There have been drastic changes in the way consumers are shopping and purchasing goods in recent years. No longer are the days of walking through malls or visiting plazas as a “one-stop-shop”. Consumers have shifted towards an easier solution where the products are at their fingertips, as online shopping has taken over. As consumers are moving more towards electronic purchasing and technology-based services, so have digital advertising placements. Ad popups have plagued websites and can be seen on almost every app or webpage that one visits. While it is often complained about by consumers, it is also extremely effective, and some states are seeing it as an opportunity to raise additional revenue via digital advertising taxation.

Digital advertising is promotional material that appears on digital platforms- any social media platform, website, or app- that is often targeted towards a certain demographic, depending on the product that the ad is pushing. States have seen this as an opportunity to bring in additional revenue through sales tax or gross receipts tax, which is crucial especially amidst a pandemic. Nebraska, New York, and Maryland passed legislation to tax digital advertisements in January of 2020 however multiple problems have already risen and this taxation is more complicated than it seems.
The benefit of this tax is pretty simple- it would bring in millions of dollars to each state. One problem with the digital advertising tax is that it largely impacts the small businesses within the state. While states are able to tax large corporations, such as Target and Walmart, it leaves small companies within the state very vulnerable. There is currently no de minimis threshold for small businesses and this additional tax would be detrimental to their overall revenue. While this issue is a problem for many smaller companies within a state, it is not the only complication with this tax.

Internet activity is usually tracked through a user’s internet service provider (ISP), which essentially leaves a trail of websites that are visited and shows where a user’s internet presence is. This allows states to track where a seller is located, and more specifically, where digital advertisements originate. However, many companies or individual sellers now utilize Virtual Private Networks (VPN). A VPN is a software that hides a user’s ISP address and will encrypt all data that is sent or received by the user. The use of a VPN causes an additional layer of complexity when it comes to digital advertisement tax. It becomes challenging for the states to determine the origin of digital advertisements.

Another large hurdle that states will have to consider with the digital advertisement tax is the Permanent Internet Tax Freedom Act (PITFA). PITFA prohibits taxation of electronic commerce that does not have a physical counterpart. This is causing controversy because it is proving difficult for states to determine which digital ads qualify for taxation within a particular state, and which ads are protected by PITFA.

It is clear that states want to be a part of this online revolution and raise additional revenues, however, there are a lot of obstacles and planning involved with this taxation process. While it may take some time for states to work out the kinks of this taxation process, it is expected that additional states will join in on digital advertisement taxation. If you are utilizing digital advertisements, reach out to the EFPR Group SALT team so we can help you analyze the risk and determine if you may be subject to this additional taxation.