Where and how does sales tax apply to marketing and advertising?

Some aspects of sales tax never seem to change, or they change infrequently. Be assured: Sales tax on digital advertising and marketing is not among those.

Digital advertising especially is a hot new area of sales tax as states consider how to tap into this burgeoning stream of potential revenue. Here’s a look at some of the latest tax on marketing and advertising developments.

An idea that won’t go away

Discussion of taxing digital advertising in the U.S. begins (and nearly ended) with Maryland, the first state to levy sales tax on this new kind of taxable commodity.

The tax applies to the annual gross revenues of a business derived from digital advertising services in Maryland. The state does not tax non-digital advertising. The term “digital advertising services” is defined to include “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 tax is 2.5% to 10% of digital advertising services in Maryland, depending on the company in question having global, annual gross revenues of at least $100 million.

The law began three years ago after surviving a gubernatorial veto, implementation problems, and unpopularity in the business community. It’s proven hard to kill even after a county circuit court blocked it on constitutional grounds: Last May, the Maryland Supreme Court vacated that order, saying the circuit court lacked jurisdiction over this action. The tax is in effect starting with the 2022 tax year.

Apple, the latest in what promises to be a long line of confrontations over this breed of sales tax, has questioned the constitutionality of Maryland’s tax and seeks a refund of nearly $756,000 for payments the tech giant made in 2022 before the law was struck down.

The case has been hailed as a new phase of legal challenges at both the state and federal level – and a test of how other states will fare with such a tax.

Other states seem undaunted:

• Nebraska saw two bills introduced early this year, LB 1310and LB 1354, to tax advertising services in the state, including digital advertising. Companies would have to have a combined gross advertising revenue greater than $1 billion; the tax rate would be 7.5%. A digital advertising service would be sourced to Nebraska based on a user’s IP address in the state (accurate sourcing remains one of the thornier issues with digital advertising taxes). If enacted, the tax would apply to digital advertising services directly related to the creation, preparation, production or dissemination of advertisements.
• The Council on State Taxation echoed other opponents of digital advertising laws in their February 2024 letter to the Nebraska legislature, calling L.B. 1310 and L.B. 1354 proposals for “a new, controversial, and untested gross receipts tax” that would create “competitive disadvantage,” a tax is “not warranted and [that] could also violate several provisions of the U.S. Constitution.”
• In Tennessee, SB 1899 claimed that digital advertising was “not substantially similar to traditional print or broadcast advertising” in part because it doesn’t rely on “the extraction of valuable personal information from users.” It and two similar bills were introduced and swiftly withdrawn earlier this year.
• Multiple digital advertising tax bills have also appeared in California, Massachusetts and New York. The District of Columbia and New Mexico are among others examining the feasibility of such legislation.

What about other marketing?

As services gain momentum as taxable, many states tax services related to marketing – like domain name registration in Washington, printing and photocopying in New Jersey and Wisconsin, those two services plus sign-making in Iowa. New Mexico taxes advertising services; Connecticut taxes a range of advertising or public relations services; and Kentucky levies sales tax for a whole fact sheet of marketing-related services (as it now does many other services), including for the production of flyers, banners, and posters.

And expect marketing services and advertising (digital or otherwise) to become as nuanced as any other in sales tax. In South Dakota, for instance, already sales tax kicks in only if the ad agency gives the ad material to the client rather than placing it in the media itself. That’s nuanced.

TaxConnex can help your business stay on top of your taxability and make certain you maintain sales tax compliance. If you're asking yourself "Are marketing and advertising services taxable?" get in touch to learn how we can help you!