Tax Plans’ New Math Is Bad News for Marketers4 Mar, 2014 By: Ian D. Volner, Jeffrey D. Knowles, Venable LLP’s Advertising
On February 26, the Chairman of the House Ways and Means Committee announced the release of a Tax Reform “discussion draft.” The draft contains a provision comparable to one in the existing Senate Finance Committee discussion draft that will create havoc across all sectors of the marketing industry. While it is considered highly unlikely that tax reform legislation will pass in 2014, once the legislative genie gets out of the bottle it can be difficult to put back, and direct response marketers — or any business that incurs advertising expenditures to promote its products or services — should understand what Congress is contemplating.
Under current law, advertising expenditures are deductible as ordinary and necessary business expenses in the year in which the expense is paid or incurred. Both discussion drafts would change that to require that some percentage of the expenses incurred in a tax year be amortized over an extended period. The Senate version of this concept would require that 50 percent of advertising expenses be amortized over a five-year period. The House version would amortize 50 percent of advertising expenses over a 10-year period.
The amortization requirement covers all channels of promotion — TV, radio, print or electronic media of any form. Indeed, the definition of “advertising” is so broad that it would likely cover a PBS sponsorship arrangement even though the contents of those spots are sharply restricted under Federal Communications Commission (FCC) regulation. Certainly, the amortization requirement would apply to any communication or message aired on commercial TV or video streamed, is subject to Can Spam opt-out requirements, is a “telephone solicitation” under the Telephone Consumer Protection Act (TCPA) or qualifies for standard mail rates under postal regulations. However, marketers should not assume that messages exempt from those regulatory limits are outside the reach of the amortization requirement.
The definition of “advertising expenses” is equally broad. In general, any expenditure “paid or incurred for the development, creation or placement of advertising” would be covered. Purchases of airtime or space in print media or postage are clearly covered, but exactly how this definition would apply to telephone or ISP charges is unclear. It is even less clear how airtime sold on a per-inquiry basis would be treated. There is an exception to the definition of advertising expenditures for amounts paid to employees or contractors performing “sales functions.” This may mean the costs of inbound sales functions performed on behalf of a DR marketer by company employees or a vendor would be exempt from the amortization requirement.
While some of these ambiguities may get resolved if tax reform continues in the next Congress, the basic irrationality of the amortization requirement will likely remain. It is clear that neither the Senate nor the House proponents of the measure understand the central importance of advertising and marketing in today’s consumer economy.
Jeffrey D. Knowles and Ian D. Volner are partners in Venable LLP’s Advertising, Marketing and New Media Group. They can be reached at (202) 344-4860.