2026 Digital Taxation Preview: Base Expansion and Legal Challenges
Digital advertising taxes are attracting their fair share of critics, and some of this criticism will play out in the courtroom in 2026. Without a doubt, U.S. states are continuing their trend of broadening their tax base through digital taxation. Expanding the sales tax base to include many digital goods and services, such as advertising, data processing, streaming services, and software subscriptions, is necessary for states to adapt to the expanding digital economy and is also a growing, lucrative source of much-needed revenue. Although we need to keep in mind that in the U.S., digital services taxes derive mostly from sales and use taxes, some states also impose a digital advertising tax on the gross receipts from digital advertising revenue of large tech companies.
Consequently, as digital advertising tax revenue continues to grow, it can generate substantial tax revenue for state governments, helping to balance their budgets and prevent shortfalls. In the U.S., digital advertising spending surpassed traditional media advertising by over $20 billion in 2019 and has continued to grow, now accounting for more than 50% of total advertising spending. It is estimated that the digital advertising industry is valued at about $600 billion globally and is projected to reach $1.1 trillion by 2030. However, here in the U.S., this is when the significant legal risks for both state governments and large tech multinationals are greatly compounded, and the cost/benefit calculus becomes imbalanced after rounds of tumultuous legal battles and challenges on
In its 2026 State Tax Competitiveness Index report, the Tax Foundation describes Maryland’s digital advertising tax as “a harmful and non-neutral” tax applied to gross revenue from digital advertising services.” The Tax Foundation also asserts that the “definitions and sourcing rules for this tax are ambiguous and nontransparent, resulting in the double taxation of digital advertising profits.” Not surprisingly, the Competitive Index dings states for imposing these types of taxes.
Washington state’s new digital advertising tax – referred to as ESSB 5814 (Engrossed Substitute Senate Bill 5814) or SB 5814 (Senate Bill 5814) – is also drawing criticism, and legal challenges. In September, Comcast filed a legal challenge to block the new law, arguing that it violates federal law and the Internet Freedom Act (ITFA).
This lawsuit is not surprising. As I mentioned in another post, the law extends sales tax to some online and digital advertising services while excluding other advertising formats. This dynamic may lead to discriminatory taxation that potentially violates the ITFA’s prohibition on taxing e-commerce differently from traditional, analog commerce.
A spokesperson for the Washington’s Department of Revenue told the Washington State Standard that eliminating the new tax law would reduce tax collections by approximately $475 million over the next four fiscal years. Interestingly, a smaller company, Security Services Northwest, filed a lawsuit regarding SB5814 in late September before voluntarily dropping the suit in November.
That said, the Comcast-Washington lawsuit is a big deal, and the next hearing on the suit is slated for mid-January. There’s a lot at stake in how the courts rule in this matter.
In addition to the potential impacts to Washington’s budget and its attempt to expand its sales tax base, the ruling will have significant implications on other states with similar digital advertising bills progressing through the legislative process. Both California and New York have introduced bills based on Maryland’s digital advertising tax. Massachusetts and Rhode Island also have introduced taxes on digital advertising revenues for companies that earn above specific thresholds.
States will intensify their efforts to address the negative fiscal impacts of a narrowing sales tax base in 2026. We’ll keep you posted on the legal rulings and precedents that shape these activities – and your tax compliance burdens.
