One of the next big trends in sales tax is one you should start thinking about: states taxing digital advertising.

Right now, a little more than two-thirds of states with a sales tax impose a tax on the sale of such digital goods as videos and music. In an ever-increasing expansion of the tax base, last year Maryland lawmakers overrode a gubernatorial veto and greenlighted a digital advertising tax, the first of its kind in the nation.

Maryland’s move is not without complications (see below), but it does seem to signal a new wave of taxation.

Who’s doing what among states with this new breed of tax? And what are some of the larger issues?

The bleeding edge

Maryland has imposed a gross receipts tax on digital ads, ranging from 2.5% to 10% on advertising businesses with global revenues exceeding $100 million, so long as they have at least $1 million in advertising revenue within Maryland for the calendar year.

The Tax Foundation has called the Maryland law “incredibly vague” on vital definitions, creating uncertainty about where revenue is sourced and when it incurs the tax. 

(Maryland’s new tax also extends the state’s existing sales and use tax to the sale of such digital goods as digital code, streaming, music, ring tones, e-books and audio books, movies, online newspapers and cable, satellite and pay-per-view television programming.)

Similar proposals elsewhere

Other states are toying with ideas similar to Maryland’s new law. According to the Tax Foundation, seven proposals in six states target digital advertising more broadly, though in some cases lawmakers have articulated a particular interest in taxing social media. Three states – Arkansas, Connecticut and Indiana – have explored specifically taxing advertising on social media.

Connecticut’s levy of 10% tax on revenues for large platforms ($10B global) appears to have gone to a public hearing 10 months ago. New York’s, a tax of 2.5-10%, is in a committee in that state’s Senate. West Virginia has also sent theirs to committee. In late January, Massachusetts also discussed two different digital advertising taxes, a 5% tax and a 5-15% tax.

Other jurisdictions have been there and done that. The District of Columbia floated the idea two years ago, though the idea didn’t make it into final law. Nebraska has tabled the idea for now while Montana has killed theirs. Similar bills are labeled “dead” in Texas and appear to have died in committee in Indiana.

Which leaves you where?

As this matter moves forward in states, besides waiting to see (often the best tactic in sales tax in recent years), you might take some comfort from the Tax Foundation’s key points on digital advertising sales tax:

  • Motivations for these taxes vary, from misperceptions that there is currently a tax loophole to a belief that technology and social media companies merit an extra layer of taxation.
  • These taxes are administratively complex, constitutionally dubious and likely violative of the Permanent Internet Tax Freedom Act.
  • Much of the cost of these taxes will be borne by in-state companies and individuals.

We’ll keep you posted.

As of recently, a court has now invalidated the Maryland Digital Advertising Tax. To read more on this - Click Here

We can help you stay on top of this ever-changing environment. TaxConnex provides an outsourced sales tax department that can take the burden of sales tax off your plate. Contact us to learn what it means when sales tax is all on us.   

Robert Dumas

Written by Robert Dumas

Accountant, consultant and entrepreneur, Robert Dumas began his public accounting career on the tax staff at Arthur Young & Co., followed by a brief stint at Grant Thornton. In 1998, Robert founded Tax Partners, which became the largest sales tax compliance service bureau in the country, and later sold it to Thomson Corporation. Robert founded TaxConnex in 2006 on the principle that the sales tax industry needed more than automation to truly help clients, thus building within TaxConnex a proprietary platform and network of sales tax experts to truly take sales tax off client’s plates.