Sales Tax Slice: Digital Advertising Avoids Taxation

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 From April 1, 2003, to June 31, 2003, the state had repealed their exemption for “media advertising,” which covers the sale of space or time in a preexisting medium for broadcast or dissemination to all or a segment of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?

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