on the digital economy, digital downloads, and streaming subscriptions as they decide how to fund a proposed $825 million per year education spending increase. Governor Hogan (R) opposes the education spending increase as too expensive, amounting to a $6,000 per family tax increase, and in response Democrats last week ruled out raising income, sales, or property tax rates. We therefore may see additional digital taxation bills aside from this one.

Because Maryland would tax digital advertising but not tax non-digital advertising, the tax is a “discriminatory tax” prohibited by the Permanent Internet Tax Freedom Act (PITFA). The use of an arbitrary threshold of global annual gross revenues, while perhaps politically popular, serves to tax larger global advertising service providers at a higher tax rate than their domestic counterparts, in violation of the Commerce Clause of the US Constitution.

The proposal also raises serious First Amendment (singling out digital commercial speech for a punitive tax) and Equal Protection (lack of rational basis for punitive tax on digital advertising) issues. For example, the Maryland Court of Appeals has held that municipal taxes on advertising media were unconstitutional for singling out for taxation newspapers and radio and television stations entitled to first amendment immunities.  See City of Baltimore [...]

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