Washington legislators may introduce a digital advertising tax bill in the state’s upcoming legislative session. See H-0028.1 (advance copy; not yet introduced). Washington’s potential legislation is the latest in a recent trend of digital advertising tax proposals (including in the District of Columbia, Maryland, Nebraska, New York, and West Virginia, none of which have become law as of the date of this blog post).
Currently, digital advertising services are not subject to Washington sales tax. They are only subject to Business and Occupation (“B&O”) tax at the “service and other activities” tax rate.
However, the new legislation would tax digital advertising services as “digital automated services.” Sales of “digital automated services” are generally subject to Washington’s sales tax and the B&O tax at the “retailing” tax rate (unless an exception applies, such as Washington’s so-called “human effort” exception). See WAC 458-20-15503. While the B&O “retailing” tax rate is actually lower than the “service and other activities” tax rate that currently applies to digital advertising services, the combination of the sales tax and the B&O tax (even at the “retailing” tax rate) would increase the overall tax burden on digital advertising services.
Specifically, the legislation would add the following language to RCW 82.04.050:
For purposes of this subsection, “digital automated services” includes digital advertising services. “Digital advertising services” includes online referrals, search engine marketing and lead generation optimization, web campaign planning, the acquisition of advertising space in the internet media, and the monitoring and evaluation of web site traffic for purposes of determining the effectiveness of an advertising campaign. “Digital advertising services” does not include web hosting services and domain name registration.
H-0028.1 at Secs. 2 & 3.
The legislation would also exclude “digital advertising services” from the definition of “advertising services” in RCW 82.04.192. H-0028.1 at Sec. 4. In other words, the legislation would expressly treat digital advertising services differently than non-digital advertising services.
The statutes addressed in the legislation, RCW 82.04.050 and RCW 82.04.192, are B&O tax statutes, but the sales tax statute follows these definitions. See RCW § 82.08.010 (not mentioned in the legislation, presumably because there is no need to amend it to implement the sales tax changes).
The legislation anticipates that taxpayers would challenge the differing treatment of digital advertising services and non-digital advertising services on Internet Tax Freedom Act (“ITFA”) grounds. The first section of the legislation states, in relevant part:
The legislature finds that digital advertising has evolved significantly due to advanced technology in data collection and aggregation, providing a robust digital environment for businesses that utilize digital advertising. . . . Despite the evolution, the legislature finds that the internet tax freedom act has not been updated to reflect the changing economic and technological landscape. The legislature finds that the exclusion of digital advertising services from the definition of “digital automated services” incorrectly assumes that there is a nondigital equivalent. The legislature finds that the advances and sophistication of digital advertising services should be properly classified and taxed as a digital automated service to ensure fair and equitable treatment of similarly situated taxpayers.
H-0028.1 at Sec. 1.
The attempt at preempting ITFA is an interesting approach. One of the primary issues when applying ITFA is whether the nondigital equivalent is taxed. Here the legislature is declaring that there is no nondigital equivalent, though the factual support for such a position will still have to be proven.
As currently drafted, the legislation would be effective July 1, 2021. H-0028.1, Secs. 5 – 7. However, the legislation is still very early stage (it has not been introduced yet). As with other digital advertising tax proposals, taxpayers are likely to oppose the legislation on constitutional, ITFA, and other grounds. See our prior coverage of state digital advertising tax proposals, including Maryland’s proposed digital advertising tax, Nebraska’s proposed digital advertising tax, New York’s proposed digital advertising tax, New York’s proposed unapportioned data tax, and West Virginia’s proposed data mining service tax.
Contact the Authors: Marie Eberle, Lindsay LaCava, Mark Yopp and Dmitrii Gabrielov
