Avalara: More states push to tax online ads despite challenges

Digital advertising taxes are gaining ground in the United States, despite the lack of a clear enforcement route and questionable legal status. The most recent proposal comes from Bay State.

Massachusetts introduces simplified tax on online advertising

Massachusetts Bill H.4179, a law establishing a tax for online advertising, would levy an excise tax of 6.25% on gross revenues from digital advertising services by “persons with revenues from services. of digital advertising provided within the Commonwealth ”. The first million dollars in revenue from digital advertising services provided in the Commonwealth each year would be tax exempt.

The bill defines “digital advertising services” as “advertising services on a digital interface, including”

  • Banner

  • Interstitial advertising

  • Search engine advertising

  • “Other comparable advertising services”

A digital advertising service is “provided within the Commonwealth” if it is received on a device with an IP address located in Massachusetts. As defined in H.4179, an IP address is “a unique string of characters assigned to each device connected to a computer network using the Internet protocol for communication”.

The tax proposed under H.4179 is considerably simpler than the digital advertising taxes introduced in (and abandoned by) Massachusetts earlier this year. Or, as Scott Peterson, vice president of government relations at Avalara puts it, “it’s awfully light on the details.” This could be problematic as there is no easy way to tax online advertising.

Complicating factors include:

  • Legality: Can a state tax isolate a form of advertising to be taxed?
  • Responsibility: Who will pay the tax?
  • Site: How can a state ensure that it is properly sourcing digital advertising?

Legal: is a tax on online advertising legal?

As Massachusetts once again attempts to impose a digital advertising tax on the governor’s office, Maryland prepares to defend its revolutionary digital advertising tax in court. It is challenged by the United States of America Chamber of Commerce and, separately, by Comcast and Verizon.

According to the American Bar Association, “Maryland law is problematic in many ways” including, but not limited to:

  • It could violate the Internet Tax Freedom Act by taxing e-commerce without imposing a similar tax on non-digital advertising revenue.

  • This could go against the First Amendment and violate the Dormant Trade Clause by discriminating against out-of-state businesses in favor of state-owned businesses.

  • This could interfere with speech on some platforms.

Peterson believes that “the constitutional challenges of taxing digital advertising and exempting all other forms of advertising are overwhelming.”

If Maryland’s digital advertising tax is found to be unconstitutional or in violation of federal or state law, the American Bar Association predicts that “taxes in other states could become just as unlawful.”

On the other hand, if Maryland wins in court (twice), it will pave the way for other states to pass similar laws.

Responsibility: who and what would these taxes affect?

Massachusetts would tax all digital advertising services on a “digital interface”, which is defined as “any type of software, including a website, part of a website, or an application that a user can access.”

Presumably, this would affect businesses like Google, Facebook, and YouTube, as a large portion of their income is generated from online advertising. But what about:

  • Hulu or similar streaming service providers?

  • National and local newspapers?

  • Other websites that generate income through advertising?

Peterson believes that “no one really understands what digital advertising is” at this point. “Does Hulu have gross revenues from providing digital advertising services when they have only provided a medium that someone else has presented the advertisement on?”

Washington, DC, ditched its first move to a digital advertising tax in part out of fears it would negatively affect community newspapers and other local businesses. As the Tax Foundation noted at the time, “a large retail chain based in the district probably could not be taxed on advertising purchases, but a smaller regional chain based in the district could.” .

And there’s this elephant in the room: Will businesses pass the cost of this tax on to consumers?

Massachusetts H.4179 does not address this issue. Maryland law prohibits taxpayers from passing the cost of the tax “directly” on to customers who purchase digital advertising services, but it does not prohibit businesses from charging customers for digital advertising services or from charging customers for digital advertising services. places a paid wall for content that is currently offered for free.

Location: How do you determine the location of a digital ad?

Digital ads target consumers wherever they go. To ensure that they only tax revenue generated from online advertisements displayed within state borders, Massachusetts and Maryland plan to use IP addresses to determine the location of the ad displayed – whether it’s a desktop computer in an apartment in Annapolis or a mobile phone owned by a Texan exploring Cape Cod.

All devices connected to the Internet have an IP address assigned by the Internet Service Provider (ISP). According to NortonLifeLock, IP addresses reveal the geolocation (for example, area code, city, and zip code) of devices connected to the Internet and change whenever a device connects to another Wi-Fi network or router. This is the reason why a person searching for “pizzerias” in Baltimore gets different results than those looking for “pizzerias” in Boston.

IP addresses do not reveal the user’s mailing address or name. Indeed, the location linked to an IP address is generally that of the nearest ISP server. In theory, this could cause Massachusetts to tax an advertisement on a device in New Hampshire that is connected to an ISP in Massachusetts. This is also why my cell phone provider sometimes thinks I am in Canada when in fact I am in the United States on the rugged coast of the Olympic Peninsula in Washington.

How can a State verify the accuracy of an IP address? What if an ad appears on a device using a virtual private network (VPN), which NortonLifeLock says “completely changes your IP address, placing your geolocation hundreds or even thousands of miles away where you actually access the Internet “. How can a state ensure that businesses are taxed on income generated from digital ads on devices located in the state, and not in another state? These are the types of questions Maryland, Massachusetts, and any other state looking to tax digital advertising will need to answer.

Other issues

There are other issues as well. Maryland’s digital ad tax lacks clear procurement rules, which the Maryland comptroller is currently working to establish. It relies on an allocation formula yet to be determined to determine revenue from digital advertising sources in the state.

Yet, as Scott Peterson notes, “allocation may not be the biggest challenge this type of tax faces.” The global minimum tax agreement could pose a more serious threat as it calls for the status quo and the removal of existing tax provisions on digital services. Although the Maryland tax applies to annual gross income derived from digital advertising services in the state, it uses variable tax rates that increase with the taxpayer’s overall income. The American Bar Association points out that this worldwide gross annual income comes “from whatever source (including non-advertising income)”, which “has the obvious effect of increasing the payout percentage and the liability of the taxpayer concerned. “. Taxing income from a taxpayer’s worldwide operations, advertising or otherwise, could violate the trade clause.

States interested in taxing online advertising

Despite all of the above, Maryland intends to apply its digital advertising tax on January 1, 2022, if it can. Massachusetts is one of many states interested in following Maryland’s lead. Others include:

Could Taxing Digital Advertising Be The Next Wayfair?

Could the fate of taxes on digital advertising mimic that of online sales tax? States have tried for decades to gain the right to tax sales from out-of-state sellers, have been repeatedly barred from doing so, and ultimately won when the Supreme Court ruled in favor of it. ‘State in South Dakota v. Wayfair, Inc. (June 21, 2018).

Peterson may say, “But this tax is poorly thought out. The constitutional challenges are serious and very different from the challenges raised in Wayfair. In Wayfair, the courts had long recognized that transactions were taxable. The issue in Wayfair was the mechanism. to collect the tax. ”

Whatever happens in the future with taxes on digital advertising, we will cover it at the tax office in Avalara.


Avalara inc. published this content on October 19, 2021 and is solely responsible for the information it contains. Distributed by Public, unedited and unmodified, on October 19, 2021 08:11:01 AM UTC.

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