New Taxes on the Digital Economy: A Closer Look at the New York Data Tax Proposal

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Over the last year, state and local governments have proposed a variety of novel taxes on the digital economy, including taxes on digital advertising and social media platforms. Two factors have motivated these proposals: (1) closing budget gaps by taxing out-of-state companies and (2) addressing perceived public policy concerns with out-of-state companies profiting on information of in-state residents. The latest in this line of tax proposals has been a New York proposal to impose an excise tax on companies that collect data from New York consumers.

On Feb. 19, 2021, Sen. Liz Krueger, who chairs the Senate Finance Committee, introduced Senate Bill 4959, which would impose an excise tax on commercial data collectors. The tax is intended to be an alternative to digital advertising taxes, which are likely to be struck down as violative of the Permanent Internet Tax Freedom Act.

Unlike digital advertising taxes or sales taxes, the proposed data tax is not a gross receipts tax. Instead, it acts more like a “head tax” — it would be based on the number of New York residents on which the taxpayer collects data. Commercial data collectors that collect data on less than 1 million New York consumers are not subject to tax. If they collect data on 1 million to 2 million New York consumers, the tax rate is five cents per consumer over 1 million. The per-consumer tax rate gradually increases as the number of New York consumers increases. The highest tax rate — 50 cents per consumer — applies to companies that collect data on more than 10 million New York consumers. These per-consumer taxes are imposed each month.

The tax is imposed on a “commercial data collector,” which is defined as a for-profit entity that “collects, maintains, uses, processes, sells or shares consumer data in support of its business activities.” This broad definition is likely to sweep up companies beyond those in the bill proponents’ crosshairs.

For purposes of the tax, a consumer is “an individual who purchases goods or services from a commercial data collector or uses the services of a commercial data collector, whether charged for those services or not.” The latter part of the provision is intended to capture most social media platforms.

The final piece of the puzzle is the definition of “consumer data.” Again, the definition is quite broad: “any information that identifies, relates to, describes, is capable of being associated with, or could reasonably be linked with a consumer, whether directly submitted to the commercial data collector by the consumer or derived from other sources.” Although the bill is ambiguous, it appears that the intent is to exclude collection of contact information, such as telephone numbers, email addresses and mailing addresses.

If the tax passes, companies in the data collection business are going to experience significant record-keeping issues. In addition to determining whether they are a commercial data collector and whether the data they collect is consumer data, they would have to determine whether the person from whom they collect data is a New York resident. The bill establishes a rebuttable presumption that a consumer is a New York resident if the consumer has a New York home address, a New York mailing address or an IP address connected to a New York location. In this regard, the bill is somewhat better than digital advertising tax bills that simply punt the sourcing issue to administrative bodies.

We note, however, that collection of location data could subject businesses that directly collect data from consumers to increased privacy compliance requirements and operational risk in the future. New York does not currently have a consumer privacy law, but it has been vetting bills similar to California’s notorious California Consumer Privacy Act for quite some time. The current New York legislative session features several privacy bills that contain onerous requirements such as obtaining consumer consent before processing personal data and providing consumers with rights to their personal data. If any such bills are enacted, analyzing and implementing these requirements will be a rigorous and expensive process for businesses.

Keeping track of the location of consumers presents challenges that will often require new infrastructure. The bill does allow taxpayers to work with the New York Department of Taxation and Finance to establish an alternative method for determining residency on a case-by-case basis.

Another issue that data collectors should be aware of is the risk of “double counting” consumers. For example, a commercial data collector may not always assign a unique identifier to persons on whom data is being collected. As a result, it is possible that the taxpayer could collect data from a single consumer multiple times in a month and unwittingly treat each collection as a separate consumer. On the other hand, from a privacy perspective, assigning the same identifier to a consumer each time may affect a business’s ability to keep the data anonymous and out of scope of potential privacy regimes.

Aside from practical considerations, the tax bill presents serious policy issues. The key issue is that the bill imposes tax on a business input. Taxing business inputs leads to tax “pyramiding” and limits transparency to the public. As a result, most tax policy experts consider taxes on business inputs to be poor tax policy.

More information about this tax proposal can be found in the following podcast episode of The State Tax Show: New Taxes on Consumer Data Collectors

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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