Pennsylvania lawmakers are pushing forward with a proposal to extend the state's existing telecom gross receipts tax to digital advertising services, but the economic burden would fall on local businesses and consumers rather than the tech giants it claims to target. The Tax Foundation analysis, published June 26, 2026, warns that HB 1678 would introduce a distortionary tax on business inputs that ultimately gets passed along through higher costs. While supporters frame the measure as making large corporations pay their "fair share," the report argues the bill would reverse Pennsylvania's recent pro-growth tax reforms and expose the state to costly litigation it's likely to lose.
The bill would apply Pennsylvania's gross receipts tax—which hits total revenue regardless of profitability—to companies providing digital advertising services in the Commonwealth. Proponents point to Maryland's digital advertising tax as a model, claiming it generated $170 million for public education. However, that total over two years fell well below the original projection of $250 million annually and doesn't account for compliance costs or ongoing litigation expenses. The Pennsylvania House recently amended HB 1678 to dedicate revenue toward property tax relief for seniors, but the report notes that regardless of how proceeds are spent, the economic consequences remain unchanged. Companies subject to the proposed tax already pay Pennsylvania's corporate net income tax, and many advertised products generate revenue under the state's sales tax, meaning there's no actual tax gap to fill.
The report finds that "taxes on digital advertising served in Pennsylvania would be embedded in the cost of advertising into Pennsylvania," meaning higher costs for local businesses that would be "split between lower profits and higher prices for consumers." According to the analysis, the taxation of digital advertising "violates multiple principles of sound tax policy, including simplicity, transparency, and neutrality." The authors write that taxing digital advertising as a business input leads to tax pyramiding, "with some of the cost likely passed on to consumers, often without their awareness." Small businesses are especially vulnerable because they "may not be able to absorb the cost like their larger national competitors."
The report explains that gross receipts taxes are fundamentally different from—and more harmful than—corporate income taxes because they apply to total revenue rather than net income after business expenses. This creates economic distortions by increasing the cost of digital advertising, which could force companies to either reduce their overall advertising budgets or shift to less efficient traditional marketing channels. The bill also raises transparency concerns because unlike a sales tax that appears directly on a receipt, the cost of a business input tax remains hidden as it gets embedded in final prices. Legal challenges are almost certain, the report warns, because taxing digital advertising without similarly taxing other forms of advertising likely conflicts with the federal Internet Tax Freedom Act, which prohibits discriminatory taxes on internet-based services. Maryland has faced ongoing litigation since 2021, while Washington's 2025 digital ad tax sparked a lawsuit within months, and similar laws in Illinois and Utah passed in 2026 face legal challenges on the horizon.
The analysis concludes that HB 1678 would undo Pennsylvania's recent progress, including phasing down the corporate net income tax and expanding net operating loss carryforwards. The bottom line is stark: the bill "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." Rather than modernizing the tax code or ensuring fairness, the report argues, the proposal introduces a hidden distortionary tax that makes Pennsylvania less competitive while generating less revenue than supporters claim—all while burdening the very businesses and consumers it purports to protect.