Breaking down Washington’s upcoming digital ads tax

A new ad tax is scheduled to go into effect in Washington State on Oct. 1. Some experts are sounding the alarm about the scope of the law, as well as how it will be implemented.

The legislation, which was signed into law in May, will impose a tax on “all digital and nondigital services related to the creation, preparation, production, or dissemination of advertisements,” according to the text of the legislation. That will include everything from graphic design to search engine marketing, online campaign planning, and site traffic analysis. There are some notable exceptions: billboard advertising, as well as newspapers, publishing, and radio and TV broadcasts, won’t be subject to the tax.

The law reclassifies digital ads (which were previously categorized as a digital automated service) as retail transactions, meaning that digital ads will be subject to the state’s retail sales tax.

The state’s Department of Revenue has been working to hammer out the details regarding how the tax will be instituted, but many of those details remain unclear. Of the bill’s seven sponsors, state senators Emily Alvarado, Claire Wilson, Jamie Pedersen, and Javier Valdez redirected queries to a staffer for the prime sponsor, Sen. Noel Frame, who did not return Marketing Brew’s requests for comment. Senators Frame, Yasmin Trudeau, and T’wina Nobles did not respond to our requests for comment.

With just five weeks left until the law goes into effect, legal, privacy, and marketing experts are voicing their concerns.

“Whether you’re a mom-and-pop business who has an IT consultant who comes in and helps rewire something, or you’re [the] big Amazons and Microsofts, they’re going to be paying tax on these services,” Elizabeth Gray, state and local tax senior manager at the Washington-based law firm Eide Bailly LLP, told Marketing Brew.

Order in the court

One question heading into October is how the tax will impact small businesses compared to larger ones like Amazon and Microsoft, both of which are headquartered in the state. Debbie Reynolds, founder, CEO, and chief data privacy officer at Debbie Reynolds Consulting, which has clients with business interests in Washington, said it’s possible that big businesses may have an easier time complying. Small businesses, on the other hand,may not have the same kind of infrastructure or resources to understand the tax’s impact on them and how to navigate it, she noted.

Some experts believe the tax may encourage some businesses to explore moving their operations elsewhere. “I do believe there will be businesses that will move out of Washington because of this, sadly,” Michelle Strom, principal, president, media at Washington-based Strom & Nelsen Strategic Marketing, Inc., told Marketing Brew.

Amazon declined to provide a comment. Microsoft declined to comment.

We can[’t] work it out

Washington’s impending tax is somewhat similar to a digital advertising tax that passed in 2021 in Maryland, which taxes digital ad businesses that accrue at least $100 million in global annual gross revenue. The law, which marked the first of its kind in the country, is tied up in the courts after multiple businesses sued, claiming that it violates the federal Internet Tax Freedom Act (ITFA), which restricts states from taxing e-commerce businesses if similar services aren’t also charged.

Other states have since proposed similar digital taxes, including California, Louisiana, Nebraska, New York, Rhode Island, and Virginia.

Some experts say there could be an argument that Washington’s law violates the ITFA.

“A lot of states will watch to see how this plays out and see if this is even possible,” Reynolds said. “The internet doesn’t have borders like states have physically.”

There are plenty of other questions. In a document published in July by the state’s Department of Revenue summarizing public sessions held to discuss the law, some advertisers express concern about the difficulty of determining, say, audience geography or how the tax stands to affect existing contracts with clients.

Collecting data on digital ads for tax implementation purposes could also potentially run afoul of other laws already on the books, Reynold said, pointing to Washington’s My Health My Data Act, which restricts some location-tracking that could relate to healthcare data. The potential privacy implications of data collection could introduce one more thing businesses will have to navigate, which Reynolds said could potentially impose a larger burden on small businesses.

“It’s a tight-wire act at this point,” she said.

Looking ahead, Strom said she expects businesses to begin to build the tax into their marketing budgets, which could ultimately mean they have less to spend on advertising itself.

“When a business decides to cut their marketing, it hurts them because they have less exposure,” she said. “It impacts the businesses and brands themselves, and it impacts the agencies, and also it impacts media outlets, because there will be less media purchase because of this tax.”