Patchwork of Digital Services Taxes Threatens U.S. Startups
TLDR: Federal officials are sending conflicting messages about their continued participation in global talks about the creation of a framework for digital services taxes (DSTs). While many of these taxes are targeted at large Internet companies, there are concerns that the startup community will be harmed by the trickle-down effect of increased costs for services and products to offset the taxes.
What’s Happening This Week: U.S. officials are still planning to participate in international talks regarding the implementation of digital services taxes, despite U.S. Trade Representative Robert Lighthizer telling Congress last week that the White House has pulled out of the global discussions.
The Trump administration and U.S. lawmakers have been critical of efforts by several countries to impose taxes on transnational Internet companies largely based in the United States. Many countries have held off implementing their own digital services taxes in order to give the Organisation for Economic Co-operation and Development (OECD) time to reach an agreement on a global digital services tax before the end of the year. Ambassador Lighthizer told lawmakers, however, that Treasury Secretary Steven Mnuchin decided to withdraw from the OECD talks because the U.S. was “not making headway.” The European Union has threatened to impose its own digital services tax, regardless of whether or not a global agreement is reached.
While the U.S. is still planning to be involved in the talks in at least some capacity—including participating in an OECD-led meeting in early July—a number of countries have already moved forward with their own digital services taxes. Earlier this year, the United Kingdom implemented a two percent digital services tax on Internet firms with a global revenue of more than $648 million--at least $32.4 million of which comes from UK users. Indonesia—a non-OECD member—is also planning to implement its own 10 percent value-added tax on digital services and products provided by non-domestic Internet companies beginning on July 1st.
The Office of the United States Trade Representative announced earlier this month that it is investigating digital services taxes that are being considered or have already been adopted by ten of the country’s trading partners, including those in the UK and Indonesia.
Why it Matters to Startups: Although the proposed digital services taxes are aimed at large U.S. tech companies, the startup community will likely still be impacted by these levies. The tech firms that will be most affected by these DSTs provide critical services to startups—from online digital advertising tools to cloud-based products—and may have to offset the new taxes by passing the additional financial burden on to the smaller firms that depend upon their services. And any higher service and product costs will have an outsized impact on the startup community.
The growing reliance on digital services, particularly during the coronavirus pandemic, demonstrates that international taxation schemes should be revisited by international officials. But the currently proposed taxes—implemented largely on a country-by-country basis—do not provide an adequate path forward for the global community. Thus far, digital services taxes have largely been discriminatory against U.S.-based companies, with countries often exempting their own domestic firms from the levies. Policymakers cannot adequately review the current taxation schemes if they plan to use these levies to willfully target firms based in the United States.
This complex web of taxes would also make it difficult for emerging startups to determine whether or not they are responsible for DSTs on a jurisdiction-by-jurisdiction basis. With countries setting their own arbitrary revenue thresholds for companies that would have to pay digital services taxes, expanding startups with limited resources would be forced to navigate this widening regulatory landscape. And that additional regulatory burden is in addition to the trickle-down effect of higher costs for services and products offered by larger firms targeted by DSTs.
At the same time, several states are considering enacting their own digital tax measures. A state-by-state approach would further add to an overly burdensome regulatory regime. Earlier this month, several New York state lawmakers outlined their proposal to create “a data sales tax.” State lawmakers in Maryland also passed a digital services tax earlier this year that would have taxed Internet firms that profit from digital advertising in the state up to 10 percent of their annual gross revenues. Maryland Governor Larry Hogan vetoed the measure in May.
These digital services taxes are just the latest in a string of recent laws and regulations that have disproportionately affected U.S. tech firms. Duplicative and discriminatory taxes based on a firm’s success should not widely vary from country to country, or from state to state. All these measures will do is make it more difficult for startups to expand their operations and access the critical services that they need to thrive.
On the Horizon.
The High Tech Law Institute at the Santa Clara University School of Law is holding a half-day virtual summit on “The Rise of Privacy Tech” starting at 8:30 a.m. PT tomorrow.
The Senate Commerce Committee is holding a Federal Communications Commission oversight hearing at 10 a.m. tomorrow.
The House Energy and Commerce Subcommittee on Communications and Technology and the Subcommittee on Consumer Protection and Commerce of the Committee are holding a joint hearing tomorrow at 11:30 a.m. to discuss “How Disinformation Online is Dividing the Nation."
NetChoice is holding a panel discussion at 2 p.m. tomorrow with the authors of Section 230—Sen. Ron Wyden (R-Ore.) and former Rep. Chris Cox (R-Calif.)—to discuss how the law is working to protect the Internet.
The House Financial Service Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets is holding a hearing this Thursday at noon on “Capital Markets and Emergency Lending in the COVID-19 Era.”
