Promotion Agencies Grapple with New Connecticut Tax
Promotion agencies are preparing to deal with a new Connecticut sales tax to be imposed on advertising services beginning April 1.
Advertising services related to the development of media advertising or cooperative direct mail advertising, such as layout, art direction, graphic design, mechanical preparation and production supervision, will be subject to 3 percent sales and use taxes. Sales of non-media advertising services and direct mail advertising services, other than cooperative direct mail, will be taxed at 6 percent.
“Administratively it’s going to become a nightmare to disseminate what is taxable and what is not taxable,” said Jim Plattner, senior vice president and CFO for J Brown/LMC Group in Stamford, CT.
Plattner said there is also concern over how clients will react to the tax. “From our clients’ perspective, their budgets are locked and really tight,” he said. “They can’t go back and say ‘I need another 3 percent or 6 percent on top of everything else because Connecticut changed its sales tax laws.’ The client may say, ‘we’re going to have to reduce our spending by that amount to cover you having to charge us the sales tax.’ That will really hurt us.”
Howard Steinberg, CEO of Source Marketing, Westport, CT, concurred. “Budgets will be impacted,” he said. “In a time of increasing budget pressures and bottom line intensity, here comes another factor that will place some downward influence on marketing spend.”
The American Association of Advertising Agencies (AAAA) along with the Association of National Advertisers is continuing efforts to repeal or ameliorate the tax. Concern is growing that other states will adopt similar measures. The tax law was passed as part of a budget deficit bill in February as a short-term fix to help reduce the state’s $500 million deficit.
“We think it’s a bad tax,” said Linda Dove, senior vice president of the AAAA. “It puts any ad agency or promotion agency in the state of Connecticut at a competitive disadvantage. If I’m an advertiser, I’m going to find it a lot easier to go to Boston to buy my advertising than go to Glastonbury.”
She said the resources to administer collection of the tax are going to be costly to agencies.
The state imposed the tax to help reduce a $900 million budget deficit and hoped to raise $5 million on the tax. However, others suggest that number is much lower.
“We believe that they have very erroneous information,” Dove said. “We believe that our agencies in Connecticut will contribute $1 million or less.”
The Promotion Marketing Association said the high concentration of sales promotion agencies located in the state of Connecticut has raised concerns for the association and its members. (Eight of the top 25 promotion agencies ranked by PROMO magazine in its 2002 PROMO 100 are based in Connecticut.)
Linda Goldstein, the chair of the PMA’s government affairs committee and a partner in Hall Dickler Kent Goldstein & Wood LLP, said the trend toward integrated marketing means that every promotion agency will likely be affected.
“If a sales promotion agency is conducting an in-store or retail promotion for a client, it’s likely that they’re going to be developing all of the elements of that promotion,” Goldstein said. “So, the fact that the regulation itself may have parceled out particular items that are taxable and others that are not, as a practical matter will not provide much relief to our members.”
The PMA has not taken any action on the issue but plans to address the sales tax at its upcoming government affairs meeting to determine if action is warranted.
“The industry has historically been somewhat successful in fighting taxes of this type,” Goldstein said. “This was premised by a need to create short-term revenue at a time when the advertising agency and sales promotion business is certainly feeling the impacts of the economy. It’s just another blow to the industry.”
