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Are State Digital Services Taxes Off the Table? Don’t Count On It

While digital services taxes (DSTs) have become almost de rigueur in European Union countries – France, Italy and Austria, among others, now tax certain revenue streams of digital companies – similar proposals from U.S. states haven’t made much headway. So far.

In 2020, Maryland lawmakers introduced a tax on revenues from digital advertising; the bill was vetoed by Gov. Larry Hogan last May.

But the rumors of DST’s death are greatly exaggerated, and tax leaders should keep a close eye on developments.

While Maryland’s initiative didn’t make it past the governor’s office, the DST idea is still very much alive, as increased revenue will be demanded by most states due to their post-Covid recovery and budget short-falls. The Nebraska legislature has considered a digital advertising tax that resembles the Austrian and Italian DSTs. New York State legislators have floated the idea of a tax on the data economy.

It’s true that any new DST initiatives will face strong headwinds. As I put it in the article, Maryland is not in France. U.S. States operate under legal traditions and constitutional frameworks that are very different from those of EU member states. Legislation designed along European lines might not be able to withstand the legal challenges that it would inevitably face. DST opponents can also point to negative economic impacts when higher advertising costs are passed along to end-consumers.

That said, the states’ urgent need for new revenues may yet be the CPR that restores DST’s heartbeat. Still, new forms of taxes, such as re-defined cable and streaming taxes and other supplemental revenue will also be required.

Faced with budgets shredded by the pandemic, legislators could see digital services as a huge, untapped reservoir of potential income, and their efforts to tap into it may be hasty and ill-considered.

Tax leaders should advocate for fair tax policymaking and promote alternatives to what in the article I describe as “legally dubious, economically questionable and ineffective” DST laws. For example, it’s worth reminding legislators that changing existing tax rates is less disruptive for businesses than creating new tax categories.

DST may be an idea whose time has not yet come. But it’s also one that may not be too far way.

Please remember that the Vertex blog provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information. The views and opinions expressed in the Vertex blog are those of the authors and do not necessarily reflect the official policy, position, or opinion of Vertex Inc.

George L. Salis

Chief Economist and Senior Tax Policy Director

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George L. Salis is Chief Economist and Senior Tax Policy Director. He is an economist, lawyer, and tax professional with 29+ years’ experience in international taxation and trade compliance, tax planning and controversy, fiscal regulation, and tax economics consulting. He is responsible for analysis of economic, fiscal, legal, trade, and development issues in countries, as well as tracking and analyzing the rapid change in tax policies and regulations, and inter-governmental organizations, and tax administrations around the world.

George is the recipient of the Advanced Certificate in EU Law from the Academy of European Law, European University Institute in Florence, and the Executive Certificate in Economic Development from the Harvard Kennedy School of Government.

George received his BSc in economics and political science, an LLB (Honours), an MA in legal and ethical studies, and an LLM (Honours) in international tax law. He also holds the PhD in international law and economic policy, and the SJD in Taxation from The University of Florida, Levin College of Law. George is a Certified Business Economist (CBE- NABE).