France recently created an uproar with the U.S. over passage of its digital services tax, but while the French have since stepped back as the world waits to see if the Organization for Economic Cooperation and Development can establish global guidelines, it appears at least two U.S. states are prepared to jump on board with similar legislation.
A proposal in Maryland would tax digital advertising services at a rate of between 2.5-10%, based on the organization’s revenue. The bill would only apply to companies with at least $100 million in global annual gross revenues, and be effective for tax years after 2020, but the legislation creates challenges for advertisers due to its sourcing rules. For instance, the bill considers digital advertising services to be in Maryland if they “appear on the device of a user” with an IP address in Maryland or if the user “is known or reasonably suspected to be using the device in the state.” Good luck trying to determine who’s in Maryland and who’s not in the age of VPNs and mobile phones.
Nebraska, too, is proposing legislation, though it’s more of an end around, as the state wants to amend its existing sales tax law rather than creating a new one. The amendment would add retail sales of digital advertisements, which are defined as “an advertising message delivered over the internet that markets or promotes a particular good, service or political message” to the definition of gross receipts for Nebraska sales tax purposes. If enacted, Nebraska’s proposed changes will be effective October 1, 2020.
The proposals put forth by the two states are problematic on several fronts. The laws would certainly face legal challenges and lobbying efforts by a number of groups opposed to the legislation. Plus, the taxes would be difficult to administer and track, not to mention the increase in costs to advertisers.
While these two proposals are in their infancy, all new taxes start somewhere, and the prospect of digital services taxes in the U.S. warrants close monitoring.
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