Illinois tax increases part one: Digital services taxes

Digital Services Tax #1: Targeted Advertising Services Tax

Somewhat similar to Maryland’s Digital Advertising Gross Revenues Tax (Maryland DAT), the bill proposes a Targeted Advertising Services Tax on “providers of targeted advertising services” at a rate of 10% of “the gross receipts derived from such targeted advertising services provided in [Illinois].” Note that the Maryland DAT rates are progressive – ranging from 2.5% to 10% for the largest sellers of digital advertising.

• What’s Taxable?

A taxable “targeted advertising service” is “any programmatic written, oral, or graphic statement or representation conveyed through a digital interface or any other method of delivery.” The term is defined to include a variety of advertising services, including banner advertising; search engine advertising; interstitial advertising; and a catch-all – other comparable advertising services that use personal information about the people to whom the ads are being served.

The Maryland DAT is limited to advertisements on digital interfaces. The Illinois tax appears to be broader, akin to the Utah TAT, applying to advertisements “conveyed through a digital interface or any other method of delivery.” The “or” seems to render the digital interface as optional, as opposed to the Maryland DAT which requires a digital interface.

• "Programmatic” 

Interestingly, this tax is limited to only “programmatic” advertisements, which S.B. 3019 defines to mean “capable of automating advertising services.” The definition elaborates that “programmatic” advertisements may be “sold in real time by employing technology that uses computer-driven or software-driven workflow or machine learning algorithms.” We believe that the term comes from our litigation challenging the Maryland DAT. While there is no reference to “programmatic” in the Maryland statutes, the Maryland Comptroller asserts that its digital advertising tax contains a “programmatic” requirement.

• News Media Exemption and a $1 Million Floor

Like Maryland’s tax, this tax excludes “advertisement services on digital interfaces owned or operated by or operated on behalf of a news media entity.” The tax also does not apply to providers of targeted advertising services that have fewer than $1 million of annual cumulative gross receipts from targeted advertising services provided in Illinois. For purposes of the $1 million threshold, business entities that are members of controlled group of corporations, as determined under IRC § 1563, will be treated as a single entity.

• Preempting Illinois Localities

The bill allows only a state-level tax on targeted advertising services. Localities would be prohibited from imposing their own tax on “the occupation of providing targeted advertising services.”

Digital Services Tax #2: Social Media Platform Fee

The bill proposes that, beginning January 1, 2027, each social media platform must pay a “fee” to the Illinois Secretary of State based on a monthly report of its average number of monthly users located in Illinois. This imposition is similar to the existing Chicago Social Media Amusement Tax (Chicago SMAT). The tax rate varies from $0.10 - $0.50 per month per Illinois user, after the first 100,000 Illinois users. The Chicago SMAT is imposed at $0.50 per user over 100,000 Chicago users. Each year, the fee charged is increased in accordance with the increase in the Consumer Price Index.

• What is a social media platform?

A “Social media platform” is defined as: 

“a website or internet medium that:
(1) permits a person to become a registered user, establish an account, or create a profile for the purpose of allowing users to create, share, and view user-generated content through that account or profile;
(2) enables one or more users to generate content that can be viewed by other users of the medium; and
(3) primarily serves as a medium for users to interact with content generated by other users of the medium.”

• Anti-Pass Through

Similar in spirit to the Maryland DAT’s pass-through prohibition, which was found to violate the First Amendment, the bill prohibits a social media platform from varying the cost of “access, features, services, or in-app purchases” based on geographic origin “for the purposes of recouping the” Social Media Platform Fee.

• Entity Exclusion

Unlike the Chicago SMAT, the Illinois Social Media Platform Fee does not exclude certain entities, such as providers of cloud computing services, Internet search providers, and email service.

We will be releasing another Alert describing the other Illinois tax increases, so stay tuned.

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If you have any questions about this Legal Briefing, please feel free to contact any of the attorneys listed or the Eversheds Sutherland attorney with whom you regularly work. 

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