First U.S. state adopts tax on digital advertising services

Does your company rely on digital advertising services? There’s an escalating tax trend that employers should be aware of.

In the last year or so, several states have proposed taxing digital advertising services in one way or another. Some wanted to add a new gross revenues tax on these services; others advocated to expand the sales tax base to include these services.

And just recently, Maryland became the first state to make it happen.

The trailblazing state

The Old Line State’s newly enacted House Bill 732 taxes annual gross revenues received from specified digital advertising services (e.g., banner advertising, search engine advertising). For companies, the tax rate will be between 2.5% and 10%, contingent on your annual gross revenues.

Though the governor initially vetoed the bill, the House and Senate were able to override it on Feb. 12, 2021. According to the Maryland Constitution, vetoed bills take effect 30 days after the override, meaning this bill just became effective around March 14, 2021.

One caveat of the new tax: Maryland hasn’t provided much guidance on how a company should determine which part of the digital advertising revenue is attributable specifically to the state.

Others on trend

This digital advertising sales tax trend is popping up all across the globe. Some countries, like France and India, already tax these services. Other countries are in a similar position to the U.S., with legislation currently circulating.

Though Maryland is the first state in the U.S. to enact such legislation, there are several others making moves. Those states include:

• Connecticut: House Bill 6187 would impose a tax on revenues derived from digital advertising services. In a slightly different vein, House Bill 5645 would create a tax for social media providers on revenue derived from social media advertising services.
• Indiana: Similar to Connecticut’s second bill, House Bill 1312 would impose a surcharge tax on social media providers deriving revenue from advertising services on their platforms.
• Montana: The bill draft LC 3237 would add a tax on the annual gross revenues derived from digital ad services.
• New York: A few bills are circulating here. For example, Senate Bill 1124 would add a new gross revenues tax on digital advertising services. Meanwhile, Senate Bill 302 would expand the sales tax base to include these services.
• Washington: As of now, digital ad services are subject to a 1.5% B&O tax as “other activities.” A forthcoming bill would instead make digital ad services subject to a 0.471% B&O tax as “retailing,” plus state (6.5%) and local sales tax.

You know where one state goes, others often follow. So, it’s likely more states will see this as a viable way to boost revenue and propose similar bills in the future.

While things are still in the early stages, verify that A/R and A/P know about this digital advertising services tax trend. It’ll be key for them to stay on top of how the states you do business in and with approach it.