The American Association of Advertising Agencies and the Association of National Advertisers are lobbying to prevent Connecticut's 3 percent sales tax on advertising, direct mail and public relations creative and production from taking effect April 1.
The tax, half of the original 6 percent planned, was approved three weeks ago as part of a supplementary state budget to plug a $500 million deficit for the fiscal year through June 30. The ad industry is not happy.
“What this does is put Connecticut at a competitive disadvantage,” said Linda Dove, Washington, DC-based senior vice president at the AAAA. “Neither New York nor Massachusetts tax production and creative services. So if I'm an advertiser, I'm going to make sure I'm not going to Connecticut.”
The tax is one of several measures introduced by Connecticut as it struggles to plug a $900 million deficit for the year starting July 1 and a $1.4 billion deficit in the 2004-05 fiscal year. It will be part of Gov. John G. Rowland's $13.2 billion annual state budget.
Connecticut claims the tax will raise $5 million.
“We believe it'll raise less than $1 million,” Dove said.
Connecticut direct agencies and clients, who eventually will shoulder the tax, will be affected.
For example, the tax potentially covers the creation of a mailer from copy, design and layout to printing and production. It also could affect the development of direct response television spots as well as online ads. Add to that extra paperwork and filing.
Simply put, the cost of advertising and marketing will rise in Connecticut.
Dan Jaffe, Washington, DC-based executive vice president of the ANA, said any tax on the selling process in this slow economy is counterproductive.
“Why make it more expensive to sell?” Jaffe said. “Advertising is what generates sales and therefore sales tax. The governor has claimed that the tax is a 'nuisance' and may not be worth the collection costs. But it's worse than that. It creates a totally anti-business environment, which clearly is not their intention. So we have a lobbyist — we're going to work hard to roll it back.”
Moreover, advertising does not lend itself easily to widget taxing.
“This is not a workable tax,” Dove said. “It's going to be extremely difficult to administer.”
Even its implementation is unclear so late in the game. After the bill's passage by the Connecticut legislature, it is the Department of Revenue Services' responsibility to publish preliminary guidelines. That has not happened and may take months.
The tax originally covered media ad time and space. That was dropped after media owners protested. No state currently taxes ad time and space. Florida had such a tax in 1987 but it was repealed in six months after intense lobbying from the AAAA and the ad industry.
If unchallenged, Connecticut may set a tempting precedent. Other cash-strapped states may come calling for advice to eliminate deficits with new taxes.
“So there's always that chance that a few states will be shortsighted,” ANA's Jaffe said. “In the search for dimes, they may lose long-term dollars.”
States first introduced sales tax in the 1920s and '30s. Manufacturing provided the bulk of the tax. But state coffers started drying up after manufacturing decreased. The 46 states with sales tax were unprepared for a service-based U.S. economy. And sales tax does not apply to many services.
“Things were exacerbated in the last two years as the economy has gone south,” Dove said. “People are not buying. So what you've got now is states reaching out to extending this sales tax to services. But there is not the political will to go against the business community successfully.”