On September 13, 2023, the D.C. Tax Revision Commission met and evaluated over a dozen tax proposals. Most concerning, the Commission discussed the possibility of implementing a digital advertising tax or a data mining tax.

D.C. Tax Revision Commission

The Council of the District of Columbia established the Commission to comprehensively review the District’s tax code. The Commission’s mandate is to make tax policy recommendations on:

1. Providing for fairness and equity in the apportionment of taxes and promoting progressivity;
2. Broadening the tax base;
3. Making the District’s tax policy more competitive with surrounding jurisdictions;
4. Encouraging business growth and job creation; and
5. Modernizing, simplifying, and increasing transparency in the District’s tax code.^[1]

By the end of 2023, the Commission is set to submit its slate of recommendations to the Council, along with specific steps for implementing the recommendations, such as draft legislation and regulations.

The Commission previously released reports in 1998[2] and 2014.[3] Each Commission’s report made recommendations for changes to the District’s tax system. For example, in 1998, the Commission recommended a 1.5% business activities tax and “taxing sales of tangible products to District residents the same regardless of whether they are sold remotely or by District-based businesses.” In 2014, the Commission recommended reducing the District’s business franchise tax rate from 9.975% to 8.25%.

D.C. Tax Revision Commission proposals

Throughout 2023, the Commission has met with various tax and fiscal policy experts, as well as community and industry representatives. It has prepared a series of proposals to review and potentially suggest to the Council. On September 13, 2023, the Commission met for the first time to discuss these various proposals. In advance, the Commission released the list of proposals that they would review. 

The first proposal on the list was “Strengthen and clarify taxation of digital ads and services.” The Commission released a proposal paper, elaborating on the topic. The proposal paper specifically listed as options: (1) a digital advertising tax act similar to Maryland’s enactment; and (2) a tax on “the extraction of consumer data by tech platforms in much the same way that states tax the extraction of valuable commodities like fossil fuels or precious metals.” The second option would be a “per-consumer excise tax that accounts for each user whose data is being mined.” 

The sordid history of state digital advertising taxes

Maryland became the first – and only – state in the United States to impose a tax on gross receipts from digital advertising services in 2022. The tax is imposed on gross revenues derived from digital advertising services in Maryland at graduated rates, from a minimum rate of 2.5% to a maximum rate of 10% of such revenues. The Maryland digital advertising generated immediate controversy, with taxpayers challenging the tax in state^[4] and federal courts on federal statutory and constitutional grounds.[5] While those challenges have yet to result in a final nonappealable decision on the legality of the Maryland tax, we expect the Maryland Supreme Court to eventually reach the merits and, hopefully, find the tax to be unconstitutional. And while several other states have considered Maryland-style digital advertising tax legislation, those proposals ultimately have been rejected.

With the history of Maryland’s digital advertising tax in mind, the Commission’s proposal paper acknowledged that any potential D.C. tax similar to Maryland’s tax would likely face similar legal challenges. But the paper noted that it may be able to “minimize challenges by, for example, imposing a tax on all advertising (as opposed to just digital advertising). There could then be less risk that the tax would violate the federal Internet Tax Freedom Act.” But imposing a broad advertising tax could prove difficult for the Council based on recent experience. In 2020, the Council considered expanding its sales tax base to include sales of advertising services and personal information, as part of its Fiscal Year 2021 Budget Support Act of 2020. Ultimately, the D.C. Council opted not to pursue expanding its sales tax base to these sales due to the adverse impact on local media and press, on top of the likely litigation that would follow if a targeted tax on digital advertising were adopted.[6]

The Commission meeting on September 13^th

At the meeting, the Commission discussed the first batch of proposals but without formally voting on them, which will happen in a later meeting. Rather, the meeting was intended to advance discussion in preparation for later formal voting. 

The Commission’s members were generally interested in pursuing a digital advertising tax or a data mining tax. The members saw these taxes as being worth consideration because of the potentially large amount of revenue they could generate. One member supported the taxes because he saw them as an expansion of the tax base to match changing technology, rather than a tax rate increase.

However, there was hesitancy among the Commission’s members because of the ongoing Maryland litigation and potential tax implementation difficulties. The Commission’s members noted that the process to pass and implement these taxes could be long, especially as they were interested in whether the Maryland tax would survive legal scrutiny.

The Commission also considered a variety of other proposals. For example, the Commission’s members reacted negatively to increasing the general sales tax rate from 6 percent to 7 percent due to regressivity concerns. However, they were supportive of eliminating the motor vehicle excise tax exemption for electric vehicles.

Future meetings and next steps

The Commission currently has scheduled five additional proposal review sessions—September 19^th, September 26^th, October 10^th, October 20^th, and October 24^th. These sessions will shape which recommendations the Commission will make to the D.C. Council. Of particular interest for the September 19^th meeting, the Commission likely will discuss a business activity tax proposal, which may resemble the Texas franchise (margin) tax and the Oregon corporate activity tax. Eversheds Sutherland will continue to follow these review sessions that will color the next decade of District taxation. 

[1] D.C. Code Ann. § 47-462.

[2] See Summary Report to the Mayor and Council of the District of Columbia, June 1998, D.C. Tax Revision Commission (June 1998), available at https://cfo.dc.gov/sites/default/files/dc/sites/ocfo/publication/attachments/ocfo_part_i_summary_report.pdf.

[3] Final Report, D.C. Tax Revision Commission (May 2014), available at https://cfo.dc.gov/sites/default/files/dc/sites/ocfo/publication/attachments/DC%20Tax%20Revision%20050114.pdf.

[4] The Maryland digital advertising tax was challenged in the Circuit Court of Anne Arundel County, with the plaintiffs seeking a declaratory judgment that the tax is unconstitutional and unlawful.  On October 17, 2022, the circuit court granted the plaintiffs’ motion for summary judgment and issued a final declaratory judgment, finding that the tax was unconstitutional and invalid because it violated the Internet Tax Freedom Act (which bars state and localities from imposing taxes that discriminate against electronic commerce), the Commerce Clause of the U.S. Constitution, and the First Amendment to the U.S. Constitution. Comcast of California/Maryland/Pennsylvania/Virginia/West Virginia, LLC, et al. v. Comptroller of the Treasury of Maryland, Case No. C-02-cv-21-000509 (Md. Cir. Ct. final declaratory judgment issued Nov. 17, 2022).While the Maryland Supreme Court later concluded that the circuit court lacked jurisdiction to enter the declaratory judgment, the supreme court did not address the tax’s legality. Comptroller of Maryland v. Comcast of California/Maryland/Pennsylvania/Virginia/West Virginia, LLC, et al., 484 Md. 222 (2023). As it stands, only one court has review the legality of Maryland’s digital advertising tax. That court found it to be unconstitutional under multiple theories.

[5] The Chamber of Commerce of the United States is also pursuing a challenge to the Maryland digital advertising tax at federal court. However, the United States District Court for the District of Maryland concluded that the Tax Injunction Act precluded the Chamber’s substantive challenges to the tax. While the court initially allowed the lawsuit to proceed against the tax’s pass-through prohibition, the court later also dismissed that challenge as moot because of the Circuit Court of Anne Arundel’s declaration that the tax violated the U.S. Constitution. The Chamber is currently challenging these decisions before the United States Court of Appeals for the Fourth Circuit. Oral argument is set for September 20, 2023. Chamber of Commerce of the United States v. Lierman, No. 22-2275 (4^th Cir. notice of appeal filed Dec. 13, 2022).

[6] The sales tax on advertising services would have applied to “the planning, creating, placing, or display of advertising in newspapers, magazines, billboards, broadcasting, and other media, including, without limitation, the providing of concept, writing, graphic design, mechanical art, photography, and production supervision.” The tax would have encompassed both physical and digital advertising. The proposed sales tax on sales of personal information would have applied to “information or data that is derived from a person that identifies, relates to, describes, or is capable of being associated with, a particular person” and included a person’s browser habits and consumer preferences.