Will Nebraska tax advertising services?

If it’s “a bad idea” for states to tax digital services, as the Council On State Taxation (COST) maintains, why are some states looking to tax digital advertising services?

Maryland was the first state to adopt a digital advertising tax, and it wasn’t easy: The digital advertising tax was vetoed and challenged in both state and federal courts before being allowed to stand. To date, Maryland is the only U.S. state to specifically tax digital advertising services.

Despite the hullabaloo over Maryland’s digital advertising tax, at least ten other states have considered or are considering a similar tax on digital services. One of the latest to do so is Nebraska.

Two bills introduced in January, LB 1310 and LB 1354, propose a tax on advertising services in Nebraska.

Both LB 1310 and LB 1354 seek to tax companies that 1) do business in Nebraska and 2) have a combined gross advertising revenue of greater than $1 billion. The tax rate would be 7.5% on the “assessable base” for the reporting period, defined as the portion of gross advertising revenue “derived from sales to customers in Nebraska which are delivered or provided to a location within Nebraska.” 

Per the bill, “a digital advertising service shall be deemed to have been provided within Nebraska if it is received on a user's device having an IP address located within Nebraska.” Properly sourcing digital sales in general and digital ads in particular can be tricky for businesses. It can be hard to know where a digital good was received, or used, for instance, and therefore which jurisdiction’s rules govern the sale. They may have trouble determining where people are when they see a digital ad. And IP addresses can be spoofed (faked).

Sourcing issues aside, if enacted, the Nebraska tax would apply to digital advertising services directly related to the creation, preparation, production, or dissemination of advertisements. These services include:

• Advising a client on the best advertising methods for their products or services 
• Art direction, graphic design, and layout
• Mechanical preparation
• Placement 
• Production supervision 

Revenue from the following services would also be subject to the tax:

• Acquiring advertising space in internet media
• Monitoring and evaluating website traffic to determine the effectiveness of advertising campaigns
• Online referrals
• Search engine marketing and lead generation optimization
• Web campaign planning

Domain name registration would not be subject to the tax. Nor would web hosting services or the services of a news media entity. 

On February 1, 2024, COST submitted written testimony opposing LB 1310 and LB 1354 to the Nebraska Revenue Committee. Calling the advertising services tax “new, controversial, and untested,” it argued that “such a tax would put Nebraska at a competitive disadvantage with respect to encouraging businesses to maintain or expand operations in the state.” 

COST also noted that “a recent global tax agreement brokered by the OECD/G20 nations includes a requirement that all existing national-level digital services taxes be withdrawn.” An advertising services tax is really “a disguised tax on business inputs,” it said, and its constitutionality “is in serious doubt.”

Whether the Nebraska Legislature will be swayed by such arguments remains to be seen.

A tax on digital advertising was also introduced in Tennessee in January 2024. According to SB 1899, digital advertising is “not substantially similar to traditional print or broadcast advertising” in part because it doesn’t rely on “the extraction of valuable personal information from users.” The bill imposed a data transaction privilege tax on annual gross revenues derived from data transactions from digital advertising services in Tennessee.

Despite being favorably received, SB 1899 was withdrawn less than a week after being introduced. Two other bills proposing a digital services tax were also withdrawn.

Massachusetts and New York are among the states pursuing some sort of digital advertising tax. In the Bay State alone, there are at least five bills seeking to establish either a state or local tax on digital advertising services or online advertising. To date, none of those bills have gotten much traction.

The District of Columbia Tax Revision Commission is working to strengthen and clarify its tax policy on digital advertising and services. It will submit recommendations to the D.C. Council by the end of 2024. 

New Mexico’s gross receipts tax applies to billboard, print, radio, and television advertising, but the law doesn’t specifically include or exclude digital advertising services because they weren’t widely used when the statute was created. Recognizing this, the New Mexico Taxation and Revenue Department is looking to update the regulations and tax digital advertising.

A number of states sought to tax online ads in 2021 and again in 2022, even as the battle against Maryland’s digital advertising tax raged on. And despite the ongoing controversy surrounding digital advertising taxes, they’ll likely continue to surface so long as Maryland’s ad tax brings in the money.

Learn more about tax policies related to online advertising and digital goods and services in the software section of Avalara Tax Changes 2024.