March 7, 2002

Legislative Activity

Date: March 7, 2002

To: AAF Members

From: Clark Rector, Jr., Vice President-State Government Affairs

Re: Tennessee Advertising and Services Tax Threat

There have been some significant developments in the Tennessee legislature.

On Tuesday , March 5, the Tennessee Senate Finance Committee rejected a plan to tax all currently exempt services. Instead, members vote to temporarily increase the sales tax rate from 6% to 7%.

On Wednesday, March 6, the House Budget Subcommittee sent to the full Finance Committee the House version of the bill, but approved an amendment to levy a 2% gross receipts tax on service providers, including media advertising sales.

While the Senate Committee vote was a setback for the services tax, it was not a killing blow. The full Senate could consider the legislation as soon as Monday, March 11. The bill will be subject to amendment and proponents of the services tax could try again.

The full House Finance Committee may consider the gross receipts tax next Tuesday, March 12.

It remains very important that members of AAF’s Tennessee advertising clubs and other advertising industry representatives continue to contact Tennessee legislators and let them know that taxing advertising is not a solution to the state’s budget problems.

Listed below are arguments against an advertising tax. Tennessee legislature’s Web page is www.legislature.state.tn.us. The page has tools to help you look up your representatives and find their telephone number and e-mail address.

  • National advertising dollars will leave the state. Marketers will move to markets where they can reach the most consumers with the fewest dollars. Florida taxed advertising for six months in 1987. While that tax was in effect national advertising purchases increased 3%. In Florida they decreased 12%!
  • Advertisers can reach most Tennessee consumers using untaxed out of state media across the border. During the 1987 Florida tax, Pensacola broadcasters encountered revenue losses of 45%. Most of that money went across the border to competitors in Mobile, Alabama.
  • Local media will suffer huge losses. Advertising is the primary source of revenue for the print media and the sole source for broadcasters. A reduction in advertising would inevitably result in a loss of jobs and a decreased ability to provide quality content and programming.
  • An ad tax is too complex and expensive to administer. The Florida Department of Revenue spent millions of dollars to hire over 200 new auditors in 1987. The executive director admitted afterwards, "It was not enough."

A tax on advertising is bad public policy:

  • Placing a tax on advertising services and/or placement increases the cost of advertising. Because most clients operate on a fixed advertising budget, they will compensate for the tax by decreasing their advertising purchases. This will have a direct — and negative — impact on the advertising industry, economy, consumers and the state.
  • Advertising is the engine that fuels the economy. Less advertising means fewer sales. Fewer sales mean reduced revenue and fewer jobs. Fewer sales also result in less sales tax revenue for the state.
  • Prices may rise. Studies show that advertising fosters competition and helps lower the price of products and services. Less advertising means less competition.

Do not hesitate to give me a call at 1-800-999-2231, if you have any questions.