Social media companies are facing increased scrutiny over their sales of digital advertising following last month’s federal indictment detailing the volume and character of controversial ads displayed during and after the 2016 election. While these platforms have largely managed to elude regulation, federal lawmakers recently introduced the Honest Ads Act, a bill designed to tighten oversight on web-based political ads. Patterned after existing Federal Election Commission and Federal Communications Commission guidelines that govern print, radio, and television, this effort may signal a new approach toward the industry. Amid the controversy, however, one issue that has not received much attention is how sales of advertising like this are taxed.
Surprisingly, most states do not tax sales of advertising space or time. In fact, the only state that currently taxes this service is New Mexico. The rest generally reserve their levies for sales that also involve an exchange of merchandise or goods. This is true of ad sales in the more traditional forms of media as well. Advertising appears to hold a particularly special place in the tax world, as business expenses for advertising are also generally fully deductible from federal taxes.
There are, however, a handful of states that have taxed this service in the past. Arizona, for example, imposed its transaction privilege tax on advertising placement until repealing it in 1986. Interestingly, its home-rule cities are still authorized to tax local advertising placement, and some, like Tuscon and Scottsdale, still do.
In Ohio, a 2015 Department of Taxation Information Release stirred confusion on this issue when it interpreted one form of digital advertising as a taxable “electronic information service.” The ambiguity was put to rest by the state legislature just five months later with the passage of H.B. 466, which classified digital advertising as a personal and professional service, and therefore not subject to tax. The Department of Taxation later followed by reissuing its information release, clarifying that advertising, digital or otherwise, is not subject to sales tax in the state.
Connecticut’s attempt to tax advertising placement flatlined after just three months. From April 1, 2003, to June 31, 2003, the state had repealed their exemption for “media advertising,” which covers the sale of space or time in a preexisting medium for broadcast or dissemination to all or a segment of the public. The experiment had imposed a 3 percent rate on these transactions, while keeping the full 6 percent rate for all other types of advertising. Since then, the exemption for media advertising has been restored, while non-media advertising services are still subject to the full rate.
Digital advertising’s precise targeting, easy accessibility, and tailored pricing models make it a uniquely powerful tool and equally profitable business. As the industry continues to grow, it will be interesting to see if more efforts to tax this service emerge in the future.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Do you think more states will tax digital advertising?
Sign up now to join Bloomberg Tax for a free webinar to discover the latest insight from the very first Sales Tax Administrative Scorecard. We will discuss what this new tool from COST is and how you can use it as part of your tax planning process. Register for our webinar, Sales Tax: How the States Measure Up, today.
Get a free trial to Bloomberg Tax: State, a comprehensive research service that provides deep analysis and time-saving practice tools to help practitioners make well-informed decisions.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)