A few weeks ago, Maryland became the first state in the U.S. to impose a tax on digital advertising. Over the coming months and years, it may be joined by many more states seeking to pass similar taxes. However, legislators in the U.S. are hardly the first to attempt to tax advertising platforms like Google, Amazon, Facebook and Microsoft.
Similar taxes have been passed in the UK, Austria, France and Turkey. In some of those countries, the platforms have simply passed the additional cost onto its customers, the advertisers. Assessing the implementation of digital ads taxes in those countries, along with how marketers in those regions have adapted to them, can help domestic advertisers prepare should these taxes begin to show up in more states across America.
What you need to know about Maryland’s digital ads tax
The details. Maryland’s tax applies to revenue from digital ads that are shown inside the state and is only applicable to companies that generate over $100 million from digital advertising.
Ads from companies (in this case, platforms like Google, Microsoft, Amazon and Facebook) will be taxed at a rate of 2.5% to 10%, depending on their annual global revenue. Ads from Google, which brings in far more than $15 billion a year in revenue, would be taxed at 10%. The tax will come into effect beginning this tax year, and it is expected to generate approximately $250 million in its first year, with the funds from it going towards Maryland’s schools.
Why only target tech’s biggest companies? As local businesses struggled to survive the effects of the pandemic, tech’s biggest companies saw record-breaking growth as safety concerns pushed many aspects of life online. However, as we’ve seen in countries that have passed similar taxes, the additional fees may ultimately fall on the businesses advertising on these platforms, and they, in turn, may pass them onto their respective customers.
Like in Europe, the tax may get passed on to advertisers
“Typically, these kinds of cost increases are borne by customers and like other companies affected by this tax, we will be adding a fee to our invoices, from November,” a Google spokesperson told The Guardian in September. The company also reflected this policy update on its help page about country-specific fees.
Google was semi-transparent about passing on the tax. While Google did email advertisers when it began adding the tax to their invoices, some feel that the company should have done more to communicate the change.
When there is an important change, every account user typically receives a notification or email; “In this case, only the billing contact received an email,” said Martin Röttgerding, CEO and head of SEA at German digital marketing agency Bloofusion. “Were we supposed to just stumble upon this one day, when a client calls us and asks why they were paying 5% [the tax rate in Austria] more than we’ve been reporting?” he added, explaining that the change would be easy for agencies to miss because the additional costs only appear on invoices, not anywhere else in the account or in the reporting.
“A cost of doing business.” “Our clients have just had to accept it as a cost of doing business and whilst we’ve explained to them why it is being added, ultimately there is nothing that can be done about it and they have to just pay it,” said Andy Headington, CEO of UK-based digital marketing agency Adido. The professionals that spoke to Search Engine Land for this article shared similar sentiments: they were frustrated that the tax levied against platforms was being passed on to their (or their clients’) businesses, but felt that the 2–5% rate in the UK and Austria did not have a considerable impact on their strategies.
The rate in Maryland, though, has a ceiling of 10%, which may mean that domestic advertisers might feel differently if they were forced to shoulder the burden. To avoid that scenario, the Maryland General Assembly introduced a new bill, SB 787, which would prohibit the platforms that derive revenue from digital ads to pass those costs onto their customers (the advertisers). Even so, platforms can find ways to recoup those costs indirectly, such as by raising their prices.
Maryland’s the first, but it may not be alone for long. Legislatures in other states, like New York, Connecticut, Washington, West Virginia, Montana, Nebraska and the District of Columbia are already considering imposing their own taxes on digitals ads or the sale of data, the New York Times reported. While efforts in West Virginia and New York failed last year, proponents may feel like they have a better chance now that Maryland has set something of a precedent.
Legal challenges to Maryland’s digital ads tax are expected. Since Amazon, Facebook, and Google are not based in Maryland, opponents may argue that the law violates the Constitution by taxing activity that originated out of the state. Federal law also says that taxes on digital goods and services must also apply to their physical equivalents, which may provide these companies with more grounds to challenge the tax. How these challenges play out in courts may provide other states with best practices on how to impose their own digital ads taxes.
What will Facebook do? In the UK, both Google and Amazon passed the tax onto their customers. However, Facebook did not. We reached out to Facebook about whether it will pass on the Maryland tax, or similar taxes imposed at the state or federal level, but did not receive a reply as of the time of publication.
What you can do to prepare for digital ads taxes
Much remains to be determined about digital ads taxes in the U.S.: If legal challenges are successful against Maryland’s tax, it could stall the momentum of similar legislation in other states. On the flip side, if the tax sticks, platforms will have to respond, and their actions in the UK, Austria and Turkey may be repeated domestically. The PPC professionals that spoke to Search Engine Land for this article offered the following advice, based on their experiences with the taxes in the UK and Austria:
Explicitly communicate the change with your clients. “It can be tricky to explain exactly what this [tax] is for, or why they have to pay it, but many now accept it as the price of doing business on Google,” said Arianne Donoghue, founder of Tempest Marketing, “Be very clear on how you plan to communicate it to clients, and consider drafting something now to run by your client services team.”
As with any policy change that may affect your clients, proactively communicating can help them keep track of where their money is going, decide where it’s best spent and budget appropriately.
Adjust your budgets accordingly. “We now have to factor this in when budgeting for advertising, which is another proportion of spend that doesn’t go directly into media,” said digital marketing manager Azeem Ahmad, suggesting that advertisers who’ve already budgeted out their spend for the year shave off a small percentage to see how their forecasted metrics change.
“As a rule, when proposing budgets, always give several options — some with lower/reduced spend and conversions, and some demonstrating what even more investment can bring,” he said, “If you’re client-facing, demonstrate your expertise when you’re planning and requesting spend by showing how much of an impact this additional cost that advertisers will be absorbing will bring.”
If the platforms decide to split the tax with advertisers, the fees may not be such a consideration, as is largely the case in the UK. “Don’t restructure your account for a few pennies,” said Bloofusion’s Martin Röttgerding, explaining scenarios in which advertisers might want to make adjustments:
- “You have separate accounts for each [state] — You shouldn’t have any problems. Just adjust your budgets and bidding goals.”
- “You have separate campaigns for each [state] — You cannot use shared budgets or portfolio bidding strategies unless the tax rates are the same for all of them (like Austria and Turkey both have 5%).”
- “You have campaigns targeting [states] with different tax rates — To control budgets, you’d have to separate those. As for bidding: If you’re using Smart Bidding: Separate the campaigns. Otherwise, simply use bid adjustments for the affected [states].”
And, remind your staff and clients that reporting doesn’t truly reflect all their costs as none of the metrics include taxes on ads.
Assess the bigger picture. “As the tax is charged on all services offered by multinational search and social companies, it’s not just Google, it’s on Amazon, LinkedIn, Facebook and many others,” Headington said, recommending that businesses spread their advertising budget across multiple platforms in order to mitigate risk. “Many rely solely on Google to bring in leads and sales and in doing so it’s a very risky business — they are at the mercy of their decisions and policies and can see their businesses dwindle almost overnight,” he added.
Although these companies are all subject to digital ads taxes in Maryland and Europe, the way they handle those taxes may differ. For example, advertisers on Facebook, which did not pass the costs onto its customers in the UK, have been spared the 2% tax on that platform.
“[The tax] seems to have forced those advertisers who rely heavily on Google to potentially diversify their channel offering, with some mentioning that the percent lost to fees could be better spent on other channels,” Ahmad said. Diverting your budget away from a given platform or channel should not be taken lightly, as it may mean starting from scratch and reframing expectations for clients. That being said, a 2.5–10% tax on all the major platforms, passed down to advertisers, may mean that they have to seek out higher ROI opportunities.