Tax Law | Digital Advertising Regulations | Media & Entertainment

Introduction: Illegal Under the Internet Tax Freedom Act

In September 2025, Comcast filed suit in Thurston County Superior Court, Washington, asking the court to block enforcement of a newly passed law taxing certain advertising services. The law, part of Senate Bill 5814, would impose a sales and use tax on many “advertising services,” especially those conducted online, while exempting traditional media like newspapers, television, and radio broadcasting. Comcast argues that the law is both discriminatory and illegal under the Internet Tax Freedom Act and related federal norms. The case raises important questions about the line between permissible state taxation, discrimination against digital commerce, and constitutional and statutory restrictions on state power.

Facts & Statutory Context

• Legislation: SB 5814, passed by the Washington State legislature in April 2025 and signed by Governor Bob Ferguson in May, expands the state’s sales and use tax regime to include many service categories, notably advertising services. It is scheduled to take effect October 1, 2025. (mediapost.com)
• Definition of “Advertising Services” under the law: The statute defines “advertising services” broadly: services related to the creation, preparation, production, or dissemination of advertisements (digital and non‑digital). This includes design, creative, search engine marketing, lead generation, analytics, and online placements. (mediapost.com)
• Exemptions: The law explicitly excludes certain categories from the tax: advertising services provided to newspapers, television and radio broadcasters; printing or publishing; out‑of‑home signage (e.g., billboards); naming rights; ads in stadiums. (Your News)
• Budgetary impact: The new tax is projected to generate substantial revenue—Washington expects roughly $1.1 billion in the current two‑year budget period, rising to $2.7 billion over four years. The advertising services portion (if struck down) could reduce revenue by about $475 million over four years. (Washington State Standard)

Legal Arguments Advanced by Comcast

Comcast raises several legal claims against SB 5814, including:

1. Violation of the Internet Tax Freedom Act (ITFA)
   Comcast asserts the statute violates ITFA, which prohibits states from imposing discriminatory taxes on “electronic commerce.” The crux of Comcast’s argument is that the law taxes almost all internet‑based advertising, while exempting similar advertising services that are non‑internet (traditional media, signage, etc.), thus discriminating against digital commerce. (mediapost.com)
2. Equal Protection / Discrimination among Advertising Mediums
   Implicit in their challenge is that by treating digital and non‑digital ads differently, the law violates either state constitutional protections or federal constitutional norms (e.g. the Commerce Clause or Due Process / Equal Protection principles), because similar services are taxed differently depending on the medium. Comcast frames the exclusions as deliberately drawn to shift burden onto internet‑based advertising. (Washington State Standard)
3. Statutory or State Constitutional Constraints on Taxation of Services
   Though the law expands taxable services, Comcast contests that the expansion exceeds what the statute allows, or that the law lacks uniformity, or that the exemptions create arbitrary or capricious classifications. These claims are more state law in nature. (Washington State Standard)
4. Preemption / Federal Supremacy Principles
   Under Comcast’s theory, federal law (ITFA) preempts inconsistent state laws that treat digital commerce in a discriminatory way. Thus, to the extent SB 5814 conflicts with ITFA, it must be invalid. (mediapost.com)

Key Legal Issues & Standards

Several legal doctrines and standards will likely be central in this case:

• Internet Tax Freedom Act (ITFA): ITFA prohibits multiple forms of taxation that discriminate against electronic commerce, including taxes that are “discriminatory”, meaning they treat electronic transactions differently than comparable non‑electronic transactions. The Court will have to assess whether the differences in tax liability between digital and non‑digital advertising services are discriminatory under ITFA’s definitions.
• Commerce Clause (if applicable): Under U.S. Constitutional law, state taxes must not unduly burden interstate commerce (dormant Commerce Clause) or discriminate against out‑of‑state commerce without appropriate justification. If many of the digital advertising services taxed are interstate in nature, this doctrine may also be invoked.
• Equal Protection / State Constitutional Law: The plaintiffs may argue that the classification scheme (digital vs non‑digital) lacks rational basis, or violates state equal protection or uniformity requirements for tax laws.
• Statutory Interpretation: Courts will examine the wording of SB 5814 closely, including legislative history, definitions, and the schedule of exemptions, to determine whether the classification is permissible under state law, and whether the tax is clearly defined.
• Preemption under Supremacy Clause: If ITFA indeed bars the tax (or portions of it), the state law may be preempted to the extent it conflicts with federal statute.

Possible Arguments for the State of Washington / Defendants

The state, defending the law, will likely make several counterarguments:

• That the exemptions are legitimate and based on traditional tax policy reasons (e.g. historically exempt industries, concerns about speech or media regulation, or political pressure), not aimed at digital advertising per se.
• That ITFA’s scope is narrower than Comcast claims; i.e., not all digital commerce is protected, only certain kinds of taxes; or that the law does not discriminate under the specific definitions of ITFA.
• That the law is properly within the state’s taxation powers under Washington law, and that the classification is rational (e.g., based on medium, cost structures, market realities).
• That the effect on internet‑based advertising is not unconstitutionally disparate, or that any burden is outweighed by legitimate state interests (such as revenue needs, budget balancing).
• That the complaint fails to show that the burden is substantial or that Comcast has standing to challenge the law (if harm is speculative or depends on implementation).

Potential Outcomes

Here are several possible judicial outcomes:

1. Preliminary Injunction / Stay: Because the law is set to take effect October 1, Comcast may succeed in obtaining a preliminary injunction or temporary restraining order to prevent enforcement, if it can show likely success on the merits and irreparable harm (e.g., loss of revenue, shifting cost burdens).
2. Judgment Invalidating Portion of the Law: The court may strike down the portions of SB 5814 that are discriminatory under ITFA or under state constitutional law.
3. Severability: If parts of the law are found invalid, the court will examine whether those portions can be severed, leaving the rest of SB 5814 intact.
4. Remedy / Relief: If the lawsuit succeeds, relief could include a declaratory judgment that the tax provisions are invalid; injunctive relief preventing collection; and possibly refunds or credits for taxes collected under the invalid provisions (depending on state law).
5. Appeal: Given the magnitude and revenue implications, litigation is almost certain to move to appellate courts, possibly state supreme court, and perhaps federal court if there are substantial federal questions.

Implications

• For Digital Advertising Industry: A favorable ruling for Comcast could prevent similar state tax expansions elsewhere (many states are considering taxing digital services). A loss could open the door to broad taxation of online ad services, increasing costs for digital platforms, advertisers, and possibly consumers.
• For State Fiscal Policy: Washington has relied on these new tax revenues as part of its budget balancing. Striking down the ad tax could create shortfalls in the projected revenue (~$475 million over four years) and force policy revisions. (Washington State Standard)
• Precedent for ITFA Litigation: This case may further define ITFA’s scope, especially in differentiating digital vs non‑digital services and what constitutes “electronic commerce” for the purpose of tax discrimination prohibitions.
• Uniformity in Taxation & Medium Discrimination: Beyond Washington, this case may influence how courts treat tax legislation that draws lines based on medium (online vs offline) or platform—areas rapidly evolving in tax law and commerce regulation.

Conclusion

Comcast’s lawsuit challenging Washington State’s tax on advertising services under SB 5814 presents a cutting‑edge clash between state taxation authority, federal statutory limits (via ITFA), and the rapidly changing nature of commerce and advertising in the digital age. The legal questions—about discrimination, constitutional limits, and fairness—are central not just for Comcast, but for digital platforms, advertisers, states’ revenue systems, and taxpayers.

What remains to watch is how the court handles the definitions, the application of ITFA, and whether the exemptions in SB 5814 will be upheld or struck down. The case could well become a precedent in digital commerce tax law for years to come.