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Tech Giants Mount Challenge to State Digital Services Taxes

Posted on Aug. 31, 2021

Tech giants are sparing no expense in their efforts to hold off attempts to impose new taxes on companies that saw their profits soar during the COVID-19 pandemic.

In what is shaping up to be the next Quill Corp. v. North Dakota, corporations like Amazon and Google are pouring money into lobbying efforts and hiring white-shoe law firms to oppose state efforts to impose digital services taxes.

Before the Supreme Court's 2018 decision in South Dakota v. Wayfair Inc., which allowed states to require out-of-state retailers to collect and remit sales and use taxes, and before Amazon began voluntarily collecting taxes on sales into states, the e-commerce giant fought state efforts to impose economic nexus through litigation, but later supported a federal remote sales tax solution. All states that impose sales taxes have adopted tax collection requirements for out-of-state sellers following Wayfair

But so far, Maryland is the only state to enact a digital advertising tax targeting Big Tech. The state adopted a gross revenue tax on digital advertising services in February after the General Assembly overrode Republican Gov. Larry Hogan’s veto of H.B. 732.

The Maryland tax survived a lobbying campaign by a coalition of businesses, which spent about $400,000 in an effort to kill it, according to a lobbying disclosure. The Internet Association, Verizon Communications Inc., Amazon, and Google were the largest contributors to that campaign, the disclosure shows.

Shortly after the tax was adopted, four trade associations filed a federal lawsuit to challenge the constitutionality of it. The Internet Association, which counts Google, Facebook, and Amazon among its members and represents the policy interests of global internet companies, is a plaintiff in that lawsuit, along with the U.S. Chamber of Commerce, NetChoice, and the Computer and Communications Industry Association.

Big Tech companies reported increased revenue in 2020, despite the global pandemic that affected nearly all industries. Google's parent company, Alphabet, reported revenue of more than $180 billion, or an increase of about 13 percent over the previous year. Amazon reported revenue of $386 billion, up from 38 percent in 2019. Facebook reported revenue of about $86 billion, an increase of about 22 percent from the year before. 

Subsidiaries of Comcast and Verizon have also filed suit over the tax in Maryland state court.

Ryan Maness of MultiState Associates, which tracks trends in state tax policy, told Tax Notes that “to date, a trifecta of legal, political, and policy hurdles have kept bills targeting the technology sector from becoming law with the exception of Maryland.”

“I do think that interest in these targeted tech taxes will expand in 2022. But I also think the underlying policy and legal flaws, and competing political interests, will remain,” Maness said.

Connecticut

In Connecticut, lawmakers considered a digital advertising tax based on Maryland’s tax, but the proposal failed when Gov. Ned Lamont (D) resisted calls from within his own party to adopt new broad-based tax increases.

Rep. Holly Cheeseman (R), ranking member of the joint Finance, Revenue and Bonding Committee, proposed a tax on the apportioned annual gross revenue derived from social media advertising services in the state in concept bill H.B. 5645.

The idea was later incorporated into a revenue package when the committee advanced H.B. 6443, which proposed a graduated tax on annual gross revenue derived from digital advertising services, based on global annual gross revenue.

Cheeseman told Tax Notes July 9 that lobbyists for the tech industry “made their voices heard at every level of government” in Connecticut and that she heard directly from a lobbyist for Facebook soon after she filed the bill.

“The governor said, ‘Google phoned me about the bill, and they mentioned your name,’” Cheeseman added.

A spokesperson for Lamont did not respond to a request for comment.

Cheeseman said she was contacted by Jim O’Brien, a lobbyist for Facebook. O'Brien's firm, the Connecticut Group LLC, expects to be paid $74,445 this year by Facebook for lobbying services related to consumer affairs, according to a lobbyist disclosure.

O’Brien said in an email that he was not available to discuss the legislation but suggested contacting the Internet Association, which testified against Connecticut’s bill and others introduced across the country.

When asked whether the Internet Association will continue to lobby against these bills, Christina Martin of the group said in a statement, “IA, on behalf of internet users and companies, will continue to defend against unfair and discriminatory taxes which may hurt small business operators, negatively impact consumers, and curtail innovation of products and services.”

Last year, the Internet Association spent $1.48 million on lobbying, according to OpenSecrets.org.

Connecticut’s proposal also drew opposition from NetChoice, whose members include large tech companies, and from TechNet, whose members include Amazon, Apple, Verizon, and Google.

While Cheeseman said she doesn’t buy arguments that the tax would crush the internet industry, she said she and other legislators are sympathetic to concerns from the retail industry, considering that those businesses were hit hard by the pandemic.

Cheeseman said she is waiting to see what happens with the litigation over Maryland’s tax and is also interested in seeing what happens with these companies at the federal level. She expects another digital ad tax bill will be reintroduced next year. She said she believes the proposal would gain more support if the tax were imposed in such a way that it isn't passed on to retailers.

Montana

Montana legislators considered a proposal to tax digital advertising services, although the bill died after being tabled by the House Taxation Committee.

H.B. 363, introduced February 10 by Rep. Jeremy Trebas (R), a member of the House Taxation Committee, would have imposed a 10 percent tax on revenue derived from digital advertising services. The tax would have applied to companies with worldwide digital advertising revenue of $25 million or more.

Trebas told Tax Notes that the purpose of the bill was to bring in revenue from Big Tech companies without a physical presence in Montana. He said he may reintroduce the bill in the state’s next legislative session in 2023. In the meantime, he is awaiting the outcome of litigation over Maryland’s legislation and observing what happens at the federal level.

Trebas said his argument that online platforms are working against conservatives and Republicans convinced some of his Republican colleagues to support the legislation. However, other Republican legislators and members of the House Taxation Committee were swayed by opponents of the bill who argued that the tax would be passed on to small businesses, he said.

During a February 17 House Taxation Committee hearing, the bill was opposed by the Montana Chamber of Commerce, which argued that the tax would have a disproportionate impact on small businesses because it would be passed on to customers of the companies targeted by the bill. They also brought up potential legal issues with the legislation.

Rose Feliciano of the Internet Association testified against Trebas’s bill, saying it would impose a discriminatory tax on the digital advertising market that would likely violate federal law “and will only hurt Montana businesses and consumers at a time they can least afford it.”

Feliciano said the bill would be particularly harmful to small and midsize businesses that rely on digital advertising.

Consumer Data Tax

New York Sen. Liz Krueger (D), chair of the Senate Finance Committee, introduced new legislation (S. 4959) this year that would tax the collection of consumer data as an alternative to taxing digital advertising.

S. 4959 would create an excise tax on the collection of New York residents’ consumer data “based on the number of New York individuals on whom a commercial data collector collects data within a month.”

Krueger told Tax Notes June 23 that Democratic legislators are exploring new ideas to help the state collect more tax revenue and that S. 4959 was developed with help from Robert Plattner, former deputy commissioner for tax policy at the New York State Department of Taxation and Finance. Plattner works as a part-time senior adviser for Krueger and also writes a column for Tax Notes State.

Plattner wrote in his March 22 column that the tax is designed to raise substantial revenue from companies that benefit from the collection of consumer big data; address the concern that New York consumers aren’t benefiting from the use of their data; withstand legal challenges; and be straightforward for taxpayers to comply with and revenue agencies to administer and enforce. 

S. 4959 was pending in committee when the State Legislature adjourned in June. The bill can be carried over into the next session and does not need to be reintroduced.

Legislators also considered bills that would tax digital advertising, but there were concerns about potential legal issues, Krueger said. She acknowledged that S. 4959 could face litigation but said she thinks it is on solid legal footing.

Peter D. Enrich, professor emeritus at the Northeastern University School of Law and an expert on state and local tax policy, told Tax Notes that he thinks digital advertising taxes are defensible but face serious legal challenges.

Enrich said a tax on consumer data, such as the one New York is considering, is far less susceptible to legal challenges and is a better approach because it “gets right at the problem by putting the tax on the new kind of behavior in the new data economy that is so troubling.”

The business model for some of these companies is based not on generating net income but on generating increasing volumes of data, which they are using to enhance the value of their companies, Enrich explained.

“I think a lot of the problem is we’re in a world where net income itself isn’t the best measure of power and wealth of companies,” Enrich said. “I think that the bigger problem is net income may not be the right measure for fully taxing these new kinds of businesses that are amassing new kinds of wealth and power.”

To the extent that legislators want to ensure that these companies are paying enough tax on their net income, adopting worldwide combined reporting or tightening accounting rules may be a better solution, Enrich said.

Krueger said she had not yet gotten feedback from any big companies on her legislation.

“In New York they wait to see what you’re really pushing,” Krueger said. “Usually when lobbyists don’t like bills, they try to go around me. The good news for me in the New York state Senate is I have a progressive majority who are even more passionate about taxation than I am. . . . I don’t know how much big corporations are going to get in the ear of my colleagues in the Senate right now.”

Correction, September 7, 2021: An earlier version of this article misstated how much revenue Facebook reported in 2020. The amount was $86 billion, not $86 million.

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