A proposal in Harrisburg is more harmful than proponents make it seem.
As the owner of a small Pennsylvania carpentry business specializing in historic home restoration, renovation and traditional woodworking, advertising used to mean choosing among options I could barely afford. Television was out of reach. Radio and newspaper advertising could consume a big chunk of a small marketing budget. The internet changed that.
Today, I can reach potential customers through search, social media, streaming video and audio, apps and other online services. Digital platforms compete for my advertising dollars, just as I compete for customers. That competition gives businesses like mine more choices and helps keep advertising affordable and efficient.
Advertising also supports countless free and lower-cost services that consumers use to discover new products and businesses. It’s part of a healthy, competitive economy.
That’s why Pennsylvania’s proposed digital advertising tax has it backward.
The proposal would tax digital advertising while leaving traditional forms of advertising untaxed. Pennsylvania would raise the cost of many advertising options small businesses can actually afford while favoring older media that many of us cannot.
Supporters say the tax would be paid by large technology companies, not businesses that advertise with them. But the bill itself isn’t limited to large technology companies. It contains no revenue threshold or small-business exemption for providers of digital advertising. A smaller company that earns revenue by selling advertising on a website or app could be subject to the same tax.
And this isn’t a tax on profits. It’s a 5% tax on covered gross receipts. That means the tax is based on advertising revenue, regardless of whether a business ultimately makes a profit from it. For a small or growing company operating on thin margins, that distinction matters.
There’s another problem with the argument that businesses and consumers won’t be affected simply because the tax is formally imposed on advertising providers.
I run a small business. Taxes are part of the cost of materials, fuel, equipment and nearly everything else I buy. Businesses have to account for those costs when setting prices. A tax doesn’t stop affecting customers just because the government sends the bill to somebody else.
Maryland already tried this experiment. Lawmakers there were so concerned that companies would pass the tax along that they tried to stop them from showing it to customers as a separate charge. A federal appeals court struck down that restriction.
Now Maryland’s digital advertising tax has been struck down by the Maryland Tax Court. The court ordered refunds with interest to the companies that challenged the tax. After years of litigation and court-ordered refunds, it’s fair to ask what problem this tax actually solved.
Supporters here have openly argued that “out-of-state Big Tech companies” should be made to pay. But the Maryland Tax Court also found that the state’s tax violated the dormant Commerce Clause and due process, in part because its structure relied on global revenue rather than activity within the state. After what happened there, Pennsylvania supporters may want to be careful saying that part out loud.
There’s also a more basic question: If these companies were headquartered in Pennsylvania, would lawmakers still be talking about them this way? I hope not.
Supporters also describe digital advertising as controlled by a “handful” of companies, even as they point to several major platforms competing for the same advertising dollars. From where I sit, I see companies competing for my business across search, social media, streaming, audio, apps and other online media. If lawmakers want more competition, how does making those options more expensive help?
There’s an even broader affordability issue. Advertising helps make many online services free or less expensive for consumers. Raise the cost of that model enough, and consumers can end up paying through higher prices, subscriptions or fewer free services.
That should matter even to someone who has never purchased an online ad. When advertising becomes more expensive, businesses pay more to reach customers, and consumers can pay more for the services advertising helps support.
Pennsylvania should look for ways to lower costs, expand choices and attract the next generation of businesses. A tax that makes one of the most affordable forms of advertising more expensive moves in the wrong direction.
Proponents call this “modernization,” but the bill would extend a gross receipts tax framework that still applies to steamboat and telegraph companies to digital advertising. That’s not modernization. It’s an old tax applied to a dynamic new economy.
William Hillman, owner of Hillman Carpentry