On January 14, LB 989 was introduced in the Nebraska Legislature, which would impose sales and use tax on “the retail sale of digital advertisements.” The bill defines “digital advertisement” as “an advertising message delivered over the Internet that markets or promotes a particular good, service, or political candidate or message” (see pages 5-6 of the bill). The definition is a sweeping one, but the exact scope is unclear as the terms used are not further defined. It is also unclear how a taxable digital advertising transaction would be sourced if the proposed legislation is enacted.

The digital advertising tax proposed in the bill would have an effective date of October 1, 2020. Nebraska’s state sales tax rate is 5.5%, with local sales taxes up to an additional 2%.

Similar to Maryland’s SB 2 proposal, because Nebraska would tax digital advertising but not tax non-digital advertising, the proposed tax raises a series of legal concerns (above and beyond the obvious policy concerns). For example, the tax would be a “discriminatory tax” prohibited by the Permanent Internet Tax Freedom Act (PITFA). The proposal also raises serious First Amendment (singling out digital commercial speech for tax) and Equal Protection (lack of rational basis for tax only on digital advertising) issues.

Practice Note: If enacted, LB 989 would create an uncharted and sweeping tax on digital platforms and advertisers. While this bill will have an uphill battle in 2020 (for example, Nebraska has a short, 60-day legislative session this year and Nebraska has a filibuster rule) the repeated introduction of digital advertising tax bills early in 2020 state legislative sessions may be the start of an alarming trend of legally suspect tax proposals that we are keeping a close eye on. Businesses impacted by the Maryland and Nebraska digital advertising tax proposals are encouraged to contact the authors to discuss these legislative developments further.