The Case Against Taxing Digital Advertising in Pennsylvania

A Pennsylvania legislative proposal to tax digital advertising to fund
additional school property tax relief for seniors is not only fraught with legal
peril but would harm businesses and stands to raise prices for consumers,
concludes an analysis by the Allegheny Institute for Public Policy.

“Ideally, the Legislature should be focused on reducing spending and
looking to improve the state’s business and regulatory climate as part of
state budget considerations,” says Alex Sodini, a research associate at the
Pittsburgh think tank (in Policy Brief Vol. 26, No. 23).

With the state budget deadline looming on June 30, the state House
recently passed a bill that would extend the 5 percent gross receipts tax
(GRT) to entities deriving income from “digital advertising services
displayed to a user on a digital interface wholly within this Commonwealth,
including banner advertising, search engine advertising, interstitial
advertising and comparable advertising services that utilize the personal
information of the users to whom the advertisements are served.”

The tax, ostensibly, is intended for large tech companies which rely on
digital advertisements for revenue. Broadcast and news media entities
would be exempt.

“Interestingly,” Sodini notes, “the proceeds of the tax supporting property
tax relief was an amendment added after the bill had made it out of the
House Finance Committee.” He says some committee members raised two
primary concerns regarding implementation of a digital advertising tax that
were later echoed on the House floor.

“The first major concern was over the legality of expanding the GRT to
cover digital advertising,” the think tank researcher reminds. “Testimony
provided at the April 29 committee meeting noted that Maryland passed a
similar tax in 2021 but that it has been mired in litigation. A provision in the
law preventing a surcharge or line-item specifically denoting an entity
raising prices due to the tax (passing on to customers) was struck down for
violating the First Amendment.”

The rest of the tax remains in place but is facing legal scrutiny on other
fronts.

“Opponents allege the Maryland measure also violates, among other
things, the federal Internet Tax Freedom Act, which established ‘a
moratorium on the imposition of state and local taxes that would interfere
with the free flow of interstate commerce over the internet.’

“Other states have similarly faced legal challenges in implementing a tax on
digital advertising – meaning a protracted legal battle would be inevitable
should the measure pass in Pennsylvania,” Sodini says.

And then there’s the concern about the impact of taxing digital advertising,
with some members pushing back on the notion that the effects of the tax
would be confined to wealthy tech corporations.

“The GRT is not levied against the consumer directly but can be passed on
to the consumer; lawmakers mentioned that some utilities and phone
carriers already subject to the GRT explicitly do so,” Sodini says.

As such, Sodini says businesses which advertise on the affected platforms
may be forced to bear the burden of the tax through higher prices, which
could then be passed on to the consumer.

“This would be more detrimental to smaller businesses and those with
lower profit margins that cannot as easily absorb the cost increase. Note,
too, that some advertisements for services directed at seniors would likely
be affected, including medical, healthcare and financial services.

“That could lead to a situation where prices rise in tandem with property tax
and rent rebates,” the think tank scholar predicts. “Furthermore, continuing

to tax and regulate businesses, large or small, is only going to dampen
business activity and investment in the commonwealth.”

And here’s the kicker: While Sodini says the Legislature has rightly
recognized the need to put more money back into the pockets of taxpayers
and for more school property tax relief, he says it can be done without
expanding the gross receipts tax.

One option would be to reevaluate the purposes of gaming tax revenues
and using them as corporate wealthfare for questionable “economic
development” projects, including subsidies for Pittsburgh International
Airport and heavily subsidized sports stadiums.

Another would be to use expected new taxes from “skill games.”
“Additionally, reining in expenditures in the state’s general fund would free
up more revenue elsewhere to be put toward property tax relief,” Sodini
says, adding that examining the state’s targeted subsidies and incentives
would also be more prudent than introducing a new tax.

“For example, the governor’s 2026-27 budget proposal projects that a data
center equipment sales-tax exemption could cost more than $1.7 billion
over the next five years. As the Allegheny Institute has repeatedly
reiterated, relying on taxpayer-funded corporate handouts to attract
investment is poor public policy and indicative of an unwelcoming business
environment.”

And last but certainly not least, Sodini says “it’s also worth mentioning the
excessive spending by school districts, which undoubtedly contributes to
significant property tax burdens in the first place. … [S]tate taxpayers are
already funding thousands of dollars more per pupil beyond the state
average in just a few districts in Allegheny County, despite little, if any,
discernable academic improvements.”

Reminding that Pennsylvania’s woeful economic performance and
desperate need for population and job growth is well-documented, Sodini
says implementing pro-growth strategies to bolster the tax base would be a

more sensible and sustainable solution to fund school property tax relief in
the commonwealth.

“As a result, the state – and local governments – would be less reliant on
gaming revenues — or new tax sources — to shore up finances,” Sodini
concludes.

(Colin McNickle is communications and marketing director at the Allegheny
Institute for Public Policy (cmcnickle@alleghenyinstitute.org).