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Served Up on a Plattner: A Response to Big Data Tax Proposals

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Posted on May 24, 2021
Stephen P. Kranz
Stephen P. Kranz
Kendall L. Houghton
Kendall L. Houghton
Joe Crosby
Joe Crosby
Diann L. Smith
Diann L. Smith

In Raising the Bar, Tax Notes State senior editor Doug Sheppard interviews four seasoned state and local tax veterans: Joe Crosby of MultiState Associates, Kendall L. Houghton of Alston & Bird LLP, and Stephen P. Kranz and Diann L. Smith of McDermott Will & Emery. All four were staffers with the Council On State Taxation.

In this installment, the authors respond to proposals by Robert D. Plattner in New York and others to tax the collection of consumer data for business use.

Stephen P. Kranz: It’s fair to say that we all like Rob Plattner, and as deputy commissioner for tax policy at the New York State Department of Taxation and Finance, he was very helpful in resolving problems for taxpayers, working with tax practitioners, and was able to think outside the box in coming up with solutions to very difficult problems.

Plattner’s now busy thinking outside the box on how to tax big data in an article that he wrote for this publication1 — as well as a number of debates that he’s scheduled to participate in over the coming months. He is standing up publicly for the idea that big data should be subject to a new tax; he equates it to an excise tax on data that are collected by business in his particular legislative proposal that he helped Sen. Liz Krueger (D) develop in New York. That proposal seeks to tax companies that collect data about New York consumers.

He equates the data tax to an excise tax like you would see traditionally on coal, oil, or gas extracted from the ground. That comparison is completely inappropriate and it seems that his tax concept is much more like a property tax. Unfortunately, rather than keeping the idea to themselves in New York, Plattner is on the circuit trying to sell the idea around the country. As we’ve seen in the past, bad ideas spread like a virus unless they are shut down quickly. I’d like us to discuss this bad idea in the hopes that it sees no further consideration.

First, let’s describe the tax. The tax operates under a graduated regime, and it starts at 5 cents per head, per New York consumer, per month, and goes up from there to 70 cents per head. It is based on the number of New York consumers for which the company collects data. For companies that collect data on, say, 15 million New York subscribers, which is what Plattner thinks covers the large data collectors, that would be a tax of $57 million per company, per year. So, we’re talking about big dollars in this proposal.

Plattner had his hand in helping draft the legislation that Sen. Krueger introduced,2 and he admits readily in his article that he did so attempting to avoid an Internet Tax Freedom Act challenge or constitutional challenge. I’m not sure that he accomplished either of those goals — and we will find out in litigation. One other thing to note is that there is serious ambiguity regarding the tax base itself: What is a New York consumer? How do you count those heads? What do you do when there are multiple devices that belong to one person — all hitting or all operating through a single IP address or through multiple IP addresses? How do you eliminate repeat visitors that are a single person? The tax base and sourcing issues are infinite here and as we know, the devil is in those exact details. We have seen the same problem play out in Maryland regarding its digital ad tax.

But I’ll start there with the description of the tax and see if anybody wants to add to it, and then we can begin beating up Rob Plattner in good fun.

Kendall L. Houghton: Well, before we begin beating him up, let’s just observe that Rob served up on a Plattner — pun intended — four policy objectives that he argues this data tax satisfies. As you said, Steve, he is trying to avoid legal and constitutional pitfalls, which is one of the policy objectives he explores. He also says this tax “raises substantial revenue from companies that benefit from the collection of consumer big data.”

Third, he thinks the tax is relatively simple for taxpayers to comply with; I know you’re going to poke at that a bit more. Fourth, he says that the tax reflects the concern that New York consumers don’t benefit from the highly profitable use of their data — and I think therein lies the crux of this proposal.

This regime is really intended to punitively tax any company that collects data — and by the way, he focuses on collection. I’d like to know where the utilization of the data to generate revenue comes into play, because simple collection seems to be irrelevant to the tax question — the benefit from use of consumer data — that he ought to be asking. In any event, I thought that those policy comments were interesting and provocative, and I’m sure that each of you will have more to say on them.

Diann L. Smith: One of the things, Kendall, that you just mentioned is collection of data. He specifically mentions in his article that the tax is on “collection” only. But in the referenced legislation, the definition of taxpayer includes those who maintain and use the data. Doesn’t that create a significant pyramiding problem that would cause most tax policy people to not be happy with this proposal?

Kranz: It definitely does, Diann, and the pyramiding will drive up the price tag for utilization of data. This is clearly an imposition of tremendous cost on business inputs. We don’t need to talk at length about how that is bad tax policy. I do want to go back to Kendall’s last tax policy point about consumers benefiting. How many of us rely, daily, many times a day, on free apps, free software, and free services that we access and utilize over mobile devices or our laptops that are funded by data and advertising? We check the weather on free weather apps that are busy gathering data about us. Many of us have free subscriptions to music streaming and video games that are funded by data collection and advertising. There are a nearly infinite number of businesses providing free services to consumers funded entirely on data that help produce relevant advertising.

There’s a whole world out there that is benefiting New York consumers because of free services. And you know, reading Plattner’s article and thinking about Krueger’s proposal: If you want less of something, tax it — and I think what they’re really saying is, “Let’s put big data and all of the free services that it supports out of business, and turn it into a pay-for subscription model.” The only acceptable business model is a pay-for one. Too bad for the people who will no longer be able to afford it. That’s really where the New York proposal gets long term — especially if you factor in the possibility of tax pyramiding on the many, many players that are involved in gathering, deciphering, and utilizing the data that are at issue here.

Houghton: Steve, are we also concerned — you mentioned the tax base — that we’re taxing every bit of data in the same fashion as long as it was derived from a New York resident? Some animals are more equal than others, according to Orwell; by analogy, some data are more valuable and more utilizable than others, I would think. I think that the question about how you construct the tax base here is subject to quite a bit of debate.

Joe Crosby: The pyramiding issue seems to be much more serious than it would be in any other type of tax because you don’t have a limit to the amount of pyramiding. In a traditional, say, gross receipts tax, it can only pyramid so many times over the production process. In this case, the same consumer data are being taxed every time someone utilizes that data, which is going to be — I think for any person — hundreds of different entities are likely using data. And so that’s a significant issue.

The other issue, Steve, that you were talking about in terms of the justification: It presumes that we’re not sufficiently sophisticated to understand that in return for free services, we’re giving these people access to data. I am not bought in on that, and even if it were true that I don’t know what I’m doing, is the right way to protect me to tax the companies using my data? I think the better way to protect me — if I need protecting — is to force the companies to pay for my data, and to force me to pay for their services. I’d much rather get the money myself than have the state get it and decide to put it through the normal appropriations process and spend on things that I probably wouldn’t allocate it to, myself.

Smith: And Joe, on that pyramiding issue, Mr. Plattner uses the comparison that this tax is in many ways like a severance tax. But a severance tax is supposed to compensate a state for property that is being permanently removed from the state. That does not happen here; there’s no such idea as permanently removing data, and that goes back to the pyramiding as well — that the data are once again sort of infinite, right? So I think the analogy to the severance tax does not hold up in any manner.

Kranz: A data tax is as crazy as a tax on oxygen — also a renewable resource, and one that is equally important to sustaining life. I mean, business today is dependent on the ability to gather and utilize data to serve its customers. The whole purpose of their using data and gathering data is to better improve customer service and its delivery. I also want to recognize the irony here, too, of New York state being probably the single largest data gatherer in the state, right? It has how many government agencies out there collecting data about every New Yorker, about every transaction in New York, about every piece of property and vehicle in New York? The volume of data that the state collects and uses — probably turning around and selling it to private parties so that they can do what they do — has to dwarf what most businesses are able to put together. New York, if it’s so bad to gather and use data, you should go tax yourself.

Houghton: Does the safe harbor for companies that collect the data of 1 million or fewer New York customers in a month provide the protection that Rob Plattner suggests it does? Will all small businesses be OK under that safe harbor?

Crosby: I would not hazard a guess on how many companies collect data on more than 1 million New Yorkers a month, because I have no idea. But I do know there’s no such thing as a tax that resides with a company and doesn’t get passed on. That violates economic fundamentals; all taxes are ultimately paid by real people. And it’s not dissimilar from the digital advertising tax discussion in which the imposition might be on certain entities, but the imposition doesn’t stay there, even if you write in language saying you can’t pass that tax along. Because, again, you can’t write laws that break fundamental economic principles — businesses don’t pay taxes; businesses collect taxes. People pay taxes.

So are those small business people going to be affected? I presume they’re relying on apps to function — whether they’re the restaurants in New York that are dealing with food delivery now, because they can’t have in-person dining, or the restaurants that have in-person dining and use all kinds of apps to manage reservations, payments, and all kinds of things. I don’t know, but I would imagine small businesses will be impacted one way or another.

Smith: The threshold seems cumulative. I still get emails from a candle company that I purchased something from four years ago. These emails say, “Hey Diann, remember when you purchased this Christmas candle? We’ve got a new sale on those.”

So it seems like over time, it would be pretty easy for even small businesses to reach a million people in their database — a database that maintains what their customers purchase — and send individual emails reminding the customers of when they purchased it and what it was, and offering the customer opportunities to purchase more stuff like that.

Kranz: And if you click on that and open the email, they’re tracking whether you open the email or not — so that is more data being gathered every month. And as their subscription list grows, so does the possibility of hitting the million-person-per-month threshold, so Kendall, answering your question: I don’t think a million-person threshold is sufficient if they truly want to protect small and midsize businesses. But given this is New York, I think the real goal here is just to get as much money in the door as they can while giving lip service to protecting smaller companies to make this politically saleable.

Houghton: So Joe, are they going to?

Crosby: That’s an interesting question and interesting point. I do think that Rob gets credit for designing a much more sophisticated proposal than the proposal that passed through Maryland, and he’s at least elucidated some justifications for it, although we questioned his analogy. But what underlies all this is an increasing perspective that large companies — and particularly large tech companies — are wielding too much market power, too much social power, and allegedly too much political power. Those aren’t ideas that I’m espousing; I’m just reflecting things that we hear constantly.

And I think that perspective, in large measure, is what’s driving these tax proposals. We first saw this with the European Union — concern from countries like France that large, mainly United States technology companies were exploiting those foreign markets but not subject to tax there. That concept did permeate the state tax discussion, and as Karl Frieden at the Council On State Taxation recently pointed out in these pages,3 that EU to state tax analogy really is nonsensical because states have no jurisdictional bar to taxing these companies. It’s highly likely that all of the companies that are being targeted are already not only subject to tax, but paying tax. If there is a problem, and I don’t know that there is, it is likely an apportionment issue. Apportionment is fully within states’ purview, subject to normal constitutional limits, so it’s not the case that these companies are “escaping taxation” at the state level.

Another motivation was that op-ed in The New York Times in 2019,4 which said states should tax these large tech companies — not to raise revenue, but to bring them to heel. I think that’s ultimately why we’re going to continue to see these proposals. The question, Kendall, is whether the political appetite is there to actually enact them. Not yet. We saw a digital ad tax pass in Maryland, but that’s obviously being litigated. There’s discussion of adopting the same tax that Maryland did in Connecticut right now, and that may come to fruition; it’s unclear at this point in time. But what I do know for certain is that once a state perfects a model, meaning something that they can get through legally, it will dramatically increase the political likelihood of it moving through.

There’s no doubt that states are looking for the next big revenue source. It’s been decades, really, since a new revenue source was created: sales taxes in the Great Depression, corporate and personal income taxes mainly in the ’50s through the late ’80s, really. States have been able to generate enough revenue in large part because of increasing rates and expanding federal transfers, which is of course happening to the hilt right now. But they’re going to develop new programs using those federal dollars — and the money is going to run out in about three years. Which means they’re going to need some new source of revenue, and these digital taxes could play a role.

But I don’t see these taking off everywhere; I see the country continuing to split. The more conservative states are going to be looking to continue to restrain government, whereas some of the more progressive states are going to look to build it quickly. So I see this type of tax playing a role in some states — not today, but soon.

Kranz: We should keep in mind the last time Plattner gave us an idea — I believe he claims to have been one of the fathers of click-through affiliate nexus provisions that then spread all over the country. Those had a relatively short shelf life, but they did generate a similar controversy. Companies facing that tax threat had to choose whether to continue doing business through affiliates or not. And we saw many companies terminate their affiliate relationships. In that sense, the data tax could lead to the same result — a discontinuation of service for free. But I suspect that this idea of taxing data — like taxing oxygen — will be much more controversial than click-through nexus, won’t have the same adoption rate around the country as that idea did, and hopefully will die much faster despite Plattner’s impressive thinking on the subject.

Crosby: I think that’s a really good point, Steve, because I thought about the same thing: I mean, Plattner deserves credit. He is a big thinker, and he’ll appreciate the fact that four of us spent all this time talking about him.

But the click-through laws were simply a way of getting at the issue of how to require retailers who previously weren’t subject to the state’s tax jurisdiction to collect taxes that were already due and payable. In this case, we’re talking about a brand new tax with uncertain effects on the economy and really uncertain effects on consumers. What if New York adopts this and some of the big companies say, “OK, well, we’re going to charge you now”? Or: “We’re just going to not serve the market”? We did see that with click-through, but not in New York — rather, in other, smaller states. You could see that happening to some enterprising state that picks this new data tax up but that might not have the market clout of New York.

FOOTNOTES

1 See Robert D. Plattner, “Taxing Big Data: The Severance Tax Model,” Tax Notes State, Mar. 22, 2021, p. 1227.

2 See S. 4959.

3 See Karl A. Frieden and Stephanie T. Do, “State Adoption of European DSTs: Misguided and Unnecessary,” Tax Notes State, May 10, 2021, p. 577.

4 See Paul Romer, “A Tax That Could Fix Big Tech,” The New York Times, May 6, 2019.

END FOOTNOTES

DOCUMENT ATTRIBUTES
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Tax Notes State, May 24, 2021, p. 817
100 Tax Notes State 817 (May 24, 2021)
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DOC 2021-19554
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2021 TNS 21-5
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