Texas has now joined the growing number of states proposing digital advertising taxes that we have covered previously on SALT Savvy, including Maryland’s first-in-the-nation digital advertising tax law and other proposals from Connecticut, New York, and Montana. This new Texas bill—H.B. 4467— would take effect in 2022.
The Texas proposal is very similar to the recently-enacted Maryland digital ad tax (H.B. 732) and would impose a new “digital advertising tax” on annual gross revenues derived from digital advertising services in Texas. The tax would apply to a company whose (1) assessable base (i.e., annual gross revenues derived from digital advertising services in Texas) for the reporting period is at least $1 million, and (2) annual gross revenue (i.e., income or revenue from all sources anywhere in the world before expenses) is at least $100 million. The tax would be imposed at a rate ranging from 2.5% to 10% depending on the company’s total annual gross revenue.
How does this new proposal stack up to Maryland’s digital ad tax?
Texas’s bill is identical to Maryland’s digital advertising tax in the following ways:
- “Digital Advertising Services.” Both define “digital advertising services” as “advertisement services on a digital interface” that includes “advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services.”
- Tax Base. Both impose the tax on a person’s “assessable base” and define the “assessable base” as annual gross revenue derived from digital advertising services in the state. However, since neither bill clearly lays out how to compute the tax base (as discussed below), the tax bases could ultimately differ.
- Apportionment. Neither contains sourcing rules for determining what “derived from digital advertising services” in the state means. Instead, both bills punt this work to the state comptroller, who would be compelled to adopt sourcing rules. However, they do so in slightly different ways. The Maryland law lays out a vague and ambiguous apportionment formula that provides that the part of a person’s annual gross revenues derived from digital advertising services in the state shall be determined using a fraction, the numerator of which is the annual gross revenues of a person derived from digital advertising services in the state and the denominator of which is the annual gross revenues of a person derived from digital advertising services in the United States. The law then requires the state’s Comptroller to promulgate regulations regarding how to determine the state from which digital advertising services revenue is derived. The Texas bill, on the other hand, does not attempt to lay out an apportionment formula, but like the Maryland tax requires that state’s Comptroller to promulgate regulations to implement, administer, and enforce the tax, including a method for determining the portion of a person’s gross revenue that is derived from digital advertising services in Texas. Thus, if the Texas bill is enacted, the extent to which it ultimately overlaps or differs from the Maryland tax with respect to apportionment will depend on future comptroller guidance in both states.
- Tax rates. Both impose the tax only on taxpayers whose gross revenues from all sources globally are greater than $100 million in a calendar year and whose gross digital advertising service revenues derived from the state exceed $1 million. Both have identical graduated tax rate schedules that start at 2.5% of the assessable base for taxpayers with global gross revenues of $100 million to $1 billion and that max out at 10% of the assessable base for taxpayers with global gross revenues above $15 billion.
Texas’s bill also differs from Maryland’s tax in the following ways:
- Filing and payment requirements. Maryland’s law requires filing quarterly estimated returns and making quarterly estimated tax payments. Texas’s bill provides for one annual return and tax payment due by April 15.
- Timing of Revenue Recognition. Texas’s bill raises a revenue recognition question not originally raised in the Maryland law. The Texas bill calls on the Comptroller to adopt rules for determining when taxable “business is done.” It also provides that the Comptroller “shall consider business to be done when revenue derived from that business is recognized by a person according to generally accepted accounting principles.” Nevertheless, this raises the question of whether digital advertising service revenue should be recognized when a customer pays for digital advertising services, when the digital user clicks on or views the advertisement, or if different recognition principles should be allowed for differently-structured service contracts and payment schedules.
Texas H.B. 4467 is still in its infancy stage and we will continue to keep you updated on SALT Savvy about this bill, developing legal challenges to digital advertising taxes, and the many other proposals currently being debated in state legislatures. Like the Maryland proposal, the Texas bill suffers from the same U.S. Constitutional and federal preemption infirmities (including a violation of the Internet Tax Freedom Act), so we would expect legal challenges if the Texas proposal is ultimately enacted in its current form.