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    ARTICLE - US

    California Digital Advertising Tax

    18 Apr

    California Digital Advertising Tax - Introduction

    The California State Assembly took a significant step by incorporating a digital advertising tax into legislation with A.B. 2829, an act initially focused on property tax. This amendment, effective from 1 January 2025, positions California alongside Maryland as states pioneering the taxation of digital advertisements, although it simultaneously steers them into contentious legal waters.

    Key Aspects of A.B. 2829

    Tax Rate and Applicability

    A.B. 2829 sets a flat tax rate of 5% on the gross revenues generated from digital advertising services within California. This contrasts with Maryland’s variable tax rate but maintains the threshold for applicability to entities boasting at least $100 million in global annual gross revenue.

    Definition of Taxable Services

    The bill adopts a broad definition of "digital advertising services" akin to Maryland's, encompassing various forms of digital advertisements such as banner ads, search engine advertising, and more. It also mirrors Maryland’s exclusion of services on platforms owned by broadcast or news media entities.

    Legal Concerns

    Reflecting on the Maryland precedent, the California proposal is anticipated to face legal challenges under several constitutional grounds, including potential violations of the Internet Tax Freedom Act, Commerce Clause, Due Process Clause, and First Amendment.

    Prohibition on Direct Cost Pass-Through

    Similar to Maryland’s approach, the bill seeks to prevent companies from directly transferring the tax burden onto customers purchasing digital advertising services through separate fees or surcharges. This aspect is currently a point of litigation in Maryland, suggesting a likely battleground for California’s proposal as well.

    Potential Implications and Legal Challenges

    The adoption of A.B. 2829 signals California's intent to tap into the lucrative digital advertising market for tax revenue, a move reflecting growing scrutiny over the economic influence of digital platforms. However, this initiative places California on a collision course with federal laws and constitutional protections, echoing the ongoing legal dispute over Maryland's digital advertising tax. Legal experts anticipate that California's digital advertising tax will encounter lawsuits challenging its constitutionality, drawing from the legal arguments presented in Maryland's ongoing litigation. These challenges could center on federal preemption issues, such as the Internet Tax Freedom Act's prohibition against discriminatory taxes on electronic commerce, and constitutional concerns related to interstate commerce, due process, and free speech.

    California Digital Advertising Tax - Conclusion

    California's legislative amendment to introduce a digital advertising tax with A.B. 2829 marks a bold foray into uncharted legal territory, mirroring Maryland's contentious tax measure. As California braces for potential legal battles, the outcome of Maryland's case could serve as a bellwether for the future of digital advertising taxation in the United States. Stakeholders, including tech giants, advertisers, and legal observers, will be watching closely as California navigates the complex interplay of state taxation, federal law, and constitutional rights in the digital age.

    Final thoughts

    If you have any queries about the proposed California Digital Advertising Tax, or US tax matters more generally, then please get in touch.
    Digital

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