PA Digital Ad Tax Proposal: Details & Analysis

Pennsylvania lawmakers are considering HB 1678, a proposal to extend the Commonwealth’s existing telecom gross receipts taxGross receipts taxes are applied to a company’s gross sales, without deductions for a firm’s business expenses, like compensation, costs of goods sold, and overhead costs. Unlike a sales tax, a gross receipts tax is assessed on businesses and applies to transactions at every stage of the production process, leading to tax pyramiding. (GRT) to digital advertising services. Supporters present the measure as a way to modernize the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code and assure that large corporations that profit from collecting private data and selling ads pay their “fair share.” But that narrative obscures how the tax would actually work.

In practice, HB 1678 would impose a new tax on a business input, increasing costs that would ultimately be passed along to Pennsylvania businesses and consumers. Like similar proposals in other states, it would introduce economic distortions, add administrative complexity, and invite costly legal challenges—all while raising less revenue than proponents suggest.

The Pennsylvania House recently advanced HB 1678 after amending the bill to dedicate revenue toward property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. relief for seniors. Regardless of how the proceeds are spent, however, the economic consequences of the tax itself remain unchanged.

The Truth About Digital Ad Taxes

Proponents of HB 1678 point to Maryland’s digital advertising tax as a successful model, claiming it generated $170 million to fund public education. While Maryland raised a total of $170 million during the first two years its law was in effect, that total was well below the original projection of $250 million annually, and that $170 million does not account for the cost to the state for compliance and ongoing litigation.

Advocates also claim that some of the largest corporations in the country profit from collecting private data and selling ads while not being subject to taxation. But this is far from the truth.

Businesses subject to the proposed GRT are already paying Pennsylvania’s corporate net income tax (CNIT). The CNIT is meant to be a tax on net income, or corporate revenues less the costs of doing business. In contrast, GRTs apply to total revenue regardless of profitability, making them a more economically inefficient and harmful form of taxation. Pennsylvania’s existing CNIT is the more appropriate form of taxation and already captures income from business activity (both the advertising platforms and those utilizing them).

Many of the advertised products also produce taxable sales under the Commonwealth’s sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. . And when Pennsylvania-based businesses advertising on these platforms earn income that flows through to pass-through owners in profits or to workers in wages, Pennsylvania’s personal income tax applies. There is no tax gapThe tax gap is the difference between taxes legally owed and taxes collected. The gross tax gap in the U.S. accounts for at least $441 billion in lost revenue each year, according to the latest estimate by the IRS (2011 to 2013), suggesting a voluntary taxpayer compliance rate of 83.6 percent. The net tax gap is calculated by subtracting late tax collections from the gross tax gap: from 2011 to 2.

Local Businesses and Consumers Would Pay the Price

While HB 1678 targets large digital platforms, the economic burden would be borne by others. Taxes on digital advertising served in Pennsylvania would be embedded in the cost of advertising into Pennsylvania. That means higher costs for local Pennsylvania businesses. Those costs would be split between lower profits and higher prices for consumers. The tax is economically inefficient and distortionary, and its harms are somewhat hidden from public view.

Digital Ad Taxes Are Unsound Tax Policy

The taxation of digital advertising violates multiple principles of sound tax policy, including simplicity, transparency, and neutrality. Tax laws should be easy to comply with, but instead, HB 1678 introduces complexity for businesses by requiring them to track and report digital advertising revenue separately from other income streams, imposing additional compliance burdens. The Commonwealth of Pennsylvania would face increased administration and enforcement costs.

Transparency in taxation means that it is visible and easily understood. For example, a sales tax on a final consumer purchase is obvious and easily understood—it’s right there on the receipt. Digital advertising is a business input. Taxing it would lead to tax pyramidingTax pyramiding occurs when the same final good or service is taxed multiple times along the production process. This yields vastly different effective tax rates depending on the length of the supply chain and disproportionately harms low-margin firms. Gross receipts taxes are a prime example of tax pyramiding in action., with some of the cost likely passed on to consumers, often without their awareness. Small businesses are especially sensitive to increased costs of doing business and may not be able to absorb the cost like their larger national competitors.

Taxes should neither encourage nor discourage business decisions, yet broadcast and news media entities are specifically exempted from the bill, while everyday businesses dependent on digital advertising to reach consumers are targeted. Digital advertising can be a cost-effective means for reaching customers, but HB 1678 could force companies to either reduce advertising overall or shift to other less efficient traditional forms of marketing, thus distorting economic decision-making.

Digital Ad Taxes Invite Litigation

Maryland has dealt with ongoing legal challenges since the passage of its digital ad tax in 2021. In 2025, Washington added digital advertising to its sales tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates., and just months later, a lawsuit was filed. Illinois and Utah enacted laws targeting digital advertising during their 2026 legislative sessions, and litigation is on the horizon. HB 1678 would expose Pennsylvania to almost certain legal challenges.

Taxing digital advertising without similarly taxing other forms of advertising conflicts with the federal Internet Tax Freedom Act. The law defines a discriminatory tax as any levy imposed on internet-based goods and services that is not imposed on non-digital equivalents. Digital advertising laws do exactly that: they impose a tax on digital advertising but not on non-digital advertising.

These laws also raise questions under the Commerce Clause of the US Constitution. They burden interstate commerce by taxing out-of-state businesses selectively. States cannot impose taxes that unduly burden interstate commerce by taxing or otherwise penalizing out-of-state activity relative to in-state activity. This particularly becomes an issue given the challenges of appropriately sourcing activity under the proposed tax.

The Bottom Line

Pennsylvania has enacted sound, pro-growth policies in recent years, including the phasing down of its CNIT and the phasing up of its cap on net operating loss carryforwards. HB 1678 would reverse that progress. While originally framed to fill a budget deficit, and then amended to provide targeted property tax relief, the reality is that it imposes a new and hidden distortionary tax that would ultimately be borne by Pennsylvania businesses and consumers.

The truth about HB 1678 is simple: it would create a complex tax that harms the Commonwealth’s economy, hurts in-state businesses, and exposes Pennsylvania to years of litigation it is likely to lose, ultimately forcing a refund of all taxes collected.