Recently Connecticut Legislative Leaders announced support for a digital advertising tax (“Connecticut Digital Advertising Tax”) proposed by the Connecticut Joint Committee on Finance, Revenue and Bonding (the “Finance Committee”). Connecticut joins Maryland, Massachusetts, new York, and Texas, among others, as states with concrete digital advertising tax proposals on the table (and in Maryland’s case, a law enacted).
Connecticut’s digital advertising tax idea was first proposed this legislative season by bills HB 6187 and SB 821. Connecticut “bills” are short statements in non-statutory language for the relevant legislative committee to consider. HB 6187 and SB 821 were referred to the Finance Committee on January 29, 2021 and February 3, 2021, respectively, and the Committee held a meeting public audience on the two bills on March 15, 2021. Following this hearing, the Finance Committee presented SB 1106, which included a fully drafted Connecticut digital advertising tax proposal that was heard on April 20. The finance committee also amended the budget implementation bill (HB 6443) on April 22 to incorporate an identical version of the Connecticut digital advertising tax proposal. The implementation bill is currently pending before the House.
Connecticut’s digital advertising tax proposals are similar to the digital advertising tax adopted by Maryland. That is, “digital advertising services” are defined as “advertising services on a digital interface, including banner ads, search engine advertising, interstitial advertising and other comparable advertising services”. This definition is almost identical to the Maryland definition. The “tax base” is defined as “the gross annual revenues from digital advertising services in the state”. The tax rate schedules are also the same as in Maryland: the tax rates vary from 2.5% to 10% of the tax base and the rate increases according to global annual gross income. Under both proposals, the Connecticut digital advertising tax would come into effect on January 1, 2022.
As such, Connecticut’s digital advertising tax presents some of the same constitutional issues that we have already discussed regarding the Maryland digital advertising tax in that the tax base is determined according to the activity in the state but the rate is determined according to global annual revenue. It also only applies to digital advertising, raising issues related to the Internet Tax Freedom Act.
The Connecticut proposals are also absent from any guidance on sourcing. Instead, Connecticut’s digital advertising tax proposals would allow the Commissioner of Tax Services to pass allocation and distribution regulations for the purposes of calculating the tax base, raising concerns about delegation. unconstitutional legislative powers.
Notably, Connecticut’s digital advertising tax does not contain any of the provisions recently enacted by Maryland SB 787 amend the Maryland digital advertising tax to exempt news media and broadcast organizations and to prohibit taxpayers from passing the tax directly on to customers as a separate charge, surcharge, or item.
Ultimately, because Connecticut’s digital advertising tax proposals are so similar to Maryland’s digital advertising tax, she would face many same legal challenges, including constitutional challenges and the Internet Tax Freedom Act, if passed. We will continue to keep you updated with SALT Savvy on the wave of digital advertising taxes sweeping the country.