As in other states (including Maryland, Nebraska and West Virginia), New York State legislators have recently trained their sights on digital advertising as a target for increasing tax revenues, and while such efforts have yet to result in New York’s imposition of a tax directly on digital advertising services, advertising industry participants would be well-advised to monitor such legislative initiatives because they could have a significant and far-reaching impact on the financial results of advertising industry participants.

S.8166, an April 2020 bill introduced in the New York State Senate seeks to extend application of New York State’s sales tax to “digital advertising services” in order to fund a zero interest student loan refinancing program.  S.8166 defines “digital advertising services” as “advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services which markets or promotes a particular good, service or political candidate or message.”  A “digital interface” is defined as "any type of software, including a website, part of a website, or application, that a user is able to access,” and a “user” is defined as “an individual or any other person who accesses a digital interface with a device.” If enacted, S.8166 would be effective 30 days after the date of its enactment and expire and be deemed repealed five years after its effective date.  According to the New York State Senate website, S.8166 is still with its Budget and Revenue Committee.

More recently, on January 7, 2021, S.1124, which would establish a new tax on annual gross revenue derived from digital advertising by persons with global annual gross revenues of $100 million dollars or more, was introduced in the New York State Senate. The justification for the imposition of this new tax is described as follows:

“Large digital platform companies are collecting user information to sell targeted digital ads to users. Taxing companies with massive global annual revenues on gross digital advertising revenue will generate new, necessary revenue for New York State. In a state that has incredible wealth as well as incredible poverty, it is fair to ask those who can afford it to contribute more revenue to properly address our state's priorities.”

This tax would be apportioned to New York based on receipts derived from digital advertising provided in New York, and S.1124 directs the New York State Commissioner of Taxation to adopt regulations governing this apportionment determination.  For purposes of this tax, the terms “digital advertising services,” “digital interface” and “user” are defined in a manner substantially identical to the manner in which such terms are defined in S.8166, as set forth above, except that the definition of “digital advertising services” adds the qualification that such services “use personal information about the people the ads are being served to.” The applicable tax rate would be:

• 2.5% for a taxpayer with global annual gross revenues of $100,000,000-$1,000,000,000;
• 5.0% for a taxpayer with global annual gross revenues of $1,000,000,000-$5,000,000,000;
• 7.5% for a taxpayer with global annual gross revenues of $5,000,000,000-$15,000,000,000; and
• 10.0% for a taxpayer with global annual gross revenues exceeding $15,000,000,000.

Like the federal and state income tax regimes, S.1124 would require any person having New York annual digital advertising services gross revenue of at least $1,000,000 to file an annual return and quarterly declarations of estimated tax and pay the annual tax on a quarterly basis with its quarterly estimated tax declarations.  If enacted, S.1124 would apply to tax years beginning on and after January 1, 2022.

Historically, advertising services have been exempt from New York’s sales tax, but the growing trend of state legislative efforts in New York, as well as several other states, to directly tax digital advertising services, combined with ballooning budget deficits in the wake of the recent economic downturn triggered by the COVID-19 pandemic, suggests that it may not be long before the adoption of New York taxes focused directly on digital advertising services.  We suggest that you keep a close eye on these legislative efforts and take appropriate steps to prepare for the financial fallout from their implementation.