We oppose an expansion of the sales tax to advertising and and advertising services, as well as repeal of the long-standing sales tax exemption covering printing and publishing

Dear Minnesota State Legislators, Governor Dayton and Commissioner Frans:

We write on behalf of a coalition representing tens of thousands of employees working for a wide spectrum of communications businesses in Minnesota. Coalition members include the Printing Industry Midwest (PIM), the Minnesota Newspaper Association (MNA), Minnesota Forest Industries (MFI), the Minnesota Broadcasters Association (MBA), the Advertising Federation of Minnesota (Ad Fed), the American Association of Advertising Agencies-Twin Cities Council (AAAA), the Minnesota Magazine and Publishing Association (MMPA), Minnesota Outdoor Advertising Association (MOAA), Public Relations Society of America, Minnesota Chapter (PRSA), Minnesota Interactive Marketing Association (MIMA), and The Minnesota chapter of AIGA (the professional association for design). The businesses we represent employ tens of thousands of workers, and add billions of dollars to the state’s economy each year.

The Legislature is now debating possible changes to Minnesota’s sales tax law. Those changes could include expanding the tax to services and repealing some existing exemptions. As this debate unfolds, we want you to be aware of our deep concerns about the proposed expansion of the sales tax to advertising and advertising services, as well as repeal of the long-standing sales tax exemption covering printing and publishing.

Those changes would have an immediate, severe, and in some cases, devastating impact on virtually all of the state’s communications businesses, to the many thousands of employees who work in them, and to Minnesota’s economy more generally. Our members willingly expect to pay their fair share of taxes in Minnesota. But they also expect that the state’s tax policy under which those taxes are levied is economically sound and capable of being fairly administered—a tax on advertising and publishing clearly fails both conditions.

1.  A sales tax on advertising and on publications that distribute advertising would discriminate against Minnesota communications businesses, and effectively end Minnesota’s status as one of the top advertising and communications centers in the country. Inevitably if such taxes are enacted here, they would cause the many major Minnesota companies that rely heavily on advertising and promotional activities (like General Mills, Hormel, Target and Best Buy) to move their advertising agency accounts and purchases away from the state. They would also reduce their advertising buys in Minnesota, as would most smaller companies that are in no position to increase advertising budgets in the current economy. The resulting loss of millions of dollars in revenues would severely harm all Minnesota communications businesses, a result that would be especially unfair at a time when they are facing intense competition from out-of-state and Internet-based advertising enterprises, which the state generally can’t tax.

2. No state currently applies a sales tax to the purchase of advertising or related services, and the states that tried to (like Florida and Iowa) quickly repealed it. In the past two or three decades, approximately 40 other states have looked at adopting such a tax, but after considering the possible impacts, decided not to do so.

3. Studies conducted by Dr. Robert Kudrle, a professor at the U of M’s Humphrey Institute who teaches microeconomic policy analysis and econometrics, document the harmful effects of a sales tax on advertising. In the 1990s, Dr. Kudrle performed a detailed analysis of the impact that an advertising tax might have in Minnesota. He determined that it would cost the state almost $300 million in annual business revenues, and nearly 6,000 jobs. Several years later, he followed this study up with a similar one in Wisconsin. His report there, issued in 2003, states that “the taxation of business services such as advertising serves neither equity nor efficiency in a state economy,” and it “erodes the state’s competitive position while it particularly disadvantages small business,” concluding that “the advertising taxes examined in this study would disrupt highly-successful Wisconsin industries and would hobble their efforts to compete in the national and international economy.” After Florida briefly imposed a sales tax on advertising in the late 1980s, Wharton Econometrics projected that had the tax remained in place, it would have cost the state more than 50,000 jobs and $2.5 billion in personal income after 30 months due to the loss of out-of-state advertising money and the decline in promotional efforts by businesses.

4.  A sales tax on advertising and publishing would be extremely uncertain and expensive to administer. Defining exactly what “advertising” consists of and administering a sales tax applying to it in a fair and workable way would be extraordinarily difficult, and would require an army of accountants and lawyers. Are Little League uniforms included? Grocery receipts? Business cards? Branded sports arenas? Logos on clothing? This complexity is magnified by the Internet, since the state’s legal power to collect the tax on Internet-based advertising and promotions is not only very complex, but notoriously inconsistent. After Iowa enacted and then repealed an advertising tax, the Iowa Attorney General stated, “Taxing advertising was like trying to tax the elements of nature.” And during Florida’s six-month ad tax experiment, they found that the cost of processing transactions involving some kinds of advertising exceeded the tax collections.

5.  Most advertising is sold on a business-to-business basis, and a tax on advertising and publications distributing advertising therefore results in double taxation—once on a product’s advertising, then again on the product’s retail sale. Advertising is not an end product, but rather part of a process aimed at an eventual consumer sale. “Pyramiding”—stacking sales taxes on top of other sales taxes—is universally recognized to be bad tax policy, because it tends to deter and disrupt economic activity. Since advertising is a cost of doing business, it is already included in the final selling price, and taxed at the point of sale.

6.  Advertising is one of the most important drivers of economic activity across the state. A tax on advertising and advertising publications especially hurts local economic activity—when the cost of advertising goes up, the amount of advertising goes down. That deters competition, lowers consumer demand, and reduces local employment. Especially at a time when the state and national economies remain relatively soft, suppressing advertising and promotional efforts used to stimulate business activity would be remarkably short-sighted and counter-productive.

The members of the Communications Industry Coalition ask the Legislature to reject an expansion of the sales tax to advertising and publishing which would almost certainly end up costing the state far more revenue than it would ever recover. We would also appreciate the opportunity to visit with you about this issue, and are happy to answer any questions you might have.

Sincerely,

The Minnesota Communications Industry Coalition