Nebraska Governor Jim Pillen’s ambitious plan to provide $2 billion in property tax relief via an increase in the sales tax rate and an expansion of the sales tax base is stirring significant debate. Part of his proposal is embodied in the newly introduced Legislative Bills 1310 and 1354, known as the “Advertising Services Tax Act” (the Act), which aims to finance this tax relief by imposing a 7.5% gross revenue tax on advertising services. However, this initiative faces a wall of voter opposition. A recent Battleground Connect survey revealed that 70% of likely voters disapproved of increasing the sales tax rate to offset property taxes. It should come as no surprise that Nebraska voters would not want to follow Maryland’s lead. What is surprising is that Nebraska legislators are willing to tie the fate of their new tax to a law that is currently being challenged in court in Maryland after the state adopted a similar tax in 2021.

The heart of the controversy lies in the new advertising tax’s specifics. The tax only targets firms with US gross advertising receipts exceeding $1 billion, a threshold that effectively discriminates against out-of-state advertising service providers and implicates constitutional and federal laws governing interstate commerce.

The proposed law specifically excludes “news media entities” and targets out-of-state digital advertising platforms. “Advertising services” incorporates a range of services, including digital advertising services, related to advertisement creation and dissemination. The term also includes “online referrals, search engine marketing and lead generation optimization, web campaign planning, the acquisition of advertising space in the Internet media, and the monitoring and evaluation of website traffic for purposes of determining the effectiveness of an advertising campaign.” Advertising services does not include services provided by entities “engaged primarily in the business of news gathering, reporting, or publishing articles or commentary about news, current events, culture, or other matters of public interest.” A news media entity does not include “an entity that is primarily an aggregator or republisher of third-party content.” Taxing publishers of one type of content and not taxing others raises profound First Amendment concerns.

While facially the Act applies to all advertising, its real focus is on digital and internet advertising and this targeting raises multiple legal and policy concerns:

• Impact on Nebraska Businesses and Consumers. The tax, though imposed largely on out-of-state service providers, will be passed through directly to local businesses when they buy advertising. Much like a sales tax, service providers can and will add a line-item charge of 7.5% on each invoice to the local business placing the advertisement, driving up the cost of advertising services for Nebraska businesses. These higher costs will be reflected in the prices of goods and services sold to Nebraska consumers or the profits of local businesses.
• Potential for Litigation. Drawing parallels with Maryland’s digital advertising tax, which faced legal challenges and has already once been ruled unconstitutional and barred by federal law, Nebraska’s legislation would also lead to costly and prolonged court battles.
• Conflict With the Internet Tax Freedom Act (ITFA). By targeting digital advertising while effectively excluding print media, the Act violates ITFA, which prohibits discriminatory taxes on electronic commerce. Online advertising would be subject to the tax and print advertising would not.
• Constitutional Challenges. The $1 billion threshold excludes local businesses and imposes the tax only on out-of-state advertising services providers, discriminating against interstate commerce in violation of the US Constitution’s Commerce Clause. Additionally, the content-based exclusions for news media entities trigger First Amendment concerns, as taxes based on content distinctions face strict scrutiny. Equal Protection is also a concern as the tax is targeted at only a handful of large companies.

The Act represents a bold attempt to go where no state has successfully gone before and should be rejected for the legal and policy reasons identified above. If adopted, it would attempt to fund a serious and worthwhile goal: property tax reduction. It’s risky to finance property tax relief on such an unreliable revenue source. For the Nebraska businesses that rely on large advertising providers, their costs would increase, and they would be the ones shouldering the litigation burden. As the Nebraska legislature navigates this tax proposal, the balance between fiscal innovation and legal viability should be a critical point of discussion.