Are digital marketing services taxable?

New York explains that the digital marketing service is a non-taxable advertising service. The New York State Department of Taxation and Finance issued an advisory opinion explaining that taxpayer charges for digital marketing services are not subject to sales tax. The provision of advertising and public relations services is not taxable when it is related to the development of advertising in the media. The total gross revenue from advertising services related to the development of media advertising billed by the service provider is not subject to sales tax.

Charges for advertising services that are not related to the development of media advertising are taxed, either in whole or in part, on hourly billing, provider costs, commissions, surcharges, or monthly fees. Marketing means and includes conducting tests and research for a particular customer in relation to the development of particular products, properties, goods or services that the customer sells to consumers in the regular course of their business. Taxes have been introduced on digital advertising in Connecticut, Indiana, Montana, New York and Washington, although the Montana measure has already been filed. Assembly Bill 734 and Senate Bill 302 seek to impose a sales tax on digital advertising to fund an interest-free educational loan refinancing program.

Senate Bill 1124 would tax annual gross revenues derived from digital advertising services in the state, such as banner advertising, interstitial advertising, search engine advertising, and other comparable advertising services that use personal information about individuals who are they direct the ads. In a recent advisory opinion issued to another company that provides similar services to MSP, the Department addressed the imposition of Digital Marketing services, which consist of consulting, managed services, technical services and resale of offers related to advertising and marketing. What began as a way for states to control or at least benefit from digital advertising revenues has become a patchwork of state-by-state legislation with uncertain legality. States are likely to use declining tax revenues due to COVID-19 as a justification for introducing bills that subject additional digital goods and services to sales tax.

The introduced version of the Maryland proposal sent each taxable digital advertising service to Maryland if the user's IP address located them in Maryland, or if the Comptroller knew or reasonably suspected that the user was using the device in Maryland. The definition of digital advertising services includes banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services that market or promote a particular good, service, political candidate, or message. According to Scott Peterson, vice president of government relations at Avalara, sourcing is perhaps the most critical problem facing a tax on digital advertising services. In addition, a tax on digital advertising services could violate the Inactive Commerce Clause of the United States Constitution, which implicitly prohibits states from passing laws that discriminate against or excessively tax interstate commerce.

The advertiser service was described as a strategic marketing analysis consulting service used to help advertisers define their marketing strategy. But the tax base is narrower than Maryland because it is limited to digital customer tracking ads. The implications of sales tax for online and digital advertisers have come under scrutiny in several states. One state, New York, has proposed bills that would expand state sales and use tax to sales of digital advertising.

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