State Advertising Taxes
Many legislators, when looking for new state revenue, have suggested expanding the existing sales tax to include many services exempt from taxation. Proponents claim that services are the fastest growing sector of the economy, yet they are not included in the sales tax. Advertising is typically one of the business services targeted. Proposed bills could include taxing media purchases, advertising agency services or both.
A tax on advertising services or placement increases the cost of advertising. Because most clients operate on a fixed advertising budget, they will compensate for the tax by decreasing their advertising purchases. This will have a direct—and negative—impact on the advertising industry, economy and state revenues. Advertising is the engine that fuels the economy. Less advertising means fewer sales. Fewer sales mean reduced revenue and fewer jobs. Fewer sales also result in less sales tax revenue for the state. Advertising is a legitimate cost of doing business and not the type of end-use consumption targeted by sales taxes.
Proponents argue that since services are a growing part of the economy, they should be subject to the sales tax. They often do not recognize the distinction between different kinds of services or between business and consumer services. Service taxes may be introduced to raise or replace other sources of revenue.
Ad Tax Introduced in Oklahoma
Oklahoma State Senator Nathan Dahm, R-Broken Arrow, has introduced legislation that would impose a sales tax on many forms of advertising, including newspapers, billboards and sports programs. It is unclear whether broadcast and other forms of advertising are intended to be targeted. AAF has been in touch with local AAF members and the Oklahoma Press Association about the bill. At this point in time it is appears unlikely that the bill will be brought to a hearing or vote, but we will continue to closely monitor the situation.
DTC Advertising Deductibility May be Threatened
While overall advertising deductibility seems to be safe for the moment, deductibility for direct-to-consumer advertising of pharmaceuticals may still be vulnerable. A recent report by the National Academies of Sciences included a finding that DTC advertising costs should no longer be tax deductible. The Senate Health, Education, Labor and Pensions Committee conducted a December hearing on the report.
The deductibility recommendation was received sympathetically by some Senators who acknowledged that the First Amendment would not allow banning DTC advertising. Going unrecognized was the fact that the proposal would still discriminate on the basis of content and thus still violate the Amendment’s protection of commercial speech. Some Senators and witnesses made the erroneous assumption that reducing or eliminating advertising would lower the cost of medications. Also unacknowledged was the benefits that advertising brings though consumer education and the prompting of countless conversations between patients and their doctors.
In his State of the Union address, President Trump promised to bring down the cost of prescription medications. The administration has not released any specifics on how it will propose to reduce the cost of pharmaceuticals. AAF will closely scrutinize the proposal and subsequent debate for any effort to unfairly target DTC advertising.
Tax Bill Leaves Advertising Alone
In December, Congressional Republicans were ultimately successful in passing comprehensive tax legislation which was signed into law by President Trump. The law permanently lowers the top corporate tax rate from 35% to 21%. Individual tax rates are also lowered, although not as dramatically and on a temporary basis. Most individual tax cuts will expire on December 31, 2025.
The new law does not make any changes to the tax status of advertising, meaning that advertising will continue to be fully deductible as a normal and necessary business expense in the year in which it was incurred. We know that during the writing of the new law limiting the advertising deduction was considered as a way to offset some the revenue lost from lowering tax rates. AAF worked very hard to educate lawmakers about the economic importance of maintaining advertising as a fully deductible business.
Last Updated: February 2018
In September 2008, the Mississippi Tax Study Commission has recommended adding additional business services to the list of taxable services, including advertising. The report calls for removing the exemption for professional services related to advertising but still excludes media buying and other rebilled services from taxation. In its report, the commission stated that one of its objectives was to broaden the tax base. Under present Mississippi law, all services are exempt from taxation unless specifically included.
In April 2008, the Florida Taxation and Budget Reform Commission placed a proposed amendment on the November general election ballot that would have eliminated property taxes and required the state legislature to find new funding sources to offset the lost revenue. After months of intense lobbying efforts, it appeared likely that the measure would not be approved by voters. The amendment was removed from the ballot by the Florida Supreme Court on the basis that the ballot title and summary were misleading.
In 2007, the Michigan legislature passed a measure that would have imposed a six percent tax on many business services, including some advertising agency elements. While the law would not have taxed advertising costs specifically, it would have taxed consulting fees as well as desktop publishing, both of which may be considered part of advertising services. The tax was repealed hours after going into effect.
Since Florida passed and repealed an advertising and services tax in 1987, well over half the states have considered, and rejected, a tax on advertising. The most recent proposal was in Pennsylvania, where an advertising and services tax was passed in the Pennsylvania House of Representatives as an amendment to a bill addressing medical savings accounts (Senate Bill 854) but was stopped by the Senate after a hearing on the matter.
Last Updated: October 2008