DC explores taxing sales of advertising and personal information
The Council of the District of Columbia aimed to impose a 3% sales tax on personal information and advertising services, including digital advertising services, as early as October 1, 2020. Yet after discovering a problem with the proposed tax on advertising, the Council is backpedaling.
The proposal, included in the first draft of the Fiscal Year 2021 Budget Support Act of 2020, or BSA (B23-0760), was light on details. It simply stated, “The rate of tax shall be 3% of the gross receipts from the sale of or charges for advertising services, including digital advertising services, [and] … personal information.” D.C.’s general sales tax rate is 6%.
Advertising services, digital advertising services, and personal information were defined, but no additional guidance for the Office of Tax and Revenue (OTR) or businesses was included in the BSA.
Taxable advertising services
Under the first draft of the BSA, charges for advertising services would be subject to the 3% tax. "Advertising services" is defined as "the planning, creating, placing, or display of advertising in newspapers, magazines, billboards, broadcasting, and other media, including, without limitation, the providing of concept, writing, graphic design, mechanical art, photography, and production supervision."
During a July 21, 2020, legislative meeting, Council Chairman Phil Mendelson explained, “I was surprised when I learned last night that the ad tax was being interpreted [to] tax the creative process, not just the final placement. That was never the intent.”
Taxable digital advertising services
Charges for digital advertising services would also be subject to the 3% sales tax, according to the first draft of the BSA. Digital advertisements include banner advertising, search engine advertising, interstitial advertising, or other comparable advertising.
Taxable personal information services
The first draft of the BSA also sought to impose the 3% sales tax on charges for personal information or data. This includes a person’s:
- Name, address, email address, phone number
- Physical characteristics or description
- Biometric data
- Driver’s license number, state identification card number, passport number, social security number, or other government-issued identification number
- Digital signature
- Bank account number, debit card number, credit card number, or any other financial information
- Educational, employment, insurance, and medical information
- Internet Protocol (IP) address
- Browser habits, consumer preferences, and any other data that can be attributed to a person and can be used for marketing, or to determine access or costs related to insurance, credit, or health care
It’s worth noting that under D.C. sales tax law (Code Section 47-2001(i)), a “person” can also be an association, corporation, estate, partnership, etc.
Issues to address prior to taxing advertising services and personal information
Issues left unaddressed in the first version of the BSA include how sales tax would apply to:
- Sales between related parties
- Sales for resale
- Sales taxed by other jurisdictions
- Sourcing rules
Sourcing is perhaps the most critical issue. According to Scott Peterson, vice president of government relations at Avalara, “A lot of advertising is easy to source because it only exists inside one state. Yet anything sent for view to multiple locations (e.g., television ads) or available to be viewed in multiple locations (e.g., online ads) must be apportioned.” If apportioning is necessary, calculating the tax due to D.C. could be an onerous task.
Existing regulation on the taxability of publications (Title 9, Section 460.1) offers some insight to how D.C. could source sales digital and traditional advertising services. Sales of publications for delivery inside the District are subject to sales tax, while publications sold for delivery outside D.C. are exempt.
If the tax on advertising were to follow suit, notes Jared Walczak of the Tax Foundation, “a large retail chain with locations in the District likely could not be taxed on advertising purchases, but a smaller regional chain based in the District could. With a franchised chain, if local franchisees purchased advertising, the transaction would be taxable, but if they benefited from D.C. advertising by the national brand, or by franchise portfolios based elsewhere, the transaction would likely be out of reach.”
Walczak further notes that an out-of-state company would likely not be taxed on advertisements to D.C. consumers, while a D.C-based company would be taxed on ads targeting consumers in Maryland or Virginia. In other words, local businesses would likely bear the tax burden of the tax.
Mayor Bowser weighs in
In a letter to Chairman Mendelson, Mayor Muriel Bowser voiced concerns over the proposed new taxes for just that reason. She writes, “The creation of a 3 percent advertising sales tax will hit all businesses, but especially our local community newspapers who make much of their revenue through advertising. These newspapers are important sources of local neighborhood information you cannot find in larger publications.”
She went on to call the proposed tax “ill-advised”: “Small businesses have already suffered significant losses as a result of the pandemic and increasing the cost of advertising can only serve to make it that much harder for them.”
Taxing digital advertising: A new trend?
Objections to the proposed tax on advertising services were heard. During a July 21, 2020, meeting of the Council of the District of Columbia, Chairman Mendelson introduced an amendment that reduces the proposed budget to allow for the elimination of the tax on advertising services. He did not address the proposed tax on charges for personal information.
He explained the ad tax was intended to be “a sales tax just like any other sales tax,” meaning it would apply at the point of sale. However, he realized that as written, it would tax “each step of the creative process,” making it effectively a value added tax. This, he said, “was never the intent.” Mendelson plans to offer a corresponding amendment to eliminate the tax during the second reading of the BSA, scheduled for July 28.
No matter what happens in D.C., there’s growing interest among states to tax digital advertising services. Bills seeking to tax certain digital ads were introduced in New York and Nebraska earlier this year, though they stalled in committee. And Maryland lawmakers approved a tax on digital advertising revenue in May; Maryland Governor Larry Hogan vetoed it, calling it “misguided.”
The Maryland General Assembly could override the veto when it returns to session next January. If it does, businesses would be taxed on annual gross revenues derived from digital advertising services such as banner advertising, interstitial advertising, and search engine advertising. The rate of tax would range from 5% to 10%, depending on the seller’s annual gross revenues.
With COVID-19 stressing many state’s budgets, it’s likely more states will look to broaden sales tax to traditionally exempt services like advertising. Learn more about what to expect in 2021 in our 2021 Sales Tax Changes Report.
The 2021 sales tax changes report: midyear update
Your guide to navigating the complicated world of tax compliance and preparing for the future
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