In April 2020, a Digital Services Tax (DST) was introduced for businesses that offered different services online. 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 a substantial announcement. They said that they would make advertisers pay 2% of their DST. This 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 Googles Digital Service Tax impact small business PPC campaigns? Are things going to carry on as normal 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 brought in by the UK government during 2020. It’s aimed at multinational enterprises that earn revenue from the provision of 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 formally introduced on April 1st, 2020.
However, Googles 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 exact same tax, but Google has just shifted it on to someone else.
In September 2020, they sent emails out to all advertisers that used their platform for advertising. These emails basically stipulated that advertisers now had an extra 2% service fee that goes 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 tax. 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 things like revenue.
With the current corporate tax laws, there was a misalignment between the place where profits are taxed and value is created. For instance, a lot of digital businesses will gain value from their interaction and engagement with users.
This value isn’t taxed under current laws, so many companies were finding a loophole 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. In simple terms, 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 as a way of offsetting 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, effectively meaning they pay the tax for you. That’s all there is to it on Google’s end!
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 that have a big 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. All of a sudden, some companies may no longer be making a positive ROI when 2% of their advertising revenue ends up getting taken away from them.
To make matters worse, Google is taxing this separately to your advertising costs. So, when you look at your budget and see all the costs 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 set up on your Google Ads account, you might spend your advertising budget before the charge is added on.
Ultimately, from a Google Ads perspective, it just 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 that much of a big deal for you. It’s something you can probably deal with and work around with no issues at all.
Furthermore, how will Googles 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:
A Move Away From Google Ads?
Gooogle Ads has always been the most popular advertising platform for small businesses. It’s easy to set up, and the results provide it tends to yield a positive ROI. However, by charging customers the extra 2%, it could lead advertisers to shift away from Google and seek other platforms.
The likes of 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.
This 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 you can save money.
Small Businesses Reducing Advertising Budgets
The sad reality is that a lot of 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 2% 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 with the extra 2% added on.
Therefore, we could see loads of 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. Through no fault of their own, they now have to suffer from a lack of advertising. They may see fewer leads and opportunities arise because of it. As a consequence, 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 really affect? Google passes it on to its advertisers, so they don’t feel the full force of it. But, do you think big businesses and corporations will be hurt by it? No!
The bigger enterprises will have no problem coming to terms with this new tax. It will annoy them, for sure, but they make enough money for it to barely scratch the surface. They’re still going to make profits, it just might be slightly less than usual.
The difference is that small businesses are going to be drifting between profits and losses. They lack the firepower and financial resources to compete with big businesses when advertising. This is why things like Google Ads are helpful as it gives smaller companies a chance to be seen.
With the 2% tax introduced, it will make it harder than ever for smaller companies to stand out from the crown. Big businesses will probably continue to advertise as normal, while smaller ones have to seriously rethink.
As mentioned earlier, they may stop advertising through certain platforms, or have to 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
For years, PPC has been a powerful marketing tool for small businesses. The pay-per-click model is beneficial as you only get charged when someone clicks on an ad. In theory, this means you waste less money on unsuccessful leads. It has always been a smart and popular way to spread the word about your small business.
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 really needed a strong PPC campaign.
What we can say is that the DST will definitely signal a change in marketing strategies. Again, this is a pain for small businesses as they may have to start readjusting budgets and coming up with entirely new marketing strategies. The cost of doing this can be substantial, further increasing the negative impact this tax has on small business marketing.
We can’t know for sure how Google’s Digital Service Tax impacts small business PPC campaigns. However, we can say with confidence that the cost of these campaigns will go up. As a result, businesses will either have to reduce their PPC budget or hope that they still profit with the 2% added on. In some cases, a move away from Google may be necessary to still afford digital advertising.
Is Google Right To Pass This Tax To It’s Customers?
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 surely 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.
Naturally, the flip side of this is that Google has every right to impose its own charges on customers. They aren’t the only ones to do it – Amazon is increasing its advertising prices to cover the 2% DST. It is something that many companies do when new charges or fees are introduced to them. They up their own prices or create a new 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. So, they can feel confident knowing that most customers will continue to advertise 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 have a significant impact on small business marketing. Google Ads prices will go up, meaning small companies may have to find new ways to advertise on a smaller budget.