The Big Story: Digital taxes on the horizon, Canada likely to be first
Canada put forward legislation this week to advance their proposed digital services tax, likely meaning the return of the discriminatory taxes that will raise costs for startups in 2024. Canada’s step follows a vote at the United Nations last week calling for a “framework convention on international tax cooperation” that further imperils the global tax deal designed to avoid digital services taxes hammered out by the Organization for Economic Cooperation and Development (OECD). The costs of digital services taxes fall directly and indirectly on startups, making their imminent return particularly threatening to the innovation ecosystem.
Canada—despite expressing a preference for a multilateral solution—has decided not to continue waiting for the uncertain implementation of Pillar 1 of the OECD tax deal by moving forward with their tax. Canada’s proposed tax targets large, mostly American companies, and originally was set to be enacted January 1, 2024, but now does not have a firm implementation date. U.S. officials have issued multiple warnings to the Canadian government, stating that its implementation could trigger U.S. retaliation, leading to a possible trade war, the effects of which could have lasting impacts on both U.S. and Canadian economies, and companies, including startups.
The cost of digital services taxes often falls upon startups even when the taxes are levied upon large companies. Many companies subject to the taxes have responded by passing their cost down to their customers, including startups, in the form of price increases for services on which many startups rely, like advertising services. For startups, navigating higher costs can make breaking into new markets on a limited budget even more challenging. The OECD tax plan aims to eliminate digital services taxes, providing a more streamlined approach allowing companies to innovate without dealing with numerous jurisdiction-specific taxes and is worth salvaging.
Policy Roundup:
Possible state-by-state patchwork of AI regulations threatens startups. In an open letter this week, over 60 Chambers of Commerce across nearly 30 states called on state leaders this week to avoid a patchwork of regulations that would be harmful to small businesses. Amid little legislative movement on AI federally, several states are moving and poised to enact their own varying regulations to govern the technology. Patchworks of varying rules about the same issue are confusing and increase costs for startups while undermining their competitiveness. Avoiding an AI regulatory patchwork is critical to ensure startups can scale and succeed.
Senators consider AI and copyright at insight forum. The Senate held its seventh bipartisan AI Insight Forum this week, focused on intellectual property issues, like copyright, which could have an outsize impact on startups’ ability to innovate with AI. The forum comes as the U.S. Copyright Office is working to put forward guidance on how copyright interacts with AI. To keep the AI ecosystem competitive, policymakers should avoid mandatory licensing requirements that only work for large entities and rightsholder organizations. Instead, policymakers should reaffirm interpretations that make clear ingesting data to train models is not infringing, as we argued in recent comments to the Copyright Office.
New report highlights surge in micro businesses owned by Black women. A report released this week highlights a significant surge in entrepreneurship, a trend being driven by Black women. In the U.S., 15 percent of micro businesses are owned by Black entrepreneurs, and a noteworthy 68 percent of those are led by Black women. Women are dominating innovation—in particular, Black women entrepreneurs—however, they face persistent barriers in accessing and securing capital, with micro businesses facing unique capital access challenges. Policymakers should push to enact measures to improve capital access for underrepresented founders, who are drivers of U.S. innovation.
Coalition advocates for non compete reform bill in New York. This week, Engine sent a letter alongside a dozen others urging New York Governor Kathy Hochul to sign into law legislation that would prohibit non compete agreements in the state. The letter underscores how the proposed law will bolster New York's economy by improving workforce mobility and the availability of talented individuals that want to found or work at startups. Although the New York State Legislature approved the bill in June, Governor Hochul has yet to take action or provide public comments on the matter. She must sign the bill before the year-end in order for it to become law.
House subcommittee dives into net neutrality rulemaking at oversight hearing. This week, a House subcommittee held an oversight hearing featuring the Federal Communications Commission that focused extensively on their ongoing effort to reinstate the open Internet rules. A free and open Internet that fosters a fair playing field online is critical for startups. The FCC effort to enshrine net neutrality protections began earlier this year and the rulemaking process will proceed well into next year.
Startup Roundup:
#StartupsEverywhere: Santa Fe, New Mexico. Skoden Ventures is a VC firm that backs startups led by Indigenous, Black, brown, and women founders, aiming to foster a more equitable and creative economy. In our conversation with founding partner Kelly Holmes, we explored the challenges she encountered while building her company and her aspirations to ease the path for the next generation of underrepresented founders.
