‘It has been chaotic’: 4 months into Washington State’s digital ad tax, marketers are still adjusting

The Washington State digital ad tax has been live for almost four months. Some marketers are still struggling to figure out compliance.

The law, which went into effect on Oct. 1, places a tax on “all digital and non-digital services related to the creation, preparation, production, or dissemination of advertisements,” with certain exceptions like billboard ads and radio broadcasts. Since then, in response, some marketers have scrambled to reallocate budgets to pay the tax while navigating new tax policies from companies they buy ads with.

“It has been chaotic,” Lindsey Lind, president of Seattle-based agency Vision Media, told Marketing Brew. “We knew this was coming. We planned for this…But we’re still seeing challenges in a couple of key areas on the client side.”

One issue with the tax, agency execs told us, has been its timing. Lind estimated that marketing budgets from clients in Washington State have taken a 10% hit since the law went into effect as clients late in the budget cycle moved money to cover the tax. Some of them hadn’t already planned the expense into their spending, she noted.

While Lind expects clients’ budgets to balance out in coming years, she said that media effectiveness has taken a temporary hit.

“Clients are seeing diminished effectiveness from their media” because of that reallocation, she told us.

While some clients have shrunk marketing budgets to accommodate the tax, others are looking outside of the state. Seattle-based shop Project Bionic lost six local clients as they moved their business to agencies located out of state, Joshua Dirks, the agency’s co-founder and CEO, told Marketing Brew. The financial effects of the tax have prompted Project Bionic to shutter its doors next month.

“We still don’t have clear guidance on things,” Dirks said. “It’s left a lot of people taking pretty extreme measures [to try] to go ahead and figure this out, and unfortunately how the platforms are handling it is also draconian.”

Alex Bond, a spokesperson for Noel Frame, the prime sponsor of the bill, provided a statement from the state senator noting that the lawmaker is working on improving the law with additional legislation.

“As a small business owner myself, I know that people are trying to do the right thing and follow the law,” Frame said in the statement. “If state government is going to ask someone to pay more in taxes, we should do our best to make the new law as easy as possible to implement and comply with. I’ve heard some of these concerns raised myself and we’re working to make the law better. We have a new bill introduced this year, Senate Bill 6113, that I hope will address some of these concerns. The Department of Revenue has conducted an extensive series of surveys and listening sessions over the past year which helped us put this update to the law together and I appreciate the feedback we’ve received as a part of that process to get this issue right.”

Who’s in charge?

For brands and agencies, a major challenge of navigating the state tax has been disparate responses from major ad sellers. According to memos viewed by Marketing Brew, both Google and Microsoft notified clients in recent weeks that they would begin collecting the ad tax beginning Jan. 1.

Google referred Marketing Brew to its Help Center upon request for comment. Microsoft did not respond to a request for comment.

Other companies are taking a different approach. Comcast sued the state and its Department of Revenue in September, arguing that the tax violates the federal Internet Tax Freedom Act (ITFA), which prohibits states from taxing e-commerce companies if analogous services aren’t also subject to the tax too.

The ad tax “crosses that line in terms of interstate commerce that digital typically has been exempt from and it also, much like we see with digital privacy, creates this patchwork system [in which] different states have different regulations,” Lind said. “It’s a lot for both agencies and marketers to be able to manage.”

In 2021, Maryland passed a similar law that taxes digital ad companies that accumulate a minimum of $100 million in global annual gross revenue. The tax had brought in about $419 million for the state as of October, according to Office of the Comptroller data reported by Maryland Matters. However, it was bogged down in court over multiple lawsuits alleging that it violates ITFA. In October, a judge struck down part of the law, which concerned disclosure of the tax, rendering that part unenforceable.

If other states follow Washington and Maryland’s lead, it could add an additional layer of complexity for marketers.

“Imagine a world where Idaho has one tax on Meta and California has a different tax on Google,” she said. “Trying to comply with all of that gets really, really complicated.”