The D.C. Council is considering a new sales tax on advertising services, including digital advertising services, and personal information. Yesterday, on July 6th, the D.C. Council released the Committee Print of the Fiscal Year 2021 Budget Support Act of 2020, which includes a sales tax expansion to those services beginning October 1, 2020 at the reduced rate of 3% instead of the general 6% sales tax rate. In addition, the proposed Budget Support Act would further reduce the benefits of Qualified High Technology Company status – which will be discussed in a future Legal Alert.
Later today, the D.C. Council will consider, vote on, and possibly amend the Budget Support Act at the Committee of the Whole meeting and Legislative Meeting. The Council will hold a final vote on the Budget Support Act later this month, at which time the legislation will be sent to the Mayor for signature and ultimately to Congress for its 30-day review period. In a letter to the Council on July 4th, the mayor publicly opposed tax increases this year given uncertainty resulting from the COVID-19 pandemic. Eversheds Sutherland will continue to monitor the Budget Support Act as it progresses through the District’s legislative process.
Advertising service sales tax
The proposed Budget Support Act’s advertising service sales tax resembles aspects of the
Maryland,
New York, and
Nebraska digital advertising tax proposals, but with several important differences:
- Like those proposals, the proposed Budget Support Act’s advertising service sales tax would apply to “digital advertising services,” which is defined as “[a]dvertising services related to advertisements displayed on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, or other comparable advertising.”
- Similar to the Nebraska proposal, but unlike the Maryland and New York proposals, the Council’s proposal expands the sales tax base instead of adopting a separate tax on gross revenues from digital advertising services.
- Finally, unlike each of those proposals, the Budget Support Act’s advertising tax is much broader, applying to all “advertising services,” defined as “[t]he planning, creating, placing, or display of advertising in newspapers, magazines, billboards, broadcasting, and other media, including, without limitation, the providing of concept, writing, graphic design, mechanical art, photography, and production supervision.”
According to the Council, if the advertising tax provisions of the Budget Support Act are adopted, “the District [would] join the City of Phoenix, AZ, the Province of Quebec, Canada, seven states, and 29 nations who have either considered or have implemented a sales tax on the sale of advertisements in their jurisdictions.”
Personal information sales tax
The proposed Budget Support Act would also expand the sales tax to personal information at the same reduced 3% sales tax rate. “Personal information” is defined as “information or data that is derived from a person that identifies, relates to, describes, or is capable of being associated with, a particular person.”
The proposal offers numerous examples of personal information. In part, these examples include a person’s name, address, telephone number, email address, IP address, digital signature, financial information, and “browser habits, consumer preferences, and any other data that can be attributed to a person and can be used for marketing, or determining access or costs related to insurance, credit, or health care.”
The Council expects the proposed digital advertising and personal information taxes to generate revenues of $18.4 million in FY21 and $79 million over the next three fiscal years, FY22 through FY24.
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Eversheds Sutherland Observations: While a few states broadly tax all services, including advertising services, and other states have more recently considered – but rejected – digital advertising taxes, the District would become the first jurisdiction to adopt a targeted, transaction-based tax on digital advertising and personal information, as defined in the Budget Support Act. As noted above and previously discussed by Eversheds Sutherland, the Maryland General Assembly passed a digital advertising tax, but that legislation was vetoed by Governor Hogan. The ultimate fate of the Maryland tax, which is structurally flawed and distinct from the District’s proposal, is uncertain at this time.
Not only would the District be an outlier at the state-level, the District’s expansion of its sales tax base to digital advertising and personal information arguably contradicts the US Department of Treasury’s opposition to international digital services taxes. This apparent conflict between District and federal tax policies ought to be considered in light of congressional review of the Budget Support Act.
Finally, the proposed Budget Support Act does not address sourcing for either the advertising tax or the personal information tax. Accordingly, the Office of Tax and Revenue would need to address the complex sourcing issues associated with taxing those services. In so doing, OTR should solicit and consider input from all stakeholders when developing that guidance to avoid potential as-applied Commerce Clause or Due Process challenges.
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