State Digital Tax Proposals Threaten Startup Ecosystem
TLDR: As countries continue to debate whether or not to levy digital services taxes on tech companies, several states are considering implementing their own digital tax measures. While the currently proposed state-level bills are unlikely to receive much traction, they demonstrate a growing willingness on the part of state representatives to levy their own taxes against online companies of all sizes.
What’s Happening This Week: Lawmakers in New York, Maryland, and Nebraska are continuing to debate the merits of imposing digital taxes on online companies. The state-level push is similar to international efforts to impose digital taxes on Internet platforms.
Just last week, the U.S. and France reached a temporary truce on a controversial French digital services tax that would have imposed a three percent tax on Internet platforms with a global revenue of more than 750 million euros and 25 million euros in France. President Donald Trump initially threatened to impose retaliatory tariffs of up to 100 percent on $2.4 billion worth of French goods, but France agreed to delay collection of the tax until December in exchange for the U.S. agreeing to hold off on imposing tariffs. The United Kingdom, Italy, and the Czech Republic have also proposed their own taxes on online companies.
As digital tax measures receive greater international attention, it’s likely that other state lawmakers will introduce similarly harmful measures over the next several months.
Why it Matters to Startups:
The tech industry and the Trump administration have voiced strong opposition to a country-by-country patchwork of digital taxes. A similar state-by-state effort would lead to an overly burdensome regulatory regime that would harm U.S. startups and entrepreneurs the most. As The National Law Review recently noted, the introduction of these bills “may be the start of an alarming trend of legally suspect tax proposals.”
Both the Maryland and Nebraska bills introduced this year would impose taxes on digital advertising accrued in their respective states. The Nebraska measure (LB 989) would “impose sales and use taxes on digital advertisements,” although the scope of the bill—and whether it would only impact large companies or startups that operate in Nebraska—is unclear.
Likewise, the proposed Maryland bill would also tax companies that profit from digital advertising in the state anywhere from 2.5% to 10%, depending on the companies’ annual gross revenue. The legislation would apply to companies that have over $100 million in annual revenue, largely impacting companies located outside of the state. Some legal experts have cautioned that this constitutes a potential violation of the Dormant Commerce Clause.
While the bills introduced in Maryland and Nebraska would likely target large companies that profit from digital advertising—like the proposed international digital services taxes—this could have a trickle-down effect on startups and small businesses that rely on these platforms to reach consumers. The added discriminatory tax burden could result in platforms passing on the cost of the tax and of compliance through increased costs to the users of the platforms.
The most troubling of the state efforts so far is the New York bill, which would impact “every corporation which derives income from the data individuals of this state share with such corporations.” The measure, which would apply to every business with New York-based customers, would impose a five percent tax on the gross worldwide income of companies. While the currently proposed bill is likely unconstitutional in its broadness, it represents an alarming threat to both established companies and emerging startups.
Instead of heeding serious concerns about the fragmented implementation of digital taxes on the global level, states are instead introducing their own extreme—and likely unconstitutional—measures. By creating regulations that only affect certain consumers in certain states, these bills would disincentivize companies from reaching some online users that are critical to regional or early-stage startups. Companies would also be more likely to pass the additional tax burden down to the startups that rely on targeted digital advertisements and other critical services, which could be especially harmful to startups operating on shoestring budgets.
Although these three state bills are unlikely to move forward because of serious constitutional questions, we are concerned that state lawmakers’ continued focus on digital tax issues will lead to the introduction of other harmful legislation moving forward.
On the Horizon.
The House Science, Space, and Technology Committee is holding a hearing on “U.S. Competitiveness in Critical Technologies” at 10 a.m. tomorrow.
The House Energy and Commerce subcommittee on communications and technology is holding a hearing on “Empowering and Connecting Communities Through Digital Equity and Internet Adoption” at 10:30 a.m. tomorrow.
