California Digital Advertising Tax Bill Progresses to Assembly Committee on Revenue and Taxation

The Digital Advertising Services Tax Law passed the California Assembly Committee on Privacy and Consumer Protection with a 6-3 vote on April 23 and is now pending before the California Assembly Committee on Revenue and Taxation. If enacted, A.B. 2829 would impose a 5% tax on annual gross revenues derived from digital advertising services in California. The tax would be effective January 1, 2025 and would apply to taxpayers with at least $100 million in global annual gross revenue, including revenue from services other than digital advertising.

The proposed legislation, introduced by California Assemblymember Diane Papan (D) on April 1, 2024, is modeled after the Maryland Digital Advertising Gross Revenues Tax. The California Senate Committee on Revenue and Taxation held an informational hearing in March regarding a potential digital advertising services tax proposal, and the Committee’s Chairman, California Senator Steven Glazer (D), has stated that he is considering introducing a similar bill in the California Senate.

Maryland enacted its controversial digital advertising tax in 2021. [1] The tax is currently in substantial litigation that seeks invalidation on various grounds, including violation of the First Amendment, the due process clause, the commerce clause of the US Constitution, the federal Internet Tax Freedom Act (ITFA), and the prohibition against taxpayers passing through the direct cost of the tax to customers.

The proposed California legislation would be expected to have similar legal challenges due to credible potential US and California constitutional infirmities, inconsistency with the ITFA, failure to provide sourcing requirements, and prohibition against direct pass-through of the tax to customers. Other states are also considering similar digital advertising taxes modeled after the Maryland law.

Like the Maryland tax, the proposed California tax would be imposed on “digital advertising services,” which is 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.” California would also exclude “advertisement services on digital interfaces owned or operated by or operated on behalf of a broadcast entity or news media entity.” The bill fails to provide a sourcing provision to determine the taxable revenues derived from digital advertising services in California.

Companies providing digital advertising services and businesses that utilize those services should continue to monitor the progress of state digital advertising taxes legislation and litigation.