Special Report: How COVID-19 is changing business sales tax obligations and enhancing risk [Part 7]

COVID-19 is changing the way we do business, the way we buy, the way we sell — and how all of this affects businesses of all sizes and industries as well as their customers.

Greetings from my home office in NYC. It’s my Week 7 covering COVID-19 changing the way you and I literally live our lives. I sincerely hope you and your families are safe and well. In this week’s installment of my special report covers how this crisis is impacting businesses, buyers and the tax landscape. You can follow this series and more information on sales and use tax on our blog.

This is the seventh blog in this ongoing series.

The Impact of COVID-19 on states so far

States and municipalities across the nation are estimating they will need as much as $750B to shore up revenue shortfalls and expense increases, primarily related to the COVID-19 pandemic. Many states have called their situations dire and have expressed the need for significant federal funding. In addition, a few states have begun to expand their tax reach using “economic nexus” for income tax purposes and attempting to expand the obligation for sales tax to digital advertising. Other states are considering the imposition of new taxes such as a gross receipts taxes that go beyond digital advertising. We can expect states and municipalities to expand their state sales tax base as well as sales and use tax rates to help make up for revenue shortfalls.

One recent development that has been interesting to track is the potential of states to impose sales taxes on digital advertising.

States Exploring Sales Tax on Digital Advertising

A few states have introduced bills in their legislatures that would extend their sales tax reach to digital advertising. Maryland’s legislature is the first state in the U.S. to have passed a bill to impose a sales or “gross receipts” tax on digital advertising. As expected, Maryland’s Governor Hogan vetoed the bill today, May 7. Maryland’s legislature passed the bill with a veto-proof majority, so whether the bill becomes law depends on whether any legislators change their minds. This would need to be the case for the veto to be overridden. In light of the significantly increased revenue needs of the state as the result of COVID-19 developments, this change of heart by legislators has become especially challenging. The legislature can override his veto by a three-fifths vote in both chambers. The Maryland legislature is planning to convene for a special session at the end of May.

If signed into law, the tax on digital advertising is expected to raise $100 million. However, the bill is likely to face many legal challenges. Many believe that the bill violates the federal Permanent Internet Tax Freedom Act (PITFA). Signed into law in 2016, the law prohibits states and localities from assessing taxes on internet access. Second, it prohibits “discriminatory taxes on electronic commerce.” Many believe that Maryland’s bill violates this portion of the PITFA.

There are many other problems with the bill including its failure to clearly define what a digital advertising service is. The bill defines digital advertising service as including advertisement services on a digital interface. It is not clear what is considered a digital interface because it is vaguely defined.

Nebraska and New York Follow Maryland’s Lead


Quickly following the introduction of the bill in Maryland, Nebraska introduced a bill to expand the state’s sales tax base to include digital advertising. The bill has not yet progressed very far.

New York

Identical bills were recently introduced in the New York Assembly and Senate that would impose sales and use tax on digital advertising services, unless such services were purchased for resale.

“Digital advertising services” is broadly defined 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.” (With the exception of the added last clause, the definition of “digital advertising services” is identical to the definition in the digital advertising in the Maryland legislation.

While the New York bill is very similar to the Maryland bill, the New York digital advertising tax would be limited to the advertising services that use personal information about the people that the ads are being served to. This limitation may have been inspired by Professor Paul Romer, an economist who wrote a New York Times opinion last year that advocated for a tax on targeted digital advertising. He also testified in support of Maryland S.B. 2 before the State Senate’s Budget and Taxation Committee but stated that he wanted to tax only targeting and tracking advertisements.

The New York bill has been referred to the Budget and Revenue Committee for further action.


Bottom line is that states and municipalities are currently and will increasingly face severe revenue shortfalls. Given differing federal government priorities, it is unwise for many states and municipalities, particularly those heavily hit by COVID-19, to rely on the federal government to provide sufficient and timely funding. What to do? Expanding state and municipality sales tax bases and increasing sales and use tax rates are approaches many states are actively examining or acting upon. The gross receipts tax is another option for states that would significantly increase tax revenue but hit businesses hard. Much more on the gross receipts tax in my next Special Report. If you have questions, reach out to me at  mark.friedlich@wolterskluwer.com.

If you are seeking a sales tax automation and compliance platform to help you keep it all straight, sign up for a demo of CCH® SureTax® platform.

This special report is part of an ongoing series from Wolters Kluwer focusing on tax and business developments, legislation and government relief efforts and other COVID-19-related activities. If you have questions, concerns or need additional insight on your situation, you can reach out to author and sales and use tax expert, Mark Friedlich at mark.friedlich@wolterskluwer.com.

COVID-19 (Coronavirus) Resources for Tax & Accounting Professionals

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Wolters Kluwer is right by your side to help you stay up to date with tax and compliance changes and support your ability to work remotely. Please visit our Coronavirus (COVID-19) Resource Page for Tax & Accounting Professionals.


Mark Friedlich

All stories by: Mark Friedlich

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