States Need a Uniform Solution to Accelerate Digital Ad Taxes

Digital advertising taxes have emerged as a potential solution to states’ declining budgets and need for more revenue sources. To avoid the chaos of patchwork plans, states should consider coordinated approaches that balance sovereignty with consistency and predictability in the marketplace.

Rhode Island is the latest to join the trend, proposing a 10% tax on digital advertising revenue from companies earning over $1 billion globally. The move, modeled after Maryland’s digital advertising tax, reflects a growing appetite for state revenue sources that are responsive to a changing economy.

These isolated efforts—and future state initiatives inspired by them—risk creating a compliance nightmare for businesses if left uncoordinated. The patchwork sales and use tax system that continues to burden enterprises selling across state lines can teach us a lesson. Without a uniform framework, the push for digital advertising taxes could hinder innovation and disproportionately impact smaller businesses.

State-level digital advertising tax policies remain relatively rare. Maryland is the only state with a fully implemented example, and it’s facing significant legal and administrative challenges—with suits alleging violations of laws ranging from the Internet Tax Freedom Act to the First Amendment.

But multiple proposals and discussions indicate widespread interest in digital advertising taxes. Statehouses in Connecticut, Indiana, and Arkansas each have had formal proposals. More states, such as Massachusetts, New York, and Texas, are considering similar plans for the future.

Starting Jan. 1, 2026, Rhode Island’s proposed tax would target companies with $1 billion or more in global revenue. The tax is projected to raise $9.5 million in its first year and nearly $20 million annually once fully implemented.

The levy aims at major players such as Google owner Alphabet Inc. and Facebook owner Meta Platforms Inc., which make up a large piece of the $225 billion annual US digital advertising pie. The $1 billion threshold prevents smaller players from being subject to the levy, but there is no reason to believe such a threshold will be preserved in the future. For instance, Maryland’s threshold is a tenth of that, at $100 million.

There is a growing consensus among policy advocates that something should be done to address the external costs to society that stem from social media companies—businesses that are usually underwritten by digital advertising revenue. When the demand to tax digital advertising to hold social media platforms accountable intersects with states’ need for new revenue streams, a bumper crop of state digital advertising tax proposals likely will emerge across the country.

A lack of uniformity risks entrenching an oligopoly in the digital advertising space. Large corporations with the resources to absorb compliance costs and navigate numerous separate state tax obligations would proliferate, while smaller competitors may be driven from the market. Such a scenario would reduce competition and innovation, leaving consumers and advertisers with fewer choices and higher costs.

To get ahead of that situation, states could collaborate to offer a practical and politically viable solution. Such an agreement could be modeled on the Streamlined Sales and Use Tax Agreement.

Any agreement should have uniform standards that still allow states to administer and enforce the taxes in a way that aligns with their unique fiscal needs. The Streamlined Sales and Use Tax Agreement, a voluntary agreement among 44 states designed to simplify sales tax collection, brought much-needed order to sales tax administration.

It also standardized and simplified exemption criteria and improved transparency in collections. Participating states still retain control over their individual tax policies, but businesses benefit from reduced compliance burdens and uniform language.

A similar agreement for digital advertising could standardize all definitions and thresholds. Establishing consistent criteria for taxable activities and revenue thresholds would simplify compliance. For example, ensuring all states agree on what qualifies as digital advertising revenue would eliminate a huge potential source for ambiguity and variety among states.

Similarly, aligning sourcing rules—whether taxes apply based on the location of an advertisement’s audience or the advertiser—would avoid overlapping claims to the same revenue and reduce the likelihood of costly litigation. Advertisers would be able to follow a clear hierarchy for sourcing transactions, making it easier to determine the appropriate tax jurisdiction and reducing administrative burdens and associated costs.

Such an agreement could further enshrine provisions to shield smaller businesses, such as minimum revenue thresholds and safe harbors for companies making good-faith compliance efforts. This could protect advertisers from liability for tax compliance issues if they follow guidelines set forth by the compact when calculating and remitting sales tax.

Maryland’s ongoing legal battles illustrate the high stakes of entering this space without clear and consistent frameworks. States should pay close attention to these challenges and derive lessons about what works—and what doesn’t. These insights can facilitate a streamlined and constitutionally sound approach that avoids the pitfalls Maryland is facing.

If such an agreement is to get off the ground, a state-driven initiative likely would be more politically palatable than a federal framework. Although a federal solution could guarantee uniformity, it would face resistance from states wary of ceding control over taxation policy. A state-driven approach would allow states to tailor implementation while benefiting from shared principles and efficiencies—all while building on existing cooperative efforts.

By working together, states can tap into a potentially lucrative revenue stream while minimizing the risk of unintended market distortions. Starting now would help states avoid the problems of a patchwork system and learn from the challenges of sales and use tax standardization.

Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and practice professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social

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