Ohio Governor John Kasich is one of several governors across the nation proposing an expansion of state sales taxes to include all forms of advertising. Guest columnist Jack Greiner weighs in with an overview of Ohio’s predicament and the potential national impact these laws might have — on media in particular.
I’m not aware that anyone has actually, you know, started to chant “ax the tax” in response to Ohio Governor Kasich’s proposed budget, but that seems to be the sentiment among a growing number of constituencies. Between now and July 1, when the budget is due to take effect, there should be some fur flying in and around Columbus.
But let me back up. Earlier in February, Kasich unveiled a proposed state budget. A centerpiece of the proposed budget is a plan to radically reshape Ohio’s taxation system.
The good news? The plan would reduce income tax rates in all brackets by a total of 20 percent over three years. It would lower the sales tax from 5.5 percent to 5 percent beginning September 1, 2013.
A New Reality
The bad news? Well, that depends on your perspective, but lots of folks are not too happy with this part: The plan subjects a whole bunch of services to the sales tax. Kasich feels it is time to recognize his state’s “new reality.” Ohio was once a manufacturing heavy economy — so a tax on “goods” raised sufficient revenue. But as the economy has become has become more service oriented, the old system doesn’t work so well. Kasich also feels that the expanded sales tax on services will hit low-income Ohioans less severely — these citizens are less likely to use an architect, for example.
Service Industry Impact
But the tax affects whole categories of professionals who have never had to mess with sales tax before. So in my case, my already exorbitantly high legal fees will be 5 percent higher. Just what we needed — one more reason for people to hate lawyers. The Ohio State Bar Association (OSBA) just recently released a statement in opposition to the plan.
The OSBA’s concerns include the standard — it will raise the cost of doing business in Ohio. Additionally, the OSBA feels the tax could be an unconstitutional infringement on a criminal’s right to counsel. But keep in mind that the state is required to provide counsel to indigent defendants. I’ve watched enough “Law & Order” episodes to know the Miranda warning pretty much by heart, so I’m not sure this argument is going to carry the day.
Media, Agencies to See Tax Increase
While lawyers may be the only ones making a constitutional argument against the tax, they are not the only professionals affected. Fees charged by advertising and marketing agencies are subject to the tax, as are the charges for radio, TV, newspaper and billboard advertising. The Ohio Newspaper Association is not a fan. It points out a legitimate concern — because Ohio cannot tax interstate commerce, it can’t levy the sales tax on national advertising. When the local hardware store buys advertising, it will be hit with the tax. Lowe’s and Home Depot won’t. Advantage: Goliath.
There is also legitimate concern that Ohio advertising agencies may suffer from the fact that Ohio borders four states, none of which impose similar taxes. That begs the question: What is to stop a Cincinnati company from using a Kentucky advertising firm to handle its business? The answer to that question may depend on how aggressively the Ohio Department of Taxation chooses to collect the payment of “use taxes.” If this tax plan becomes law, it will impose “use taxes” as well as “sales taxes.” If an Ohio business uses a service — for example, advertising — from a non-Ohio entity, it would be required to pay the use tax. Sort of the yin to the sales tax yang if you will. You know, it’s like those online purchases you make where there’s no sales tax — you all pay the use tax, right? Right? Anyone? Bueller?
What’s Next for the Ad Tax?
It is difficult to predict the future, but we have some history to examine. Florida passed a tax on advertising in 1987. And it flopped. According to Advertising Age, “broadcasters saw $93 million in ad sales wiped out.” It didn’t take long for Florida to repeal the tax. I suspect Columbus-based lobbyists will recite this history from sun up to sun down in the coming weeks.
Kasich seems invested in this plan, and he tends to be supremely confident in his positions. Does that make him an irresistible force or an immovable object? One way or the other, the answer will play out by July. In other words: slightly longer than the Academy Awards, but potentially even more entertaining.