Revenue-Hungry States Set Sights on Taxing Ads

Desperate for cash, the governors of Ohio and Minnesota are eyeing a tax on advertising. And even as agencies, broadcasters, newspaper publishers and big advertisers prepare to push back, there is concern that such moves could not only pass, but spread to other states and to the federal level.

If Ohio's legislature approves Republican Gov. John Kasich's proposed budget, sales of print, billboard, radio and TV advertising would be subject to a 5% sales tax. Further, the tax would likely apply to the fees agencies charge clients.

Mr. Kasich wants to expand Ohio's sales tax so he can raise enough revenue to cut other taxes, including personal income and business taxes.

Procter & Gamble, based in Cincinnati, has not made an official statement regarding the plan, said company spokesman Jeff LeRoy, but he added, "I can't imagine anybody would want a tax on advertising."

The Ohio budget doesn't require approval until July 1, so opponents of the tax have time to kill it -- something that's happened in the past when such proposals were floated.

Dan Jaffe, exec VP-government relations for the Association of National Advertisers, said taxing advertising is counterproductive.

"The whole purpose of advertising is to generate sales," Mr. Jaffe said. "So if you're becoming more reliant on sales taxes, you shouldn't be doing anything to stop an effort to sell."

Counterproductive or not, the idea has bipartisan appeal.

In Minnesota, Democratic Gov. Mark Dayton's budget proposal calls for an extension of the state's sales tax to many business-to-business services, including advertising.

Steve Arndt, chief financial officer for Minneapolis-based Campbell Mithun, said the 5.5% tax could hurt the competitiveness of Minnesota's advertising agencies.

"Do we adjust our prices by 5.5% [to remain competitive]?" Mr. Arndt asked. "That's a business decision we'll have to make."

Minnesota's advertising agencies have joined a coalition of corporations, broadcasters and others who are lobbying against the tax.

"We certainly are going to oppose any tax that has an impact on our clients' marketing abilities," Mr. Arndt said.

Campbell Mithun works for Minnesota-based General Mills. There are other big advertisers in Minnesota, including 3M, Target and Best Buy.

Mr. Jaffe said advertisers will pass over states that tax advertisers, hurting ad revenue for area broadcasters, magazines and billboards.

The industry is closely watching Louisiana Gov. Bobby Jindal, a Republican. He may push to tax advertising in his state because he wants to eliminate the state's personal income and corporate taxes and broaden sales taxes to make up for lost revenue.

The American Association of Advertising Agencies is holding it "Transformation: 2013" conference March 10-13 in New Orleans this year, and Peter Kosmala, senior VP-government affairs for the 4A's, said his organization is "closely tuned to Louisiana to see what develops there." But Mr. Kosmala said the 4A's has no plans to cancel or move its convention.

Few states have taxed advertising, and none have done so successfully.

Florida tried it in 1987. But national advertisers canceled conventions in the state. Advertising was also canceled. Broadcasters alone saw $93 million in ad sales wiped out. Facing an uproar, Florida repealed the tax.

But states aren't the only issue.

"If something of this magnitude is taking place in the states, they certainly would be aware of it in Washington," Mr. Jaffe said. "We're keeping ourselves on high alert."

In fact Ohio's Mr. Kasich proposed ending the deductibility of advertising expenses when he was chairman of the House Budget Committee in the mid-1990s. But advertisers pushed back, and he dropped his proposal.

House Ways and Means Committee spokeswoman Sarah Swinehart said all expensing would be examined by members of the tax-writing panel, including advertising costs.

"I'm sure this is something that would be reviewed and looked at," she said.