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Editorial: Taxing advertising is bad idea

From The Exponent Telegram of Clarksburg:

Gov. Jim Justice in his State of the State address presented to the Legislature a budget proposal that called for $450 million in tax increases (euphemistically referred to as revenue enhancements) and just $30 million in state budget cuts — or expense reductions — to balance the 2018 state budget.

The largest tax increase proposed by Gov. Justice, based on percentage increase, is the elimination of sales tax exemptions on professional services and advertising. The state’s base sales tax of 6 percent, plus the governor’s proposed additional base sales tax increase of .5 percent and the 1 percent Home Rule sales tax (depending on the community where you live), would total a whopping 7.5 percent.

That means every small business and consumer will pay an additional 7.5 percent on attorney’s fees, accounting services, beauty shop and spa treatments, haircuts, gym memberships and more. Plus, all advertising on television, radio, billboards and in newspapers would be taxed as well. Doctor’s fees would remain exempt.

An advertising tax is not a new idea, just a bad one. Since 1987, 40 states have considered and rejected a tax on advertising. Florida is the only state that has enacted a sales tax on advertising, but it quickly repealed the tax because it was impossible to administer and it had an adverse economic impact. Today, no state in the country applies a sales tax to advertising.

The fact is that advertising stimulates sales and jobs throughout the economy.

When the cost of advertising goes up, businesses advertise less, which leads to less consumer demand and purchasing. This slows the economy and reduces government revenue.

A tax on advertising would create a new layer of hidden taxes because of problems of pyramiding or double taxation. Pyramiding occurs when the sales tax is imposed on business services at the intermediate level, rather than being imposed only on the final purchase of the product by consumers.

Advertising is not an end product, like a bar of soap (or similar product). Rather, advertising is an input process that helps produce the final sale of the bar of soap, which is already subject to the state sales tax. Since a portion of any tax on the intermediate advertising process is likely to be passed along to consumers, there would be at least double taxation for most products or services purchased in the state.

If the sales tax exclusion is removed, more advertising dollars that are currently spent in West Virginia would be shifted to media outlets outside the state.

Similarly, there is no legal way to require out-of-state advertisers and merchants to remit sales tax on advertising goods and services directed at West Virginia consumers.

As it was proposed last year and was defeated in the House, 97-3, the sales tax continues to exempt internet advertising. This is highly unfair and inequitable. Digital and social media advertising is growing at an unprecedented level and has passed all other traditional media segments in total advertising revenues.

Google and Facebook are getting a free ride, yet contribute nothing in terms of job creation, community service or traditional tax revenues to the state treasury. If such a sales tax is to be levied, then it must be inclusive of all paid advertising media.

A tax on advertising would hurt West Virginia consumers because businesses will pass along the increased cost of doing business when they can. This is especially concerning since West Virginians already struggle with a difficult economy. With customers already struggling, it’s likely that West Virginia businesses will also have to absorb some of the added costs.

Many will note that it’s obviously self-serving for the newspaper industry, or any media, to make an argument opposing a sales tax on advertising. As the newspaper industry does sell advertising, that’s certainly true, but it doesn’t make the argument wrong. In fact, making an argument against a tax on advertising serves the best interest of everyone.

Before removing the sales tax exemption on professional services and advertising, our legislative leaders must explain how placing a sales tax on advertising will help West Virginia’s businesses and industries and generate more overall tax revenue.

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