How Service Taxes Impact Different Sectors of Advertising
Source: American Advertising Federation – Madison Chapter
The call for an ad tax always raises the issue of how to define advertising. Newspapers, magazines, television, direct mail and outdoor usually come the minds of legislators. However, baseball caps, t-shirts, matchbook covers, blimps and sponsored sporting events are forms of advertising subject to tax. The Federal Trade Commission has never been able to define advertising and Florida failed in 1987. How will other states define advertising?
Three states have imposed an ad tax (Arizona, Iowa, Florida) and each repealed it. The economic dislocation resulting from the application of sales and use tax to the service of advertising was quickly demonstrated in 1987 when over 200 new auditors hired by Florida could not administer the sales tax placed on a wide range of services, including advertising.
What is the reaction to an ad tax by different sectors of the advertising industry? The following scenarios show the changes brought to the marketplace by imposing the sales and use tax to the service of advertising.
Advertisers/Retailers
Advertising budgets are reduced to pay the tax. For example, a 5% tax means 95 cents instead of $1 spent on advertising.
Retail ad budgets often are a fixed percentage of gross receipts mandating the ad budget reduction. A corresponding drop in sales further reduces the advertising budget.
National advertisers can reach demographic markets within the state imposing the tax from outside the state.
Cooperative ad dollars, important to small retailers, are shifted to other states.
Spot advertising quickly goes to other states.
Advertising dollars shift to forms of advertising which are not impacted by the ad tax proposal.
Agencies
The clients purpose is to sell the end product to consumers at retail with assistance from professional advertising services. Advertising services are part of the retail cost to consumers upon purchase of the end product. Thus, ad taxes are double taxation.
The loss in client work is greater than initial reductions to pay the tax due to factors listed below.
The largest agencies easily avoid the tax by moving accounts out of state either to other offices or establish an out of state office for major clients.
Small agencies lose business across state lines and/or face a reduction in client budgets equal to the tax imposed.
In house work by clients is exempt. Thus, creative work, paste‑ups and other services can be lost by agencies.
Agencies in the state imposing the tax can not remain cost competitive.
Winning new business from outside the state becomes very difficult when potential clients face a new tax and/or your Department of Revenue auditors examining their accounts. Advertising agencies from any state can place ads in the state imposing the tax without paying the tax.
Media
The reduction in purchased time and space is increased beyond an amount equal to the tax by factors listed below.
Media outlets across state lines quickly profit.
The cost of advertising during prime time television is a closely guarded secret, even affiliates don’t know…how will the tax be applied?
Spot advertising on television and radio moves to other states.
Cooperative advertising moves to other states.
Print ads move to out of state publications reaching the state.
Broadcast advertising shifts to out of state cable telecasts to avoid the tax.
In state cable operators must charge tax on local advertising.
Test markets in the state are replaced by other markets out of state with similar demographics.