State Advertising Taxes

Issue
Many legislators, when looking for new state revenue, have suggested expanding the existing sales tax to include many services exempt from taxation. Proponents claim that services are the fastest growing sector of the economy, yet they are not included in the sales tax. Advertising is typically one of the business services targeted. Proposed bills could include taxing media purchases, advertising agency services or both.

AAF Position
A tax on advertising services or placement increases the cost of advertising. Because most clients operate on a fixed advertising budget, they will compensate for the tax by decreasing their advertising purchases. This will have a direct—and negative—impact on the advertising industry, economy and state revenues. Advertising is the engine that fuels the economy. Less advertising means fewer sales. Fewer sales mean reduced revenue and fewer jobs. Fewer sales also result in less sales tax revenue for the state. Advertising is a legitimate cost of doing business and not the type of end-use consumption targeted by sales taxes.

Opposition
Proponents argue that since services are a growing part of the economy, they should be subject to the sales tax. They often do not recognize the distinction between different kinds of services or between business and consumer services. Service taxes may be introduced to raise or replace other sources of revenue.

Status
In September 2008, the Mississippi Tax Study Commission has recommended adding additional business services to the list of taxable services, including advertising. The report calls for removing the exemption for professional services related to advertising but still excludes media buying and other rebilled services from taxation. In its report, the commission stated that one of its objectives was to broaden the tax base. Under present Mississippi law, all services are exempt from taxation unless specifically included.

In April 2008, the Florida Taxation and Budget Reform Commission placed a proposed amendment on the November general election ballot that would have eliminated property taxes and required the state legislature to find new funding sources to offset the lost revenue. After months of intense lobbying efforts, it appeared likely that the measure would not be approved by voters. The amendment was removed from the ballot by the Florida Supreme Court on the basis that the ballot title and summary were misleading.

In 2007, the Michigan legislature passed a measure that would have imposed a six percent tax on many business services, including some advertising agency elements. While the law would not have taxed advertising costs specifically, it would have taxed consulting fees as well as desktop publishing, both of which may be considered part of advertising services. The tax was repealed hours after going into effect.

Since Florida passed and repealed an advertising and services tax in 1987, well over half the states have considered, and rejected, a tax on advertising. The most recent proposal was in Pennsylvania, where an advertising and services tax was passed in the Pennsylvania House of Representatives as an amendment to a bill addressing medical savings accounts (Senate Bill 854) but was stopped by the Senate after a hearing on the matter.

Last updated: October 2008

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