Idaho’s top real estate agents are not cashing commissions in Boise – they’re writing tax laws in Olympia. Washington state legislators keep raising the cost of doing business so fast that they may as well set up a relocation desk for Idaho.
Case in point, digital advertising costs are about to jump roughly 10% for Washington businesses thanks to a record tax package rammed through the Legislature last spring. In total, the new tax package is expected to generate more than $9 billion to prop up state spending in the current budget. Just over one billion will come from extending the retail sales tax to “advertising services” and several high-tech categories (IT support, custom software and website development, security, temporary staffing, and more).
Most kinds of nondigital advertising are notably exempt from the new tax, leaving legacy media like radio, TV, and newspapers as the big winners and internet-based advertising as the biggest loser.
In what can only be described as an obvious response, Comcast is suing the state over it. The complaint argues the advertising provision violates the federal Internet Tax Freedom Act (ITFA), which forbids states from imposing taxes that discriminate against “electronic commerce.” Taxing online advertising while exempting most traditional media is a textbook example of what the federal law was designed to preclude. The company is asking the court to declare the law invalid and stop Washington from enforcing it.
A similar digital advertising tax in Maryland is in the midst of a multi-year legal battle over its constitutionality. Rulings to date have found the tax unconstitutional. The legal uncertainty and novelty of the tax should have given legislators pause. Relying on a tax that may ultimately be repealed to fund essential services is spectacularly foolish.
The ITFA complaint could have been avoided by keeping the tax base broad instead of picking on digital ads, but including legacy media (especially those that write editorials during elections) would have made the politics harder.
The new law taxes services based on where the customer “first uses” them. The Tax Foundation suggests the plain language of this rule could result in Washington-based businesses paying local sales tax on digital advertising purchased anywhere in the world.
While the Department of Revenue may go full metal jacket on state-based enforcement of this tax collection, they’re going to have a much harder time doing so with businesses outside of their jurisdiction. Whenever possible, businesses can and will shift purchasing of these services, putting Washington advertisers at a competitive disadvantage.
The state wants digital advertisers to calculate, allocate, and document taxable activity across jurisdictions. But if advertisers could casually charge their clients 10% extra, they’d already be doing it. Work will shift to competitors in jurisdictions where an identical campaign isn’t saddled with Washington sales tax.
Ad agencies are not the only businesses that need to worry about complex compliance. The Department of Revenue has already issued eight different interim guidance statements to help businesses understand the new law. While very large companies like Comcast have the legal and compliance staff to oppose or comply, many small businesses will be caught flat-footed, having provided services that Washington now considers taxable retail sales, but not having collected the sales tax.
The penalties are steep. Service providers are not retailers (at least they weren’t before this law) and have no experience implementing destination-based taxation. If this is Washington’s way of improving the Idaho economy, they are doing a bang-up job.
One of the “interim guidance” statements explains how the DOR will categorize taxable activities into “dissemination” services or “pre-dissemination” (creative) services. Under this digital “creative” tax, almost any activity that results in a digital product is considered taxable, even if the company had no part in hosting or disseminating any ads.
Therefore, graphic design, search engine optimization, social media content creation, editing, scriptwriting or assistance are all taxable activities. That means content created for YouTube is likely taxable, but content created for television is not. The so-called digital tax is a shining example of positively byzantine tax favoritism.
Meanwhile, this rushed policy is creating more than just advertising chaos. To calm a brushfire of taxpayer confusion, the Department of Revenue recently affirmed (for now) that professional services like law, accounting, and engineering don’t suddenly become taxable just because the product is delivered electronically or via a portal. Had the department gone the other way, every accountant or lawyer who emailed a work product would be a de facto retailer on Oct. 1. That’s how precariously this law was written.
As it turns out, when you sprint tax policy through the legislative process, you get sloppy definitions, carve-outs for the well-connected, and costly uncertainty for everyone else.
Washington should instead focus on funding core functions of government by prioritizing spending without weaponizing the tax code against modern electronic commerce. Comcast’s lawsuit isn’t just corporate pushback – it’s a reminder that Washington lawmakers should stop inventing legally suspect ways to tax businesses.
Perhaps it’s time they take a break from working to improve neighboring Idaho’s economic outlook and instead prioritize the health of businesses in the Evergreen State for a change.
Amber Gunn is a Senior Policy Analyst for the Mountain States Policy Center, an independent research organization based in Idaho, Montana, Eastern Washington and Wyoming. Online at mountainstatespolicy.org.
