Digital Taxation Hits a Roadblock, But Alternative Route to Taxing Big Tech Shows Promise

New Jersey has an opportunity to tax big tech and raise revenue for public services — and it's all about the data.

Published on Nov 2, 2022 in Tax and Budget

New Jersey’s economy has rapidly changed in the 21st century, but the state’s tax code has not kept up with this progress. After a failed attempt to tax high-speed stock transactions, state lawmakers have gone back to the drawing board on ways to tax staggering profits in the digital economy, starting with a study on how the blockbuster industry is currently untaxed, undertaxed, and ways to address that. While that report has yet to be released, developments in other states are starting to draw a roadmap of how these policies could work in practice.

Last month, a Maryland Circuit Court judge ruled that a first-of-its-kind digital tax law was unconstitutional. The new law, aimed at big tech firms, would have taxed revenues derived from digital advertising services at rates between 2.5 and 10 percent, depending on the annual gross revenues of the business. The tax was estimated to raise up to $250 million per year to fund K-12 education across Maryland before it was challenged in court by Verizon and Comcast.

The presiding judge said the law violates the Constitution’s prohibition on state interference with interstate commerce and the federal Internet Tax Freedom Act (ITFA), which forbids discrimination against running an online business. The Maryland Comptroller, the suit’s defendant, has since recommended that the state Attorney General drop the appeal and revisit the matter in the next legislative cycle.

Tax experts largely agree — though not entirely — that the law’s fatal flaw was its vulnerability to an ITFA challenge, and that states should pursue other approaches to taxing big tech outside of digital advertising.

It’s the Data, Stupid

Wealthy corporations are getting a windfall through the free extraction and commercial use of the public’s personal data — from the products you buy online, to the emails you write, to where you spend your time, and so much more. Not only do consumers give up valuable information with no knowledge or meaningful ability to prevent it, but they also are being manipulated by the use of their data. That sort of manipulation has huge societal costs, including poor mental health, misinformation and political polarization, not to mention the swift growth of extreme concentration of political and economic power and the hollowing out of local news outlets.

A tax on the collection of big data is really a form of compensation for data mining, and state lawmakers have every right to impose one. But it must withstand legal challenges from the tech industry. While the Maryland digital advertising tax was ruled unconstitutional, New York may have found an alternative pathway: Senator Liz Kreuger has proposed a bill that would levy a tax on the collection of New York consumer data by commercial data brokers.

The new tax would be easy to administer because it would be calculated using an industry figure called “active (or unique) monthly users” as the tax base, according to this tax model. And tax policy experts say it actually addresses the real problem —  the tax-free accumulation and concentration of massive wealth drawn from big data — better than a tax on advertising would. Data collectors amassing consumer data would pay an annual tax based on the number of active monthly users. Revenue estimates of the New York proposal range from $57 million to $150 million a year, depending on the collection size threshold and tax rates.

Taxing Profits Derived From Big Data

Lawmakers should also consider a separate tax on the extreme wealth generated by big data. This additional tax would get to the heart of another major issue — massive profits made by big tech companies with a near monopoly on the digital economy. The recently enacted federal 15 percent minimum tax on “book” profits offers an enforceable measure of excess profit to build upon at the state level. However, more corporate business tax reforms (looking at you, foreign tax haven loophole) would be necessary to get the most out of this capital value tax in New Jersey.

Whether it’s data mining or the profits made from it, the concept is the same: Focus on the collection of data, not the internet. It allows policymakers to take a stand on a unique industry that is building and concentrating extreme wealth while avoiding the scrutiny of an interstate commerce court challenge. It’s time for New Jersey to rightfully tax the collection of residents’ data and for big tech to begin paying what they rightfully owe.