Proposed internet tax would hurt small businesses across California

Running a small business is difficult in California – a state with high costs, costly regulations, and problems associated with homelessness and crime – but unfortunately, the Legislature is considering a new tax that would make things even worse. 

Sen. Steve Glazer is proposing billions of dollars in new taxes with Senate Bill 1327, which would impose a 7.25 percent tax on online ads that small businesses place on advertising platforms. 

Small businesses are especially reliant on digital advertising to reach potential customers, and this new tax would increase their advertising costs. It’s already hard enough to compete at a time when inflation, the recent gasoline tax increase, local tax hikes, shoplifting, and other costs are hitting Main Street businesses hard.

The Legislature is considering this idea despite a recent poll in which 68 percent of Californians said they already pay too much in state and local taxes. 

Revenue from the tax hike won’t help alleviate the challenges facing small businesses or most households. Glazer’s bill would redistribute revenue via tax credits that would subsidize the media – a concerning provision that would make news organizations reliant on subsidies controlled by the government officials they cover.

This legislation is similar to Maryland’s first-in-the-nation digital advertising tax, which has been the subject of litigation ever since it was enacted four years ago. Maryland’s elected comptroller, the defendant in several suits against the tax, said the state should quit spending money “to defend a law that was constitutionally questionable at the time of enactment.”

California lawmakers would be wise to learn from Maryland’s mistake and pull the plug on SB 1327 immediately, before more damage is done. 

As Maryland has learned, the Internet Tax Freedom Act, implemented by the Obama administration and Congress, prohibits discriminatory taxes on electronic commerce, defined as “any transaction conducted over the Internet or through Internet access, comprising the sale, lease, license, offer or delivery of property, goods, services, or information, whether or not for consideration.” This law expressly prohibits states from imposing “discriminatory taxes on electronic commerce.”

In clear violation of the Internet Tax Freedom Act, SB 1327 would discriminate by taxing digital advertising differently than other forms of advertising.

While this legislation certainly would create more work for lawyers, it would be harmful to the rest of us, and to the California economy.