The fight is not over though, as the organization’s Alison Pepper says she expects other states facing worsening budget deficits to introduce similar tax bills
By Lindsay Rittenhouse. Published on July 28, 2020.
In a final vote today, The Washington, D.C. City Council nixed, as expected, a proposed 3 percent tax on advertising services and the sale of “personal information.”
The tax, just one part of the city’s proposed 2021 Budget and Financial plan, was introduced to help combat Washington, D.C.’s growing budget deficit, which has been compounded by the pandemic. Last week, the D.C. Council chairman had announced he would be abandoning the tax, which the Washington Post reported has left city officials scrambling to figure out what then to cut from the budget to make up for an estimated $18 million loss in projected revenue. The proposed tax was expected to generate $18.4 million in revenue for the 2021 fiscal year.
Since its introduction earlier this month, though, the tax was met with pushback by local D.C. area agencies and organizations like the American Association of Advertising Agencies (4A’s), which argue it would have had adverse effects on local small businesses.
“The 4A’s is very grateful that the D.C. City Council listened to the hundreds of D.C.-based companies who expressed their opposition,” the 4A’s said in a statement. “No state or city is going to be able to tax their way to prosperity in the midst of our current pandemic and economic crisis, and attempting to do so will be counterproductive at best. Advertising grows business, and concurrently, grows the sales tax base for states and cities. Before immediately jumping to new taxes, states and cities should first consider how they can help their small businesses thrive, as small businesses will be the ones to lead the way to economic recovery.”
Still, Alison Pepper, executive VP of government relations for the 4A’s, tells Ad Age that she doesn’t expect this fight to be over, as she anticipates other states facing steep budget shortfalls to introduce similar tax bills.
“I absolutely expect other states to follow suit,” Pepper says, noting how she is particularly concerned with the introduction of the personal information tax, which can be “confusing” to advertisers.
In April, Treasury Secretary Steven Mnuchin said the federal government should not be responsible for bailing out “mismanaged” states facing budget deficits, placing the problem in the hands of states to figure out. States, of course, are only seeing their budget shortfalls worsen due to the pandemic. The Center on Budget and Policy Priorities estimated that states could face a collective budget deficit of $290 billion by 2021 due to the health crisis. According to Forbes, the states least unprepared for a recession are Michigan, New Hampshire, Mississippi, Pennsylvania, Florida, New Jersey, Oklahoma, Kentucky, Illinois and Louisiana.
According to the proposed budget plan, Washington, D.C. would have joined the city of Phoenix, Arizona and “seven states” that have “either considered or have implemented a sales tax on the sale of advertisements in their jurisdictions.”
“While some of these jurisdictions have focused on digital advertising, the Council’s tax includes the sale of all advertisements, not just digital, and the sale of personal information,” the proposal detailed. “The Council set the sales tax rate at 3 percent for the sale of advertisements and expects revenues to increase by $18.4 million in FY21 and $79 million over the financial plan.”
The proposed budget plan calls for the allocation of various funds to invest in areas such as criminal justice reform, education and economic justice in the D.C. area. It’s unclear what cuts will be made to make up for the scrapping of the 3 percent ad tax.
Pepper says “fortunately,” the D.C. City Council was receptive to the local advertising community’s pushback on the proposed tax. She calls the introduction of the personal information tax, in particular, a “new flavor of taxation” that the industry has increasingly seen introduced recently in states. Pepper argues it is unfair for advertisers to be taxed on the sale of personal information because not all data is used to “target” consumers but to gain “insights and understand their consumers.” The 4A’s, Pepper says, believes that is not a fair “taxable transaction.”
“There’s a fundamental confusion about these taxes,” Pepper says. “This isn’t the same old tax fight that’s been going on for 20, 30 years. There is an obscene new level of taxes.”
Despite the 3 percent ad tax being defeated in Washington, D.C., Pepper says she “absolutely expects other states to follow suit.”
In May, the governor of Maryland vetoed a similar digital ad tax bill proposed in the state. Maryland lawmakers had quietly approved HB 732 in March, which imposed a 10 percent tax for every digital ad sold by companies such as Google and Facebook. The legislation also applied to smaller companies, but at a lower tax rate based on annual global gross revenues. A “copycat” bill was then introduced in New York. Marketing experts have raised several issues with these bills, namely around who is going to pay the tax—the media buyers? Demand-side platforms (DSPs)?
Cary Hatch, chairman of the Mid-Atlantic Board of Governors for the 4A’s and CEO of MDB Communications based in Washington, D.C., was part of the sea of advertisers pushing back on the latest 3 percent advertising and personal information tax.
“Understandably, the District is grappling to fill the enormous gaps in the city budget, as a result of the abrupt and devastating economic downturn,” Hatch says, but she argues that “a new tax of the sale of advertising services would severely harm the very economic driver needed to help the businesses we serve to survive and remain viable in order for them to continue to serve their clients and customers.”
Hatch says, notably, the tax would put “many media and marketing organizations” in the D.C. area at “a competitive disadvantage” to rival businesses in other states.
“Many publishers, broadcasters and agencies are already struggling to recover from the dual blows of a pandemic and a record economic downturn. This additional tax would hamper what is already expected to be a slow return to normal economic activity,” Hatch says, noting that MDB has been operating in Washington, D.C. for the past 33 years and is just one local business that “is a key part of any economic recovery blueprint.”