Getting digital with sales tax in 2023

At least three states opened this year with proposals to revamp taxes concerning digital advertising and data.

Massachusetts legislators seem to be leading the way, with multiple draft bills that would adopt a digital advertising services tax on commercial data collection or the sale of personal information. The bills include:

• HD 1507, to establish a commission to study generating revenue from digital advertising that is displayed inside of Massachusetts by companies that generate over $100 million a year in global revenue. 

• HD 1683, to assess and levy in each calendar year an excise tax on the sale of digital advertising services provided within the commonwealth. Revenue from digital advertising services would be required to be remitted monthly. The excise tax would be assessed at a rate equal to 6.25% of the annual gross revenue from digital advertising services provided within the commonwealth. The first $1 million in revenue would be exempt.

• HD 3052, to impose a 5% tax on persons with revenue from digital advertising services in excess of $25 million per year. The tax would apply to digital advertising services accessed via a digital interface within the state.

• HD 3144 and SD 1439, to impose a tiered digital advertising tax with rates of 5, 10, and 15 percent based on annual gross revenues from digital advertising provided in the state, based on IP address of the user’s device on which the advertising is accessed. The tax is imposed on persons with more than $100,000 of digital advertising services in Massachusetts.

• HD 3230, to impose a 6.25% excise tax on digital advertising services provided in Massachusetts. The service will be deemed to be in the state if the advertising is received on the user’s device with an IP address in the state.

• SD 1711, to tax collection of data by commercial data collectors (similar to the New York bill below). The bill also adopts a tiered rate structure where the first $1 million of receipts is exempt but rates thereafter vary based on the number of consumers for which data is collected.

• SD 1768 would require persons who sell personal information or exchange personal information for consideration in the state to register with the Department of Revenue.

Elsewhere, proposed legislation in the Connecticut House (HB 5673) and Senate (SB 351) would establish a 10% tax on the annual gross revenues of certain businesses.

The bills are in committee. Similar proposals were introduced in Connecticut during the 2021 legislative session.

Beyond ads 

Indiana HB 1517, introduced in January, would impose a surcharge tax on social media providers. The tax would equal the annual gross revenue derived from social media advertising services in Indiana in a calendar year multiplied by seven percent, plus the total number of the social media provider’s active Indiana account holders in a calendar year multiplied by $1.

Similar proposed legislation in Indiana in previous years didn’t make it out of committee.

In New York, S1845 proposes a 5% tax on the gross income of every corporation that derives income from the data that New York individuals share with such corporations. The bill says little about how the tax will work, beyond a rebate to state taxpayers. Previous bills in New York also never made it out of committee.

New York has also introduced S2012, which imposes a monthly excise tax on for-profit entities collecting and selling data from more than one million New Yorkers per month. The tax would apply regardless of how the data is collected, whether by electronic or other means.

The rate would be scaled by the number of New York consumers whose data the taxpayer collects in a month, starting at 5 cents per individual per month on the number of New York consumers over one million, which would cost businesses at a minimum $50,000.05 per month. The rate then gradually increases, the highest rate being 50 cents per month on the number of New York consumers over 10 million, plus a flat rate of $2.25 million.

The New Jersey Division of Taxation has issued the report “Studying the Impact of Digital Economy,” billed as “a starting point” for Trenton to consider “the challenges to State tax policy presented by the digital economy.” It provides “a basic and general understanding” of the digital economy and recommends follow-up actions.

Will measures to tax digital succeed? Time will tell, but late last year a county court in Maryland blocked that state’s intended landmark digital advertising tax. The judge ruled that the tax violates the Internet Tax Freedom Act and the Constitution. Proponents promise appeal.

If you think your business may be impacted by digital sales tax developments in 2023, contact TaxConnex. We provide services to become your outsourced sales tax department. Get in touch to learn more.