California Legislature Introduces “Digital Advertising Services Tax”

Brace yourselves, taxpayers.  California lawmakers have unveiled their newest proposed tax on businesses, AB 2829.  This new proposed tax follows the footsteps of other states, such as Maryland, in targeting digital advertising revenues.

On April 1, 2024, several members of the California Assembly introduced legislation that would impose a new “Digital Advertising Services Tax” on persons with at least $100,000,000 in global annual gross revenue.  The proposed legislation would impose the tax beginning January 1, 2025, on the annual gross revenues derived from digital advertising services at a rate of five percent.

The proposed legislation simply states that the revenue generated from this new tax would be used for “youth mental health services” without elaborating further on what that might entail.  Furthermore, the proposed legislation contains an anti-passthrough provision that would prohibit a taxpayer from directly passing on the cost of the tax to a customer who purchases the digital advertising services through a separate fee, surcharge, or line item.  This new tax would be administered by the California Department of Tax and Fee Administration (“CDTFA”) under the existing “Fee Collection Procedures” laws.

While the proposed legislation does provide some minimal definitions to assist taxpayers and the CDTFA in complying with and administering this proposed tax, there are still a number of outstanding questions and issues that will have to be resolved if AB 2829 is enacted.  Furthermore, the legality of these targeted taxes on digital advertising services remains uncertain as litigation on this issue is still ongoing in other states regarding the fact that, on their face, the tax raises constitutional questions related to Due Process and the Commerce Clauses.  This proposed legislation will certainly be one of the most tracked proposals this year as it makes its way through California’s legislative process.

If you find yourself grappling with the implications of the proposed legislation or need assistance with any other California tax matter, please get in touch with our dedicated team of attorneys at Bewley, Lassleben & Miller, LLP today.