Imagine running a small bakery in Tacoma, Washington. You use Instagram to draw foot traffic, search ads to compete and a local marketing firm to stay visible. These aren’t luxuries; they’re lifelines.
But under a new Washington State law, online marketing services such as SEO, web design and social media management will soon carry a sales tax of up to 10% depending on the localities. And that’s part of a growing national trend. Across the country, lawmakers are proposing ways to tax digital advertising, driving up the cost of staying visible online.
Maryland enacted the first tax on digital advertising revenue in 2021. The tax is levied on companies with global annual gross revenues of $100 million or more and generating at least $1 million from digital advertising services in Maryland, with tax rates ranging from 2.5% to 10% based on global revenues. The law bars covered platforms from itemizing the tax on customer invoices, but not from raising prices. The result is higher costs for businesses and consumers.
A Deloitte study of a similar tax in Europe estimates that just 5% of the tax burden would fall on tech platforms, with the remaining 95% passed on to advertisers and consumers.
History offers another warning. When Florida taxed advertising in the 1980s, ad spending plummeted and the law was repealed within a few months. Since then, falling digital ad costs have opened doors for small businesses.
Nebraska went a step further, bundling a digital ad tax with levies on cigarettes and gambling, treating a core business expense like a public harm. Even traditional media companies that now rely on digital ads pushed back.
Advertising isn’t dangerous; it’s essential. It’s also foundational to the economy: A recent Interactive Advertising Bureau study found the U.S. internet economy—underpinned by digital ads that enable free access to news, tools and entertainment—accounts for 18% of U.S. GDP, supporting 28.4 million jobs across all 435 congressional districts.
Washington’s law adds sales tax to digital services such as SEO, web design, social media management and online ads—while exempting traditional formats including billboards and print. A small business paying $2,000 a month to a marketing firm could see $200 in added costs or $2,400 a year to stay visible. Some firms may try to absorb the hit, but the cost still falls on small businesses. Instead of encouraging innovation, the law sends a clear message: If your business is digital, you pay more.
And it’s not just local shops or agencies at risk. Podcasters, streamers and writers in the creator economy rely on ad-supported platforms to reach audiences and earn income from their content. Raising barriers to online advertising shrinks the revenue pool they depend on to build careers.
These taxes may not even be constitutional. The Federal Internet Tax Freedom Act prohibits discriminatory taxes on digital services, and the Commerce Clause in the U.S. Constitution bars states from burdening interstate commerce. Taxing digital ads while exempting traditional media and targeting out-of-state providers raises serious legal concerns.
Meanwhile, Congress is investing in digital infrastructure by expanding broadband, boosting access and passing tax incentives to support small businesses and entrepreneurs. If states can tax the very services those businesses rely on to grow, it undermines the entire effort.
U.S. Senate Majority Leader John Thune has introduced legislation to prohibit discriminatory digital taxes and create consistent national rules. It’s time for Congress to act, not just to protect American innovation, but to protect the businesses and creators who depend on digital tools, especially digital ads, to survive.
Digital advertising has opened doors for countless small businesses and creators. Taxing those tools—often to fill budget gaps—removes one of the few affordable ways they can compete. Policymakers should ask if they are solving a problem or creating a bigger one for small businesses and their customers.