Stations Warned About Cash-Hungry States

Stealth taxes could take a bite out of already depleted ad bases

At their legislative/regulatory meet-and-greet in Washington recently, broadcasters met with ad industry lobbyists to get some insight on potential local government threats to an already dwindling advertising base.

What they discovered wasn’t pretty. After an election year where there will likely be little political will to take on tax reform, 2011 could see the return of the dreaded sales tax on services, including advertising.

Clark Rector, executive VP at the American Advertising Federation, recalled the time in the mid-1980s when Florida imposed a sales tax on ad services. Broadcasters in the Pensacola area lost about 45% of their revenue over the six months the duty was levied, as dollars flew across the Alabama border to Mobile.

“Potentially, a sales tax on services could mean the loss of millions of dollars” in station ad revenue, Rector says, depending on how many states do it and how broadly they choose to defi ne it. “If states begin increasing the price of advertising by 5%- 8%, the best-case scenario is that [stations] are going to lose that 5%-8%. Advertiser budgets stay the same, so they will have to make lesser buys. And anybody who is buying on a regional or national basis is going to pull a fair amount of money out of those states and put it in other states where they are going to get better value for their advertising dollar.”

Linda Dove, senior VP of the American Association of Advertising Agencies (AAAA), who talked with broadcasters at the Washington fly-in, agrees that the services tax could become a bigger threat once midterm elections are over. “This is not the year they are going to take on tax reform,” she says. “We will hear a lot more conversation about this in 2011.”

Dove says the industry is always at risk of efforts to impose a sales tax. In particular, states that depend largely on manufacturing and production of tangible personal property, or rely heavily on property taxes and sales taxes on cars, have to look at other sources when those revenues begin to shrink. This is true, Dove adds, even though state legislatures are hesitant to go after business-to-business transactions in a still-struggling economy.

Though Dove warns that there may not be any direct frontal attacks this year, she is already seeing a “stealth campaign” (see sidebar). As she puts it: “We are seeing hidden fees and taxes and audits that allow the states to get money, but they are not directly confronting the business community.”