Ad tax threat in Tennessee

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Tennessee legislators, under pressure to alleviate a budget deficit of nearly $1 billion, are debating a proposed service tax including advertising-14 years after a similar move by the state of Florida galvanized the marketing community into an all-out war.

Officials of Tennessee media groups said a service tax is included in two of the four tax hike proposals legislative leaders distributed to members of the Tennessee House last week, with the possibility that action could come this week or next.

If the service tax is enacted, Tennessee would become the only state to put a tax on business services including advertising. None of the proposals-from both Democrats and Republicans-provide many specifics on how they would tax advertising. But the primary burden in advertising would be on media that have operations in the state.

This could provide a precedent for other states. Ad groups cite the Tennessee situation as especially worrisome because the state's need for money is far from unique. A total of 38 states have budget deficits this year.

Among other alternatives to raise revenue, legislators are looking at a 2% "gross profits" tax on business services and elimination of some exemptions from the 6% state sales tax and additional local sales taxes. The legislature also is considering increasing existing sales taxes or enacting the state's first individual income tax.

Ad groups are spoiling for a fight. The Association of National Advertisers last week wrote Tennessee legislators warning that the effect on marketers' costs would be serious enough to be "counterproductive and harmful to businesses, media and consumers" in the state.

"The advertising industry is relatively mobile, and a new tax would encourage firms to locate in neighboring states," said the letter from Keith Scarborough, VP-state government relations.

"Our situation in Tennessee has been enhanced by professional sports including the Tennessee Titans and the huge ad dollars that brings," said Witt Adamson, president of the Tennessee Association of Broadcasters. "Now, you have a situation where we are going to do something absolutely devastating to those areas, based on some little accountant with a green visor."

A similar debate in Tennessee last year ended in legislators doing nothing, but ad and media groups are worried because this time the pressure to act is more intense. So far, the legislature has been floundering in reaching a consensus.

"They are through here in June. They are ready to act. But nothing has a head on it," said Mr. Adamson. "Something has to happen."

Some suggest the floundering is intentional, as legislative leaders try to build support for the state's first individual personal income tax.

But John Reed, a partner in the Ingram Group, Nashville, which lobbies for media units, including the Tennessee Press Association and radio and cable owner Gaylord Entertainment, said legislators now are aware they aren't going to be able to punt away a decision.

"The difference today versus last year is that a majority of members assume they have to pass a tax increase," he said. "Even legislators who don't like the tax increase know they aren't going to get enough money by cutting the budget."

Mr. Reed said that in his talks with legislators, he points to what happened in Florida in 1987, when passage of a service tax led to a boycott against the state that forced the legislature to reverse itself. "What we always point to is what happened in Florida, when it [the proposed ad tax] had to go back in six months," said Mr. Adamson.

Ad groups expect the tax would not be levied on advertisers, but on media.

The tax would be aimed at companies doing business in Tennessee but not already paying taxes. "The underlying principle is to include business service in the state tax base by either applying sales tax to their product or taxing their gross profits," said a working document circulated by legislative leaders.

The tax, proposed by task forces appointed by the legislature, last week was in discussion stages and no legislator had stepped forward to champion it. A key player on tax matters, Democratic State Rep. Matt Kisber, chairman of the House Ways and Means Committee, was not available for comment.

Broadcasters, cable companies and outdoor companies would be hit hard, though the proposals also could affect others. Public relations companies, for example, would be among those hit by the service tax.

The tax would not appear to affect magazines mailed to Tennessee subscribers unless the magazines have Tennessee operations or editions. Magazines sold at retail might also escape significant change because in Tennessee, buyers of the magazines pay sales tax. Magazines printed in Tennessee but shipped elsewhere wouldn't be affected.

An estimate prepared by the ways and means committee said the state also expects to draw an additional $24.9 million from sales taxes on newspapers and on cable TV basic service (which, unlike premium cable, has been exempt from state sales tax).

Under current law, creative work is considered personal property and subject to state personal property tax. Under the proposals, ad agencies could deduct those payments from the new service tax. So while the business service tax would apply to agencies, deductions would mean that taxes for agencies wouldn't change much.

Mr. Adamson said local ad groups are trying to send the message that a tax could disadvantage Tennessee media and advertisers. "We border more states than any other state. We've got competition," he said. "We are saying what a mess it's going to make a out of business in a soft economy."

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