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New Trend Developing? Another Digital Advertising Tax Proposal

On January 14, LB 989 was introduced in the Nebraska Legislature, which would impose sales and use tax on “the retail sale of digital advertisements.” The bill defines “digital advertisement” as “an advertising message delivered over the Internet that markets or promotes a particular good, service, or political candidate or message” (see pages 5-6 of the bill). The definition is a sweeping one, but the exact scope is unclear as the terms used are not further defined. It is also unclear how a taxable digital advertising transaction would be sourced if the proposed legislation is enacted.

The digital advertising tax proposed in the bill would have an effective date of October 1, 2020. Nebraska’s state sales tax rate is 5.5%, with local sales taxes up to an additional 2%.

Similar to Maryland’s SB 2 proposal, because Nebraska would tax digital advertising but not tax non-digital advertising, the proposed tax raises a series of legal concerns (above and beyond the obvious policy concerns).  For example, the tax would be a “discriminatory tax” prohibited by the Permanent Internet Tax Freedom Act (PITFA). The proposal also raises serious First Amendment (singling out digital commercial speech for tax) and Equal Protection (lack of rational basis for tax only on digital advertising) issues.

Practice Note: If enacted, LB 989 would create an uncharted and sweeping tax on digital platforms and advertisers. While this bill will have an uphill battle in 2020 (for example, Nebraska has a short, 60-day legislative session this year and Nebraska has a filibuster rule) the repeated introduction of digital advertising tax bills early in 2020 state legislative sessions may be the start of an alarming trend of legally suspect tax proposals that we are keeping a close eye on.  Businesses impacted by the Maryland and Nebraska digital advertising tax proposals are encouraged to contact the authors to discuss these legislative developments further.

© 2020 McDermott Will & EmeryNational Law Review, Volume X, Number 15

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About this Author

Stephen P. Kranz Lawyer McDermott Will
Partner

Stephen P. Kranz is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C., office.  He engages in all forms of taxpayer advocacy, including audit defense and litigation, legislative monitoring, and the formation and leadership of taxpayer coalitions.  Steve is at the forefront of state and local tax issues, including developments arising in the world of cloud computing and digital goods and services.  He assists clients in understanding planning opportunities and compliance obligations for all states and all tax types. ...

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Mary Kay McCalla Martire, McDermott, local tax disputes lawyer, Internal Audits Attorney
Partner

Mary Kay McCalla Martire focuses her practice on state and local tax disputes. She helps clients with audits, tax-related litigation, letter rulings and settlement conferences. Mary Kay has experience resolving disputes involving income, sales and use, utility and telecommunications taxes, as well as premium and retaliatory tax.

Mary Kay has an extensive litigation background in state and federal court, as well as administrative tribunals. She has particular experience in the defense of qui tam (whistleblower) claims filed in the state tax arena, and has won the dismissal of many Illinois False Claims Act cases. Mary Kay played a key role in most of the reported decisions issued by the Illinois appellate court in this area over the last decade. She also has experience defending clients against class action and consumer fraud claims.

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Partner

Richard C. Call is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm's Boston office.  He focuses his practice on state and local tax litigation before administrative and judicial bodies, at all levels and in multiple states, with respect to income, franchise, gross receipts, and sales and use taxes.  He also advises clients on the state and local tax consequences of business restructurings, as well as the impact of new state legislation on current business operations.

Richard is a frequent publisher on state and local tax topics.  He has published...

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