“The Unintentional SALT Consequences of Digital Advertising Taxes"

Article by Jennifer Karpchuk on “The Unintentional SALT Consequences of Digital Advertising Taxes"

In an article published in the June issue of Journal of Multistate Taxation, Philadelphia-based Shareholder Jennifer Karpchuk and Grant Thornton LLP Managing Directors Steve Bell and Joel Waterfield discuss Maryland’s recently passed Digital Advertising Services Tax and who it will impact.

“When states consider adopting legislation imposing new taxes, legal challenges and considerations should play an important role – yet, Maryland's recent passage of its digital advertising tax suggests states' legislatures are potentially overlooking these types of challenges in hopes of new revenue streams,” explain Karpchuk, Bell and Waterfield. “Moreover, in attempting to ensure the ‘big fish’ are paying their fair share, states may have overlooked the unintended targets of their novel taxing arrangements.”

Karpchuk, Bell and Waterfield further explain that digital advertising services are any advertising services delivered on any type of software, website, or application that a person can access on a device. “Customers pay companies to promote their content using these online marketing strategies,” say Karpchuk, Bell and Waterfield. “The advertisement revenue that businesses receive for these services would be considered taxable income.”

There are a number of legal hurdles and challenges the tax faces including concerns over the possibility that states may seek to target electronic commerce and internet access, which previously led to the implementation of the Permanent Internet Tax Freedom Act (PITFA), and whether digital advertising taxes implicate U.S. constitutional issues, namely violations of the First Amendment, Commerce Clause, Due Process Clause and Equal Protection Clause.

“For those states that do not tax standard advertising, digital advertising taxes certainly single out digital advertising for tax,” say Karpchuk, Bell and Waterfield. “Further, depending upon how the tax is structured, a state's digital advertising tax could be viewed as targeting a small group of companies.”

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