On April 1, 2024, the California State Assembly amended a digital advertising tax into A.B. 2829, formerly a property tax bill. As amended, A.B. 2829 would adopt the digital advertising tax effective January 1, 2025. The California proposal is similar to the Maryland Digital Advertising Gross Revenues Tax, which is currently the subject of litigation at the Maryland Tax Court. As the California proposal is similar to Maryland’s, it also likely violates the Internet Tax Freedom Act, Commerce Clause, Due Process Clause, and First Amendment.
As amended, A.B. 2829’s digital advertising tax would be imposed on the annual gross revenues of a person that are derived from digital advertising services in the state. Unlike Maryland, the tax would be imposed at a rate of 5%, rather than escalating rates based on global annual gross revenues. However, like Maryland, the tax would apply to only persons with at least $100 million in global annual gross revenue, even including revenues unrelated to digital advertising.
The tax base in A.B. 2829 is the same as Maryland’s: “digital advertising services,” which means “advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services.” The California proposal also excludes from the tax “advertisement services on digital interfaces owned or operated by or operated on behalf of a broadcast entity or news media entity.” Because there currently is no sourcing regime in A.B. 2829, it is impossible to determine when a digital advertising service would be taxable by California.
And much like the Maryland digital advertising tax, California would also prohibit taxpayers from “directly pass[ing] on the cost of the tax … to a customer who purchases the digital advertising services by means of a separate fee, surcharge, or line item.” Maryland’s pass-through prohibition is currently in litigation before the U.S. District Court for the District of Maryland.