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Posts Tagged ‘Ad Tax’

Ad Tax Could Result in Net Loss to PA

In Ad Tax, Competition, Rules&Regs on March 2, 2010 at 6:44 pm

In my last post on the perils of Taxing Advertising, I touched on the “multiplier effect” of advertising: Each dollar invested yields a compounded return in economic activity. It can be four-fold, it can be ten-fold and more, but most importantly: It can be quantified. And it has, in robust analysis.

It is critical to understand the commerce-driving function of advertising before looking at it as just another piggy bank to raid. Unfortunately, the Governor’s proposed budget treats it like a static line item on the revenue wish list. Blissfully ignored are projections for decreased spending on advertising, the resulting cascade of lost sales across the economic spectrum and the jobs lost due to imploding revenues at already struggling employers.

So far, even the credible Think Tank analysis of the proposed Expansion of Sales and Use Tax (SUT) to 74 NEW Goods and Services — including competing PA-based heavyweights Commonwealth Foundation and The Pennsylvania Budget and Policy Center, as well as D.C. based Tax Foundation — all seem to swallow the zero-sum fallacy of a New Ad Tax. Meanwhile, the revenue gaps between projected and reality were just released by the Pennsylvania Revenue Department. The farthest off the mark? Sales tax receipts: Year-to-date collections slumped to $265.3 million “less than anticipated.”

We can and must to do a better job “anticipating” the very predictable series of unintended fiscal consequences that would be triggered by a New Advertising Tax. Our Commonwealth’s sluggish sales tax receipts have been driven by numerous interrelated forces in this Great Recession. One of which has been the vicious cycle of declining sales leading to reduced advertising, which have further reduced the volume of goods and services sold. And Taxed. Correspondingly, spending on advertising fell across the media landscape for the sixth consecutive quarter, and the total decline for 2009 was 9% nationally.

These mutually reinforcing trends are finally beginning to reverse. But a New Ad Tax would push commerce, jobs and even the hoped-for tax receipts off the cliff. Projections for Lost Sales across sectors run as high as $14.8 billion. The corresponding Job Loss: A staggering 64,040. Which will mean substantially “less than anticipated” Personal Income Tax (PIT) Receipts and a spike in demand for cash-strapped social services. As for the actual SUT Projections: Lost Sales, even at 4%, will blow a $600 million hole in the happy math on that zero-sum spreadsheet. Factoring these unintended consequences, we clearly won’t raise $534 million in “new” revenue. Just the opposite, a New Ad Tax would likely lead to a Net Loss, all things considered.


Proposed Pennsylvania Ad Tax Would Be a Dubious First in Nation

In Ad Tax, Competition, Rules&Regs on February 23, 2010 at 4:05 pm

Pennsylvania would make history if the Ad Tax — part of the Governor’s 74 count hit list on current, so-called “non-essential” goods and services — were to pass. And stay on the books. That’s because Florida, searching for “soft targets” to tax, actually passed such a measure several years ago. But the economic fallout was immediate and the devastation spilled beyond the imagination of the budget makers.

As a result, the Ad Tax was swiftly repealed. But in dire budgetary times, states succumb to collective amnesia or willfully ignore the critical Florida Ad Tax Lessons: Advertising has a demonstrable multiplier effect in the economy. Each dollar spent on advertising compounds activity across multiple direct and indirect tiers of the economy, in some cases ten-fold and more. The analysis is a Must Read.

The flip side of that complex equation is the chain reaction that follows decreased spending on Advertising: Lost Sales and Lost Jobs. And as we’ve learned from our Community Paper Publishers here in Pennsylvania, an Ad Tax will lead to steep reductions in Advertising from the Mom & Pop merchants already struggling on Main Street.

Ad Tax Threat in PA…

In Ad Tax, Testimony on October 12, 2009 at 8:48 pm

…Defeated! 101 days past the Constitutional Deadline, after a tortured process that saw countless proposals to expand the 6% sales tax on goods and services, we finally have a New Budget. Our threat here was unfortunately not unique. AdvertisingAge reports today on the growing trend in cash-strapped states to seek “soft targets,” specifically Advertising and related services.

We argued against any expansion of Sales Tax generally, further detailing how a specific Ad Tax would cripple Us and our Advertisers. Bolstered by member surveys, we showed that before even attempting to collect the first penny for the state, we would be collectively in the hole hundreds of thousands of dollars we just don’t have, because we cannot simply press a magic button on a cash register. What we do for a living requires very expensive proprietary front end systems, most needing upgrades or all out replacement, and then a cascade of other costs and burdens. All before the mere attempt to collect. Which only then would be followed by the pass-along brick wall, subsequent reductions, a lose-lose situation at the worst possible economic time on Main Street.

Here’s a sample of correspondence with PA Legislators:

RE: Opposition to Taxing Advertising

Hand Delivered – September 15, 2009

Dear Budget Conference Committee Members:

The Mid-Atlantic Community Papers Association is deeply concerned by comments that continue to be floated publicly about broad expansions to the Sales and Use Tax. We empathise with the dire predicament our Commonwealth faces, and we do not envy your monumental challenge to craft a fair and balanced budget.

Please know this: Our publishers operate on the front lines of the economy, providing the glue that bonds neighbors and the merchants on Main Street. We share a singular perspective on the condition of truly local commerce. Our collective enterprise serves the unique and most critical function of communicating between Mom and Pop businesses and their customers.

We admit candidly that if we were in your shoes we might be tempted to gaze longingly at spreadsheets circulating that promise a windfall buffet of “new revenue.” Should the mood suddenly swing in favor that commerce-killing option, we urge you to consider Three Critical Tests for fixing any new bulls’ eyes:

1. Is it a simple “sale at retail” or a complex range of commerce-driving services?

2. Is it a luxury or a necessity — a want or a need?

3. Would any new burdens of collection be minimal or disproportionately onerous?

Our member publishers would be forced to spend hundreds of thousands of dollars — money they do not have — on new software before even attempting to collect the first penny for our Commonwealth. Then double that with costs of programming, training, administration and compliance, and even new computers — all incurred before even attempting to collect the first penny of sales tax.

Community papers cannot simply press a button on a cash register and try to begin passing 6% on to our struggling customers, automatically collecting fees on diminished volume. In community publishing, the advertising “transaction” is actually a discrete set of simultaneous processes linked to billing. We rely on industry-specific, proprietary and usually customized software, which is available from only a select group of specialized vendors. The license, the programming, the training and the hardware upgrades alone will cost fortunes we just do not have.

The new burdens of sales tax collection will be disproportionately onerous on the community paper publishing industry. But that is only the beginning of the cascading disasters and counter-intended outcomes on Main Street, PA. Publishers from every corner of the state provide a granular view of the stark realities they and their advertisers struggle with today without a 6% penalty:

• An Historic Number of Small Business Doors have Shuttered — Reality in Downtown, PA

• 6% is Roughly Double the Last Average Rate Increase — For Many, No Increase for Years

• A 6% Ad Tax Can’t Be Passed Along — Much or Most Will Be Offset by Diminished Advertising

• A 6% Ad Tax Simply Cannot Be Swallowed Without Additional Job & Healthcare Losses


Details from the MACPA Member Ad Tax & Local Economic Survey:

QUESTION: When was last time you raised (or decreased) rates? What Percent?

– “in 2009 I decreased rates 25% on the rate card.”

– “Retail ROP rates were held across the board for 2009”

– “Last time was May of 07 at 3%”

– “no change for a few years”

– “August 2008 – 3%”

– “2008, 4%”

– “1/1/09 5% (Only raise in 3 years)”

– “not raised rates in nearly 4 years. If anything we have had to find ways of providing more value for no additional cost. A rate hike of 6% would be unacceptable to advertisers of all levels from local to national. We would more than likely have to eat the increase to sustain volume.”

– “July 2008, 4 to 5%”

– “Last year: What %? just 3”

– “We have been fortunate to be able to keep our same rate for the past 3 years by keeping a low overhead and constantly looking for ways to cut costs.”

– “haven’t raised the price for 3 years. Classified also is only raised every two years.”

– “2008, -3% Note: that’s decrease!”

– “We have not raised our rates in 5 years. We have been hit hard with the current economic times. We deal with small local businesses that are struggling.”

QUESTION: Across the board, what portion of a 6% hike could you pass along?

– “0!”

– “Probably half that at best”

– “None”

– “Would have to try to pass all of it on. Couldn’t absorb it”

– “We would just eat the whole amount”

– “Very little”

– “A rate hike of 6% would be unacceptable to advertisers of all levels from local to national. We would more than likely have to eat the increase to sustain volume.”

– “typically we get 50% of a rate increase”

– “A sales tax on advertising is another tax on the already-struggling businesses in our area. Sales taxes are on the consumer. But our “consumers” are businesses.”

– “We couldn’t pass much more than 1% along. If we passed an additional 3% along we would most likely see $10,000.00 less in revenues.”

QUESTION: Or, how much of a 6% Ad Tax would be met with decreased ad size and/or volume?

– “Most of it”

– “Many will have to reduce size, cut zone coverage”

– “Would no doubt lose volume, and they’ll lose business too”

– “It would reduce ad size by as much as 10%”


– “25% at bare minimum”

– “That’s difficult to put a number to. But I’m certain larger ads would be reduced in size, some advertisers would advertise every other week rather than every week.”

– “This would result in many advertisers either cutting back on size or volume of ads. Lose-lose”

QUESTION: Bottom line net loss in dollars if Ad Tax enacted?

– “60%”

– “$30,000”

– “too hard to determine, well into six figures”

– “Net loss of probably $1,000 to $1,200 per week”

– “Loss could be well over $100,000”

– “$1,680 per week”

QUESTION: On Front End Software — You would need to tag classifieds, display and inserts as both taxable & tax exempt, bill & collect accordingly, and send reports and a check to the state on a regular basis. Can your current software do this?

– “NO!”

– “Our current software would not be able to handle all you have listed”

– “NOPE!”

– “no it cannot”

– “Our ad order entry system is antiquated. Having said that, even newer models would need to be modified to accommodate for change in process. It would take time and money. Dollars we don’t have at this time. Given lean operation we don’t have the resources to manually manage the new billing challenges the sales tax would provide.”

– “No, will need new system, new servers, probably new workstations”

– “Current software will work, with some serious tweaking — I hope”

– “No, our IT staff says we’ll need another system.”

– “Definitely not. For what we paid, this is unbelievable”

QUESTION: Rough estimate of cost to upgrade, program & train on a new front end system?

– “$50,000 minimum”

– “Don’t really know, it would involve program and that is expensive!”

– “based on recent rfp, roughly $40-80k to upgrade and flow”

– “$25k in software costs…minimum $20k in training”

– “several thousand dollars, if we can patch, tens of thousands more likely”

– “the cost to get another program would be at least $50K”

– “At least $20,000 for bare bones function”

QUESTION: Ballpark cost for additional accounting relating to sales tax collection?

– “$30,000”

– “This would simply be an accounting nightmare-period.”

– “Additional expense $5,000 per year.”

– “at least another $20k”

– “A few thousand dollars.”

– “extra hour a day for our office workers $150 week, someone to collect figures and file taxes $150 week….And heaven help us if we lose an employee and must retrain someone. As a small business ourselves, just thinking about the extra bookwork, etc. is a nightmare! That’s the problem with being a small business. We try to do everything ourselves and can only do so much”

– “$300 per week”

QUESTION: How many local advertisers have closed their doors in last 12 months?

– “Hard to put a number on closings but more importantly, the remaining businesses are spending 15-20% less on advertising”

– “About 15”

– “We know of about 5 local advertisers who are oob”

– “not very many! we have been lucky”

– “15% and that’s conservative”

– “Over two dozen, with many more to come I fear.”

– “too many to count”

– “Too Many, and another huge batch are faced with the dilemma of the cost of an ad OR paying healthcare OR Wal-mart”

– “116”

– “a f—ing ton”


– “4 that affected us”

– “About one in 15 local businesses”

– “Our local business scene has drastically changed. The amount of stores that are vacant is staggering. I don’t have a number”

– “6 of my top 10!”


The consensus of first-hand publisher accounts conclude that home town economies are teetering on an historic brink. Attempts to place an additional 6% hurdle between any new product or business and their cash-strapped clients will be met with counterproductive reductions in consumption, and steep new margins that can neither be passed along nor absorbed. Any new sales tax will ultimately trigger incalculable job loss. For these compelling reasons, we ask that you please reject any proposals to Tax Advertising.