By Sebastian Griffin / For The Herald
Washington state lawmakers this year imposed a new tax that has already sent tremors through the state’s tech titans and small business owners. Senate Bill 5814 significantly broadened the state’s retail sales tax to include an extensive array of digital services.
Starting on Oct. 1, services that include digital advertising, website design, IT support, software development, search engine optimization, and even network training will be subject to the state’s steep sales tax, already as much as 10.6 percent in parts of the state. What’s not taxed? Old-school media services such as newspaper ads, TV spots, billboards, and radio. This carve-out isn’t just unfair, it follows the poor practice of picking winners and losers in the marketplace.
For small businesses already straining with razor-thin profit margins, this tax is more than just a nuisance; it’s a direct threat. Local businesses are cautioning that projects may be canceled or moved out of the state to escape this new onerous tax.
As reported by GeekWire, Curtis Costner, who runs a digital marketing firm in Tacoma, said: “It’s just more difficult for businesses to do business with other businesses in their locality.” Others share similar concerns. Scott Foreman, partner at the Seattle-based agency Copacino + Fujikado, remarked: “They think they can milk this cow forever, but cows eventually always move to the greener pastures.” The warnings are clear that clients will simply take their business to more tax-friendly states. Others worry about the broader ramifications. Washington’s never-ending focus on chasing after new tax revenue could be driving innovation, and the jobs that come with it, to other states.
By singling out digital services while sparing the traditional forms of advertising from similar tax obligations, the state Legislature has constructed a tax code that punishes the modern economy. According to the Tax Foundation, this disparate application almost assures a court challenge based on the Internet Tax Freedom Act (ITFA, a federal law that bars discriminatory taxes on digital commerce. That law specifically prohibits taxing digital services differently from physical ones. Washington’s new tax appears to do exactly that, with digital ad services subject to a sizable burden as print, broadcast and billboard advertising are exempt.
A comparable digital ad tax in Maryland was recently invalidated by a Maryland circuit court judge who found it violated both ITFA and the U.S. Constitution’s Commerce Clause by trying to regulate out-of-state commerce. Washington is now diving headfirst into the very same legal quagmire.
Lawmakers attempt to justify this new tax as part of a general “modernization” of Washington’s tax system. They argue that an economy dominated by services should be paying more to support government programs. But there is a fine line between modernization and government overreach. Picking winners and losers is not equitable tax policy.
This new tax fails to meet the principles of sound tax policy. It creates additional red tape for small digital agencies, adds constitutional uncertainty, and risks pushing away the very entrepreneurs that are building the future economy needed in the state. Rather than shoring up budget holes caused by overspending with short-term patches that stifle creativity, lawmakers need to stop creating new and constitutionally suspect ways to tax businesses that harm economic growth.
Sebastian Griffin is the lead researcher for the Junkermier Center for Technology and Innovation at Mountain States Policy Center, an independent research organization based in Idaho, Montana, Eastern Washington and Wyoming. Online at mountainstatespolicy.org.
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