Bill amended to create service/ad tax; heard by Senate committee

Legislation introduced by Senator Bob Hertzberg (D-Los Angeles) in February was hurriedly amended last week to create a tax on services that would apply to advertising and several other services used to produce newspapers.

Hertzberg’s rush to amend SB 993 was a result of the Senate Governance and Finance Committee scheduling the bill for a hearing this past Wednesday. The hastened legislative activity surrounding the bill sent lobbyists for every business group affected by the new provisions, including CNPA, scurrying to inform legislators on the committee about the horrendous consequences that would occur if the bill was passed.

All but one committee member (Hertzberg) had significant concerns with the bill. At the beginning of the hearing, committee Chairman Mike McGuire (D- Healdsburg) announced that the committee would not be taking a vote on the measure.

SB 993 would impose a phased-in excise tax on the receipt of the benefit of a service by a business in California beginning on January 1, 2020. The tax rate for services in 2020 would begin at .75%, increasing to 1.5% in 2021 and in 2022 the rate would reach 3%. The revenue from the service tax would be deposited into the general fund.

The bill purports to exempt advertising from the tax “unless the advertisement revenue paid to the person or persons in this state consists of commissions or other consideration that is based upon sales of services.”

According to the bill’s provisions, newspapers would also be subject to service taxes for engaging third parties to perform the following services:

  • Outside sales (subscription and advertising);
  • Stories from stringers and content purchased from syndicates and newswires;
  • Graphics and production services;
  • Printing; and
  • Home delivery carriers

Additionally, the bill would require newspapers to pay service taxes for other non-newspaper specific services used such as IT services, software and janitorial to name a few.

Moreover, all of these taxes would be stacked under the proposed bill, that is, they would not be recognized as component parts of the finished product as is the case under current sales tax regulations.

To offset the increased tax liability for the new service tax, SB 993 would gradually decrease the sales tax rate but not eliminate it altogether. Thus, newspapers that now have a sales tax liability would continue to have to pay it albeit at a lower rate.

CNPA informed every member of the Governance and Finance Committee how the proposed stack of service and sales taxes would be fundamentally unfair to newspapers that are already under siege because of the federal newsprint tariffs and overwhelming competition from Google and Facebook.

CNPA’s message as well as opposition from other businesses resonated with the committee which will not hold a vote on the bill this session. Instead, the committee plans to hold a series of informational hearings throughout the year to gather information about the proposal’s impact on various industries.