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Another state wants to tax ads: but Rhode Island is the first state to introduce a bill calling exclusively for the taxation of newspaper advertising.

Another state wants to tax ads

But Rhode Island is the first state to introduce a bill calling exclusively for the taxation of newspaper advertising

As many states struggle to balance budgets without raising existing taxes, many legislative eyes believe they have spotted a previously untapped source of revenue, advertising.

In general, the states are looking toward the service industries which are the fastest-growing segment of the economy right now, according to Clark Rector, vice president of state government regulations of the American Advertising Federation.

Rhode Island's Senator John Bevilacqua introduced a bill on Feb. 14 requiring "newspaper classified and display advertising" to be subject to the state's 7% sales and use tax. It was referred to the state's Senate Committee on Finance.

The bill would apply to free standing inserts, advertising supplements, and such newspaper-carried publications as Parade.

"The timing couldn't be worse. It's most crippling when double digit losses in advertising revenues are being experienced by every newspaper in the state," said Dan O'Neil, advertising director of the Woonsocket Call.

"Being the smallest state in the Union, it makes it easy to seek a tax advantage by going this route. It makes sure tax revenues stay in the state because all the business is done within the borders. That's why newspaper advertising is an easy target," said Gary Lawrence, marketing director of the Newport Daily News.

Both O'Neil and Lawrence are opposing the proposed tax. The Rhode Island Press Association and the Rhode Island Advertising Club are also working to defeat the bill. John McCarthy, president of the Providence Advertising Club, said a lobbyist is being hired with money pledged by the ad club, individual agencies, the local broadcaster's association, the public relations society, various daily and weekly papers, and the Press Association.

The organizations are hoping to defeat the bill on constitutional and discriminatory grounds since it singles out only newspaper advertising, according to Matt Hayes, Rhode Island Press Association.

While Rhode Island is the only state so far to single out newspaper advertising, other states have advertising tax bills in the works that would affect the overall business of advertising, including ad agencies, broadcast and print media.

In Massachusetts, Rep. Alvin Thompson introduced legislation to impose a 1% tax on all advertising. The legislation stated specifically to "impose on the income derived from advertising in newspapers and magazines a 1% tax."

The Pennsylvania Council of the American Federation of State, County and Municipal Employees has requested the governor to tax advertising and other services. So far, neither the governor nor Legislature has expressed any interest in pursuing the tax.

In Nevada, a bill sponsored by the Legislature's Committee on Taxation would put on next year's ballot the question of establishing a broad-based services tax, which would include advertising.

Arizona's Rep. Paul Kromko backs legislation that would levy a 1.5% gross receipts tax on all businesses, including ad agencies, broadcasters and print media.

Texas legislation is proposing a value-added tax for all goods and services from companies doing business in the state. A 1.5% tax would be applied against net income, compensation to employees, interest payments and depreciation, if any, for businesses, including agencies, advertisers, retailers and media operating in Texas.

In addition to Bevilacqua's legislation, Rhode Island's governor is putting together a tax package that is expected to include a broad-based service tax that would affect all advertising, Rector said.

Hayes said that he is more concerned about the broad-based professional service tax, which is anticipated to include advertising.

"It's quite difficult to make the argument that that bill would be discriminatory. We would have to make the economic argument. Would this raise money or stifle economy?" Hayes commented.

Some good news

The good news lately on the ad tax front includes the rejection by the Florida House of Representatives of a 1% tax on all in-state and national advertising. The tax was a funding source for public financing of elections.

The South Dakota Legislature's tax committee let a proposed removal of the sales and use tax exemption for advertising and other services die with little serious consideration.

The New Mexico House Consumer and Public Affairs Committee rejected a 5% excise tax on all in-state media advertising. Also defeated was House legislation to extend the state's 5% gross receipts tax on broadcasters to revenue derived from regional and national advertising.

Rhode Islanders are hoping to use these defeats to persuade lawmakers to pass on the suggestion to tax advertising, but are concerned because Bevilacqua is the Senate majority leader whose proposals carry weight.

"We've got to convince him that the bill won't do what he wants, which is to generate revenue," McCarthy said.

The argument against taxing advertising is that it causes the cost of doing business to rise, which means less advertising is done. If less advertising is done, less sales are made. If less sales are made, less sales tax is collected. Eventually, everything suffers.

Lincoln Pratt, corporate director of community relations for the Providence Journal said that national advertisers can boycott the state, and may do a "buy-around." Pratt believes that an advertising tax is detrimental to all.

"What happens is someone who has $100,000 in his advertising budget will take the 7% off that and spend only $93,000," Pratt said.

Pratt believes the state should avoid this step right now because the state has been hit hard by the recession and people "need advertising to get business going."

"It puts a penalty on in-state business," said Rector. "Any media that have competing media in a nearby state risk losing business to the out-of-state media because they automatically have an advantage over in-state media."

He added this makes it very difficult for local advertisers who are stuck with no other advertising alternatives.

Because all the states are having budget problems and are looking for more revenue, one fear is that, if Rhode Island passes this bill, other states may follow, Rector said.

The concrete example of advertising tax gone awry is the Florida advertising tax that was implemented in 1986 but then repealed in 1987.

One argument that arose from Florida's failed attempt was the practical problem of administering the tax. Florida hired new auditors just to administer the service tax. The state suffered a subsequent decrease in sales and sales tax revenue. Media conventions also boycotted the state, resulting in lost revenue.

"Florida passed a bill once and it was a disaster, hopefully that will be the message that gets out," Rector said.

Another argument is that the bill is discriminatory in that it taxes only newspaper advertising.

"The broadcasters are wise to join the fight," Pratt said, because, if newspapers get the bill knocked down as discriminatory, the legislators might still be able to pass it if they apply it to all media.

"I don't think taxing advertising will help anyone. It's not just newspapers who will be hurt, but everyone."
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Author:Kerwin, Ann Marie
Publication:Editor & Publisher
Date:Apr 6, 1991
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