As California grapples with its potentially historic $73-billion deficit, the proposal for a digital advertising tax geared towards supporting local journalism has emerged as a significant point of discussion. However, California may find valuable insights by observing Maryland’s own tumultuous experience with a digital ad tax.
The digital ad tax debate in Maryland culminated in a court battle that is still playing out. Given that Maryland’s digital ad tax has brought up substantial constitutional issues, the state’s Supreme Court—and potentially the US Supreme Court—will have to determine its ultimate fate. This situation warns of the years-long complexity that California may face should it decide to adopt a similar tax.
Before deciding to levy a tax on digital advertising, pertinent questions for California include the length of time it would take to confirm the legality of a newly established digital ad tax, the exact revenue it would generate, when this income would be collected, and any resulting economic, reputational, and legal costs from potential litigation.
State Sen. Steve Glazer (D) has drawn attention to the related litigation battles in Maryland. Furthermore, he has pointed out how recent technological developments do not align cleanly with traditional tax mechanisms, leading to potential under-taxation issues. Glazer suggests that a digital advertising tax could be a significant financial resource, touching on how digital advertising platforms allow free usage to their consumers in exchange for advertisements and user data collection.
However, his assertion that digital advertising platforms “generate tremendous profits” as they do not pay for business inputs such as user data could be interpreted as conjecture, considering they also need to invest heavily in capital, labor, software R&D, server maintenance and operation, and energy consumption. Additionally, defining and classifying digital advertising and placing a geographical label on where it’s purchased, sold, or used can prove to be exceedingly difficult.
While Senator Glazer’s discussion on digital advertising taxation is worthy of appreciation, the situation in Maryland strongly implies that California should approach the topic with caution. Revisiting traditional taxation methods that stimulate the economy might serve California better in terms of nurturing fiscal stability.
To read the full analysis by BakerHostetler’s, Mike Semes, on this matter, you can visit the complete article here.