Over the past year, state and local governments have proposed a number of novel taxes on the digital economy, including taxes on digital advertising and social media platforms. Two factors motivated these proposals: (1) closing budget gaps by taxing companies outside of the state, and (2) addressing the perceived public order concerns with companies outside of state that benefit from information about residents of the state. The latest in this line of tax proposals was a proposal by New York to impose an excise tax on companies collecting data from New York consumers.
On February 19, 2021, Senator Liz Krueger, chairwoman of the Senate Finance Committee, introduced Senate Bill 4959 to impose a consumption tax on commercial data collectors. The tax is intended to be an alternative to digital advertising taxes, which are likely to be classified as a violation of the Permanent Internet Tax Freedom Act.
Unlike digital advertising taxes or sales taxes, the proposed data tax is not a gross income tax. Instead, it’s more of a “poll tax” – it’s based on the number of New York residents that the taxpayer collects information about. Commercial data collectors who collect data from fewer than 1 million New York consumers are not taxable. If you collect data on 1 million to 2 million New York consumers, the tax rate is five cents per consumer over 1 million. The tax rate per consumer 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 consumption taxes are collected every month.
The tax is imposed on a “commercial data collector” defined as a for-profit company that “collects, maintains, uses, processes, sells or shares consumer data to support its business operations”. This broad definition is likely to sweep companies beyond the crosshairs of proponents of the bill.
For tax purposes, a consumer is “a person who purchases goods or services from a commercial data collector or uses the services of a commercial data collector, regardless of whether or not those services are billed.” The last part of the provision seeks the most social media platforms.
The final piece of the puzzle is the definition of “consumer data”. Here, too, the definition is rather broad: “All information that identifies, relates to, describes, or can be associated with a consumer, or could reasonably be associated with a consumer, regardless of whether it is from the consumer transmitted directly to the commercial data collector or derived from another source. “While the bill is ambiguous, the intent seems to be to exclude the collection of contact information such as phone numbers, email addresses, and postal addresses.
When the tax is passed, companies in the data collection business will face significant record keeping issues. In addition to determining if they are a commercial data collector and if the data they are collecting is consumer data, they would also need to determine if the person they are collecting data from is a New York resident. The bill creates a rebuttable presumption that a consumer is a New York resident if the consumer has a home New York address, a New York postal address, or an IP address associated with a New York location. In this regard, the bill is slightly better than the digital advertising tax bills, where the problem of procurement is simply passed on to the managing authorities.
However, we would like to point out that the collection of location data could expose companies that collect data directly from consumers to increased requirements in terms of compliance with data protection regulations and operational risk. New York currently has no consumer privacy law, but has been scrutinizing bills that are similar to California’s infamous Consumer Privacy Act for quite some time. The current legislature in New York contains several data protection laws that contain onerous requirements, such as: B. Obtaining the consumer’s consent prior to the processing of personal data and granting rights to their personal data. When such bills are waived, analyzing and implementing these requirements is a rigorous and expensive process for companies.
Tracking the location of consumers presents challenges that often require new infrastructure. The bill allows taxpayers to work with the New York Department of Taxation and Finance to determine an alternate method of determining residence on a case-by-case basis.
Another issue that data collectors should consider is the risk of consumers being counted twice. For example, a commercial data collector may not always assign a unique identifier to people for whom data is being collected. As a result, it is possible for the taxpayer to collect data from a single consumer several times a month and inadvertently treat each collection as a separate consumer. On the other hand, from a data protection perspective, assigning the same identifier to a consumer each time can compromise a company’s ability to keep the data anonymous and outside the scope of potential data protection regulations.
Aside from practical considerations, the tax return contains serious political problems. The main problem is that the bill imposes taxes on a business input. Taxing corporate inputs creates tax pyramids and limits transparency for the public. As a result, most tax policy experts consider taxes on corporate inputs to be poor tax policy.
For more information on this tax proposal, please see the following episode of The State Tax Show podcast: New Taxes on Consumer Data Collectors.