NY Consumer Data And Digital Ad Tax Bills Face Big Hurdles
New York recently joined Maryland, Washington, Oregon and Connecticut, as states that are currently considering — or, in Maryland's case, have passed — new taxes on the sales of consumer personal data or digital advertising.
Specifically, New York's Legislature has taken up bills S.B. 4959 and S.B. 1124.
S.B. 4959[1] would impose a monthly excise tax on the collection of consumer data of New York residents by commercial data collectors. The term "commercial data collectors" is defined as any for-profit entity that collects, maintains, sells or shares consumer data on more than 1 million individual New York residents in a month as part of its business activities.
Unlike the data tax laws being considered in other states,[2] S.B. 4959 applies solely to the collection of data, and would levy a graduated tax from 5 cents to 50 cents per individual per month, depending on the number of New York residents on whom the commercial data collector compiles such data.[3]
S.B. 1124, titled the Digital Ad Tax Act, or DATA, would: (1) establish a tiered tax, of 2.5% to 10%, on the annual gross revenues derived from digital advertising services in the state for any person with global annual gross revenues of $100 million dollars or more; and, (2) require each person that has annual gross revenues derived from digital advertising services in the state of at least $1 million to file a sworn return.
S.B. 1124, which actually revives an earlier bill introduced in March 2020, is modeled after Maryland's first-of-its-kind digital advertising gross revenues tax, with a key distinction between the two being that, under the proposed DATA, the term "digital advertising services" is expressly limited to those advertisement services on a digital interface that use personal information about the people to whom the ads are directed.
The stated purpose of both S.B. 4959 and the proposed DATA is to raise revenue to fund state services, which revenues could surpass $1 billion.[4] For instance, with respect to S.B. 4959, each affected commercial data collector could expect to pay a minimum tax of $50,000.05 per month, up through, at the highest rate, $2.25 million per month plus 50 cents per month per individual over 10 million.
Along with potentially bringing in significant revenue, the bills would also allow New York lawmakers to collect hard data on, and better understand the full scope of, the consumer personal data collection and digital advertising industries in the state.
Data collection and digital ad tax laws like S.B. 4959 and the proposed DATA face significant administrative and legal hurdles.
Administrative Concerns
Opponents of S.B. 4959 have argued that, as currently written, New York's data collection tax bill could result in double taxation — where, for example, the personal data of New York consumers is also subject to another country's or state's sales tax based on the market for the data, i.e., the location of the sale or final use of the data.
Some have also argued that such a tax may lead to multiple taxation, where the revenues generated from a data collector's commercial use of consumer data is already subject to income or gross receipts taxes in New York or other jurisdictions where the collector does business. These same arguments apply to the proposed DATA.
Furthermore, when it comes to taxing the collection or sale of an electronic medium such as data or online advertising services, pinpointing the location of such activity can be difficult,
if not impossible.
Commentators point to the difficulty of using IP addresses to determine the source of data or digital advertising revenue, because IP addresses do not always pinpoint locations, and, even where the IP addresses do provide exact locations, those locations may not be accurate because virtual private networks, proxy servers or other tools can mask the true location of a computer.
Along those lines, if the source of the sale or collection of data or digital advertising is determined using IP addresses, then individuals living near a state border may be picked up by their home state and the neighboring state — or neither.
It is also unclear how these types of taxes would apply to an individual on whom data is collected or sold, or who is viewing a digital ad, while visiting another state. The collection or sale of data or digital ads that relate to an individual with an address in one state, may be collected from or directed to that individual while he or she is traveling or working out of state.
And that begs the question, should the state in which the individual lives, perhaps only even part-time, be taxing the collection or sales of data obtained from that individual while he or she is not in that state? These are just a few of the many administrative questions that New York's proposed laws will need to answer, before considering the constitutional hurdles.
As the first case to challenge Maryland's digital ad tax, Chamber of Commerce of the USA v. Franchot[5] may serve as a bellwether of the constitutional viability of digital ad tax laws,
as well as bills like S.B. 4959.
The plaintiffs in Franchot argue that Maryland's digital ad tax violates the Internet Tax Freedom Act, the dormant commerce clause, the due process clause of the Fourteenth Amendment and the First Amendment.
While the constitutional objections in Franchot point specifically to the mechanisms found in Maryland's digital ad tax, the arguments have equal application to the proposed DATA and S.B. 4959, because of the similarity of the laws and enforcement mechanisms.
The Internet Tax Freedom Act Implications
Under the Internet Tax Freedom Act, states are prohibited from imposing multiple or discriminatory taxes on electronic commerce.[6] In pertinent part, a "discriminatory tax" is a tax on electronic commerce that "is not generally imposed and legally collectible by such State ... on transactions involving similar property, goods, services, or information accomplished through other means."[7]
Whereas a "multiple tax" is "any tax that is imposed by one State ... on the same or essentially the same electronic commerce that is also subject to another tax imposed by another State."[8]
As the Franchot plaintiffs argue, Maryland's digital ad tax is discriminatory because it would tax digital advertising delivered over the internet while not similarly taxing nondigital advertising. Further, they argue that Maryland's digital ad tax is also a multiple tax because it would impose a tax "on digital advertising for extraterritorial commerce that is already taxed by the States in which that commerce actually takes place."[9]
The same Internet Tax Freedom Act arguments would conceivably apply to data tax laws that do not tax similar collection and sale efforts in nondigital arenas, or if courts determine that the electronic activity taxed is already under the purview of a separate, preexisting tax in another state.
Dormant Commerce Clause Concerns Based on Tiered-Tax
Both New York and Maryland use global annual gross revenues as a way of determining the applicable tax burden on digital advertisers. The dormant commerce clause "prohibits States from regulating or burdening out-of-state commerce, penalizing extraterritorial conduct, or imposing charges that have the purpose or effect of discriminating against interstate commerce."[10]
And because the only way to determine which tax bracket a digital advertiser falls into under Maryland's digital ad tax and the proposed DATA is tied to the advertisers' global annual gross revenues, both laws could be viewed as regulating and burdening advertisers' out-of-state conduct, thereby, intruding on Congress' exclusive authority to regulate interstate commerce.
The same constitutional concern may apply with respect to taxes imposed on the collection — and certainly the sale — of consumer personal data. For instance, if a nonresident data collector acquires the personal data of a New Yorker through the stream of commerce outside of New York, that data collector would seemingly be subject to New York's data tax. As a regulation of activity outside the taxing state, this might violate the dormant commerce clause.
The 2008 U.S. Supreme Court decision MeadWestvaco Corp. v. Illinois Dept. of Revenue[11] offers some guidance to state legislators wrestling with these constitutional considerations. The Supreme Court noted there that:
The Commerce Clause and the Due Process Clause impose distinct but parallel limitations on a State's power to tax out-of-state activities. The Due Process Clause demands that there exist some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax, as well as a rational relationship between the tax and the values connected with the taxing State. The Commerce Clause forbids the States to levy taxes that discriminate against interstate commerce or that burden it by subjecting
activities to multiple or unfairly apportioned taxation. The broad inquiry subsumed in both constitutional requirements is whether the taxing power exerted by the state bears fiscal relation to protection, opportunities and benefits given by the state—that is, whether the state has given anything for which it can ask return.[12]
Dormant Commerce Clause and First Amendment Concerns Based on the Pass- Through Prohibition
When originally enacted, Maryland's digital ad tax law did not prevent advertisers from passing the tax burden downstream to its customers. The law was subsequently amended, though, to prohibit just that conduct. The plaintiffs in Franchot point to the pass-through prohibition as the law's further violation of the dormant Commerce Clause as well as the First Amendment.
They argue that if the prohibition is interpreted to regulate conduct that is wholly outside Maryland, then the pass-through prohibition regulates extraterritorial conduct, and thus, violates the dormant commerce clause. And if the prohibition is interpreted to only regulate conduct within Maryland, then the pass-through prohibition would violate the dormant commerce clause by unjustifiably favoring in-state customers — to whom the tax burden cannot be passed on.
In either scenario, the Franchot plaintiffs maintain that inclusion of language highlighting
the additional tax to customers on their invoices may count as either core political speech or commercial speech, and thus, the pass-through prohibition acts an unlawful suppression of
such speech.
The proposed DATA does not currently contain a similar pass-through prohibition, leaving open the possibility that advertisers will simply pass along the tax burden to its residents, thereby defeating the purpose of the tax.
It remains to be seen if S.B. 4959 and the proposed DATA survive committee reviews or get tabled for another year while the foregoing administrative and constitutional hurdles are worked out.
[1] NY Legis. S.B. S4959. 2021 Reg. Sess. (2021). https://www.nysenate.gov/legislation/bills/2021/s4959.
[2] Oregon's House Bill 2392 proposes the imposition of a 5% gross receipts on selling personal information on individuals with an Oregon IP address (Or. Legis. H.B. 2392. 2021
Reg. Sess. (81st Leg.)) [link: https://olis.leg.state.or.us/liz/2021R1/Downloads/MeasureDocument/HB2392/Introdu ced]; Washington's House Bill 1303 would extend the business and occupation tax to sales of personal data, with a tax base measured by the gross income of the business from sales of data related to Washington residents (Wash. Legis. H.B. 1303. 2021 Reg. Sess. (67th Leg.) [link: http://lawfilesext.leg.wa.gov/biennium/2021-22/Pdf/Bills/House%20Bills/1303.pdf?q=20210603115826].
[3] NY Legis. S.B. S4959. 2021 Reg. Sess. (2021). [link: https://www.nysenate.gov/legislation/bills/2021/s4959].
[4] The predecessor of DATA (NY Legis. S.B. S8166. 2020 Reg. Sess. (2020)), which did not pass, would have dedicated the revenue raised from the tax collections to student loan
relief.
[5] No. 1:21-cv-00410 (D. Md. Feb. 18, 2021).
[6] 47 U.S.C. § 151.[link: https://www.govinfo.gov/content/pkg/USCODE-2015- title47/pdf/USCODE-2015-title47-chap5-subchapI-sec151.pdf].
[7] 47 U.S.C. § 151 note § 1105(2). [8] Id. note § 1105(6)(A).
[9] Compl. at 18. [10] Id.
[11] 553 U.S. 16 (2008).
[12] Id. at 24–25 (cleaned up).
