Question by : What are the taxes involved with advertising?
A little background on why the question: I am participating in a case competition and the hypothetical situation involves a gaming company who has decided to switch from selling its product via CD to cloud computing. Our goal is to analyze the tax implications of this switch (e,g, the distinction between “good” and “service”) and what not. The case states that the company has high confidence in the potential of the game to become incredibly popular.
Just for argument’s sake, say instead of dealing with the varying definitions of “good” and “service” in different counties and states, we make the game free, and we generate revenue through advertising instead.
What are the taxes involved with advertising? Assuming all our revenue is now generated through advertising, is our income taxed? How does location affect taxation on advertising services, as in are sales and use taxes, if applicable, according to the state in which the company purchasing the service is located, or where the server hosting the ads is located?
I hope the general idea of my question is here. I am by no means a tax expert; I just wanted to get some feedback as research on this topic is giving me a lot of contradictory (or incomprehensible) information if you are not a tax law expert.
Answer by Karie Iversen
First, in regard to advertising as a business promotion activity, not all advertising is going to qualify as a business tax deduction. Only the cost of advertising in newspapers in some countries television, radio and web sites can be deducted.
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