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.