State legislators in the Massachusetts House of Representatives recently introduced four bills on the taxation of digital advertising services. Two of these bills propose a tax on digital advertising services, a third bill would set up a “special commission” to study how to generate revenue from digital advertising, and a fourth bill appears to be a placeholder for some action on digital advertising taxation. This makes Massachusetts one of the latest states to join the wave of state digital advertising tax proposals targeting large digital advertising service providers. We have previously covered Maryland’s digital advertising tax, the first in the nation to become law, and various other states’ pending digital and data tax proposals, including New York and Texas. Below, we summarize and compare the various Massachusetts proposals.
HD.3210 would impose a tax on a taxpayer’s “annual gross revenues . . . derived from digital advertising services in the commonwealth.” While other states delegate authority to the state tax administrator to determine appropriate sourcing rules (such as the recently enacted Maryland digital ad tax and similar Texas proposal), Massachusetts specifies these rules in the proposed statute. The bill states that advertising services are provided in Massachusetts if the services appear on a device with a Massachusetts IP address or appear on the device of a user who is “known or reasonably presumed to be using the device in the commonwealth.” The bill defines “digital advertising services” as including “advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, promoted, boosted, or sponsored content, and other comparable advertising services.” The tax rate ranges from 5% to 15% of annual revenues derived from digital advertising services in Massachusetts, depending on the taxpayer’s “annual gross revenues” (i.e., revenues from all sources derived within Massachusetts). The lowest (5%) tax rate applies to persons with $50 million to $100 million in annual gross revenues, while the highest (15%) tax rate applies to persons with annual gross revenues exceeding $200,000,001.
Furthermore, the tax would only be imposed on persons deriving at least $100,000 in annual gross revenues from digital advertising services in Massachusetts. Such persons must file a return by April 15 of the following year. The bill would require any person that reasonably expects annual gross revenues from digital advertising services in Massachusetts to exceed $100,000 to file quarterly estimated tax returns. A person required to file a return under the aforementioned provisions would be required to attach a statement with “any information that the commissioner requires to determine annual gross revenues derived from digital advertising services in [Massachusetts].” Effectively, the bill would impose an information reporting requirement on persons with $100,000 in annual gross revenues from digital advertising services in Massachusetts even if they owe no tax (i.e., if the person has less than $50 million in annual gross revenues from all sources derived within Massachusetts, so that that lowest tax rate does not apply). If passed, Massachusetts HD.3210 would likely face significant legal challenges, most notably under the Internet Tax Freedom Act.
HD.3601 is similarly targeted at large digital advertising service providers. However, unlike HD.3210, this bill would impose a flat 5% “excise tax” on the sale of digital advertising services in Massachusetts, which are similarly defined as “advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising and other comparable advertising services.” Like HD.3210, this proposal includes sourcing guidance. But HD.3601’s guidance is slightly different than HD.3210 because it deems digital advertising services to be provided within Massachusetts based only on the IP address of the user’s device and not whether the user is known or presumed to be using the device in Massachusetts. The tax would only apply to persons with more than $25 million in annual revenues from digital advertising services within the commonwealth, a higher threshold than the one in HD.3210. Finally, taxpayers would be required to remit the excise tax due on a more frequent (monthly) basis.
HD.3558 would not impose any new taxes, but instead would establish a special joint commission to “conduct a comprehensive study relative to generating revenue from digital advertising that is displayed inside of Massachusetts by companies that generate over $100 million a year in global revenue.” The commission would be required to examine the experiences and policy efforts of other states relating to taxing digital advertising and file its report and recommendations for legislation by February 15, 2022. This bill embodies the “wait-and-see” approach to digital advertising taxation, which many states may follow as lawsuits challenging Maryland’s tax gain momentum.
HD.3812 is a draft bill entitled “An Act relative [sic] taxation on gross revenues from digital advertising,” but it currently contains no substantive language and merely states: “draft being worked on by house counsel.”
These Massachusetts proposals highlight the varied approaches that states may take to tax digital advertising services and, as illustrated by HD.3558, the desire of some states to base their digital ad tax policies on the experiences and policies of other states.