In April 2020, a Digital Services Tax (DST) was introduced for businesses offering different online services. This included things like search engines, social media and online marketplaces. The aim was to help regulate the currently unregulated digital industry.
Fast forward a few months, and Google made an important announcement. They said that they would make advertisers pay 2% of their DST. The new tax came into effect in November 2020, and it applies to all businesses advertising through Google.
Effectively, this is an extra charge for you to face. But, how will Google’s Digital Service Tax impact small business PPC campaigns? Are things going to carry on as usual, or will there be a dramatic shift in how people approach digital advertising?
What is the Digital Services Tax?
The Digital Service Tax is a new law by the UK government in 2020. It’s aimed at multinational enterprises that earn revenue from providing a social media service, search engines or an online marketplace to UK users.
The tax will charge 2% on the revenues of businesses earning money through these mediums. It was first drawn up in 2019, with the tax being introduced on April 1st, 2020. Sadly this isn’t an April Fools joke.
However, Google’s Digital Services Tax is not technically new legislation. You may hear people speak about it, and you might wonder if it’s different from the original DST. In reality, it is the same tax, but Google has just shifted it on to someone else.
In September 2020, they sent emails to all advertisers using their platform for advertising. These emails stipulated that advertisers now had an extra 2% service fee on top of their advertising bill. In essence, advertisers are the ones paying the DST for Google.
Why Was Digital Servicea Tax Introduced?
The introduction of the DST was mainly derived from enterprises finding ways to avoid paying taxes. Digital advertising – and the digital marketplace in general – is still a relatively new realm. It doesn’t have much regulation, and it’s easy to blur the lines when looking at revenue.
With the current corporate tax laws, there was a misalignment between where profits are taxed, and value is created. For instance, many digital businesses will gain additional value from their interaction and engagement with users.
This value isn’t taxed under current laws, so companies found loopholes to avoid paying as much tax as they should.
Essentially the DST was brought in to cover this. By charging this extra 2% tax, it ensures that digital businesses are making fair contributions to supporting vital public services.
Simply put, it’s to get these digital companies that make money via search engines, social media or online marketplaces to pay more tax.
Why Did Google Introduce Its Own Digital Service Tax?
Simply put, they did this to offset the new tax they had to pay. It’s basic economics: Google now has to pay a 2% DST, so what’s the best way to do that without seeing your profits suffer? You charge your customers a 2% added charge, meaning they pay the tax for you.
What Impact Will This Have On Digital Marketing?
The impact this will have on small business marketing is hard to gauge. For some companies, it can have a very significant impact. Most notably, businesses with an extensive PPC campaign via Google Ads may be in trouble.
If you’ve got a big budget and most of your leads rely on these adverts, the extra 2% charge is a big deal. Suddenly, some companies may no longer be making a positive ROI when 2% of their advertising revenue is removed.
To make matters worse, Google is taxing this separately from your advertising costs. So, when you look at your budget and see all the prices you have to pay via Google Ads, this 2% isn’t shown. It gets added on afterwards, which poses a couple of problems.
- Firstly, this can lead to instances where you think you’ve profited from your advertising campaign, only for the extra charge to put a dent in things.
- Secondly, if you have prepayments on your Google Ads account, you might spend your advertising budget before the charge is added.
Ultimately, from a Google Ads perspective, it makes everything more complicated and expensive. If you don’t rely on Google Ads and barely use the platform, the extra 2% won’t be a big deal for you. It’s something you can probably deal with and work around with no issues at all.
Furthermore, how will Google’s digital services tax – and the digital services tax in general – impact the rest of the online marketing world? Here are a few things you might see in the future:
Are you Thinking of Moving Away From Google Ads?
Google Ads has always been the most popular advertising platform for small businesses. It’s easy to set up, and its results yield a positive ROI. However, by charging customers the extra 2%, it could lead advertisers to shift away from Google and seek other platforms.
Microsoft Advertising and Facebook have both come out and said they’re absorbing the 2% tax on their services. This means that small businesses aren’t getting charged extra, and they won’t increase their pricing.
For reference, Microsoft Advertising includes LinkedIn, while Facebook has Instagram under its belt as well. So, we could see more small businesses going down the social media route as it could be cheaper and more transparent.
Social media paid to advertise seems like a viable option for small businesses with limited budgets. If your target market frequently uses LinkedIn, Facebook or Instagram, it makes more sense to prefer these advertising platforms to Google. You’re not paying their digital services tax so that you can save money.
Small Businesses Reducing Advertising Budgets
The sad reality is that many small businesses can’t afford to move away from Google Ads. If most of your leads come via this stream, you will lose a lot of money by simply stopping them altogether.
Unfortunately, you also have to deal with the added tax, which can make your current advertising budget too much. You physically can’t spend what you’ve already been spending and expect to make a profit.
Therefore, we could see many small businesses shrinking their advertising budgets to cover this extra cost. That might include giving up on other forms of advertising, or it could just mean paying less for Google Ads than they currently are.
In either case, it looks pretty bleak for some small enterprises. They now have to suffer from a lack of advertising. They may see fewer leads and opportunities arise because of it. Consequently, profits may slow down, and it can take a small business some time to steady itself!
Less Competition For Big Businesses
You have to ask yourself, who does this tax affect? Google passes it on to its advertisers, so they don’t feel the full force of it. Do you think it will negatively impact big businesses? No!
The more significant enterprises will have no problem coming to terms with this new tax. It will surely annoy them, but they make enough money to barely affect them. They’re still making profits; it just might be slightly less than usual.
The difference is that small businesses will be drifting between profits and losses. They lack the firepower and financial resources to compete with big companies when advertising. This is why things like Google Ads are helpful, as it gives smaller companies a chance to be seen.
With the digital services tax imposed, it will make it harder for smaller companies to stand out from the crowd. Big businesses will probably continue advertising, while smaller ones must seriously rethink their marketing strategy and budgets.
As mentioned earlier, they may stop advertising through specific platforms or resort to a much smaller budget. In either case, it paves the way for big companies to take advantage and overshadow small ones even more.
Less Reliance On PPC
Now, Google’s Digital Services Tax may signal small Businesses shifting away from Pay Per Click. Small business marketing may start focusing on other ways of drawing in leads.
This could include more inbound marketing techniques – like content marketing, social media, etc. Is this a good or bad thing? Truthfully, it remains to be seen.
Some companies may find themselves more successful marketing this way, while others need a strong PPC campaign.
We can say that the Digital Services Tax will signal a change in marketing strategies. Again, this is a pain for small businesses as they may have to start readjusting budgets and developing entirely new marketing strategies.
The cost of doing this can be substantial, further increasing this tax’s negative impact on small business marketing. We can’t know how Google’s Digital Service Tax impacts small business PPC campaigns.
As a result, businesses will either have to reduce their PPC budget or hope to still profit with the added 2% costs. In some cases, a move away from Google may be necessary to afford digital advertising still.
Is Google Right To Charge This Tax?
Unsurprisingly, there’s been a lot of negative press surrounding Google after their announcement a few months ago. Many see it as an unnecessary move for such a big company to make; others are less convinced.
Currently, Google dominates all digital advertising channels, so indeed, it should just take the tax on the chin. Particularly when you consider the 2% tax only relates to adverts shown to a UK audience.
Additionally, small businesses will be the worst hit by this tax. A multi-billion company like Google shouldn’t struggle to pay an extra 2% on its digital services in the UK. By shifting it to the advertisers, it now becomes the responsibility of much smaller companies.
These companies can only ever dream of earning what Google earns, yet they now have to pay an extra 2% because a big company can’t be bothered to pay tax.
The flip side is that Google has every right to impose its charges on customers. They aren’t the only ones to do it – Amazon is increasing its advertising spend.
It is something that many companies do when new charges or fees – they up their prices or create a further fee to cover the new costs.
Still, it’s hard to argue that Google is right to do this. It certainly doesn’t seem like something the company needs to do. The worst part is that Google knows that many businesses depend on their advertising service to survive.
So, they can feel confident knowing that most customers will continue advertising via the Google Ads platform.
To conclude, DST is a new tax law introduced to regulate digital services in the UK. Businesses that make money via social media, search engines or online marketplaces will pay a 2% tax on revenue.
Google has found a way around this by charging their advertisers the 2% tax, ensuring they don’t technically have to pay it. Whether or not they should’ve done this is up for debate, but it will significantly impact small business marketing.
Google Ads prices will go up, meaning small companies may have to find new ways to advertise on a smaller budget.