The tax is set to take effect Oct. 1. If the company gets it overturned, it could cost the state nearly a half-billion dollars in revenue over the next four years

Jerry Cornfield
Washington State Standard

Comcast is suing to block a new Washington law imposing sales tax on advertising services, imperiling a financial linchpin lawmakers relied on to balance the state’s budget.

The cable giant contends that the statute set to take effect Oct. 1 violates federal law because it does not apply the tax to all advertising services in the same manner.

Attorneys for the corporation also assert that parts of the law are not allowed under the federal Internet Tax Freedom Act, which bars states from imposing “discriminatory taxes” on electronic commerce. 

“Almost all forms of advertising conducted over the Internet are subject to the tax, while most forms of advertising conducted off the Internet are not subject to the tax,” they wrote.

If Comcast succeeds in getting the tax overturned, it could force major recalibrations in the budget.

Striking the tax on advertising services alone would reduce tax collections by roughly $475 million over the next four fiscal years, said Mikhail Carpenter, a spokesperson for the state’s Department of Revenue.

The lawsuit filed in Thurston County Superior Court on Sept. 9 names the state and the Department of Revenue as main defendants. 

A Comcast spokesman said the lawsuit lays out the company’s concerns and declined to comment further.

Department of Revenue officials are reviewing it with legal counsel, Carpenter said.

The fight centers on a section of Senate Bill 5814, a major expansion of business taxes passed by the Democratic majorities in the House and Senate in April and signed by Democratic Gov. Bob Ferguson in May. Republicans in both chambers opposed the bill.

This bill is counted on to raise roughly $1.1 billion in this two-year budget and $2.7 billion over four years, much of it by charging the retail sales and use tax on more services, such as digital advertising, security services and temporary staffing.

It is one of the largest pieces of a $9.4 billion package that Democrats approved in April to balance the current budget, and the next one as well.

Comcast is contesting provisions that will require sales tax be collected for ads sold by streaming services, while exempting advertising services of newspapers, radio and television broadcasting, as well as on billboards and buses. Naming rights and ads in stadiums will not be subject to the tax either.

This would mean, for example, a Seattle television station won’t charge sales tax on ads sold to a local business, but a streaming service like Netflix must charge sales tax if it sells an ad to the same business.

“These excluded categories of advertising were drawn in such a way that the burden of the tax falls on Internet-based advertising, rather than non-Internet based advertising,” reads the lawsuit.

The lawsuit is not raising a new issue.

A coalition of streaming services, including Netflix, Paramount+, Peacock, and the Walt Disney Co., urged Ferguson to veto the bill, arguing the new advertising tax would lead to higher costs for customers or fewer options if services leave the market.

“Singling out one segment of the ad economy for this kind of discriminatory treatment is the wrong way to address the state’s fiscal needs and would do far more harm than good,” the Streaming Innovation Alliance told the governor in a letter.

The Department of Revenue is in the process of writing final rules for implementation of the tax law. 

As part of the process, in July, it held two “listening sessions” in which business owners and operators sought clarity on what advertising services would be covered, questioned the legality of the approach, and expressed concern consumers would be negatively impacted.

The department expects to issue “interim guidance” on advertising service in the next two weeks, Carpenter said. It will provide taxpayers with instructions “they can rely on while the department continues to review issues and adopts final interpretive guidance.”

This guidance will not address the legal issues raised by the lawsuit, he said. 

This report was first published by the Washington State Standard.