Tax on Digital Advertisements Stalls

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A job killer bill that sought to tax digital advertising revenue has stalled and is likely dead for the year, as tax-related proposals are not subject to the normal legislative deadlines.

The bill, AB 2829 (Papan; D-San Mateo), implements a new tax on digital advertisements of 5% of the revenue generated by the ads. In addition to increasing taxes on businesses, it is likely unconstitutional.

Likely Unconstitutional

The CalChamber opposed AB 2829 because it would enact an unnecessary, unimplementable, and likely unconstitutional digital ad tax on California’s employers. The bill punishes businesses of all sizes and communicates that employers will be fiscally targeted by the state merely for operating here. Moreover, AB 2829 will subject the state to an onslaught of litigation and drive employers elsewhere.

AB 2829 aims to tax businesses that have annual global revenue of at least $100 million at a rate of 5% of the revenue derived from digital ad services. The bill is nearly identical to Maryland’s digital ad tax that was signed into law in 2020.

Maryland’s legislation has been the subject of litigation since its inception and provides a glimpse into California’s future should AB 2829 be signed into law — namely unending and expensive litigation, the CalChamber pointed out in a recent letter to legislators.

Other Concerns

AB 2829 also appears to violate the Internet Tax Freedom Act (ITFA), the First Amendment, and the Commerce Clause. Specifically, the ITFA was enacted in 2016 and establishes policy regarding federal and state taxation of the internet, based upon its unique characteristics as a mode of interstate and global commerce uniquely susceptible to multiple and discriminatory taxation.

The ITFA preempts multiple or discriminatory taxes on electronic commerce. The Act states that a discriminatory tax is any tax on electronic commerce that is not generally imposed and legally collectible by such state or political subdivision on transactions involving similar property, goods, services, or information accomplished through other means.

An ITFA and Commerce Clause violation appear to be the most pressing issues in this case. AB 2829 would impose a tax only on digital ads, which is obviously the assessment of a targeted and discriminatory tax. Furthermore, the bill expressly exempts usual forms of advertising while aiming its sights on entities with $100 million or more in annual revenue. In regard to the First Amendment, the bill exempts broadcast and news media, which is content-based discrimination.

AB 2829 was held on the Assembly Revenue and Taxation Committee Suspense File this week.

Staff Contact: Preston Young