Making Big Tech Pay Their Share: The Taxation of Digital Advertising in Maryland
In sharp contrast to the bevy of tax incentives offered to Amazon as part of a bid for the so-called “HQ2,” Maryland has charted a path towards taxation of technology companies as part of its commitment and obligation to its residents. This move to hold large companies accountable for the money they derive from Maryland residents is laudable, given the amount of data mined from individuals and used to sell targeted digital advertising as well as the crisis of state budget shortages. However, as written, Maryland’s efforts raise serious legal concerns that jeopardize the viability of the current iteration of the bill. The bill draws on an existing model to achieve important social goals. However, in the context of the American legal framework, the current iteration of the bill raises First Amendment freedom of speech concerns and faces further challenges under the commerce clause and federal legislation enacted to promote and facilitate Internet commerce. These shortcomings need not be fatal, though. With modest redrafting, the policy underlying the bill could be implemented in order to fulfill Maryland’s goals.
Introduced in the Senate as Senate Bill 2 and in the House as House Bill 695, parallel bills in the Maryland legislature impose a
tax on gross revenues derived from digital advertising. The amount ranges from 2.5% for a corporation with annual gross revenues from $100 million to $1 billion up to 10% for those with gross revenues over $15 billion. The revenue raised will go to the Blueprint for Maryland’s Future Fund, which funds K-12 education improvements in the state. This policy, though lauded as the first attempt to tax digital advertising revenues in the United States, is not without global precedent. Rather, it is modeled after a French law, which levies a 3% tax on digital interface and “targeted advertising services” in France. The tax only applies to companies with global revenues from digital interface and targeted advertising of more than €750 million globally, with at least €25 million of which was derived from French users. France enacted this legislation July 11, 2019, and was quickly rebuked by the American business community. In particular, President Trump threatened countermeasures of tariffs up to 100% on $2.4 billion worth of French imports to the United States, including sparkling wine and cheese. As a result, France and the U.S. negotiated a pause on the enactment of the law on the condition that the threatened tariffs not go into place.
Like its French model, Maryland’s bill specifically targets large technology companies. The Fiscal and Policy Note for the Maryland bill calls out by name Alphabet (the parent company of Google), Facebook, and Amazon. Proponents suggest that this legislation will force tech companies to “pay their fair share” by contributing to local tax bases rather than reaping the benefits while paying only minimal tax obligations. However, the opponents are not without their own ammunition. As part of their strategy to defeat the underlying policy, they raise legal questions regarding the current drafting and scope of the bill.
Opponents argue that the selective taxation represents a content-based restriction on free speech because it selectively targets some kinds of advertising based on its communicative content. Following the recent Supreme Court case of Reed v. Town of Gilbert, which expanded the category of what is considered a content-based restriction on speech, this kind of selective taxation could be viewed as falling into the category of speech subject to strict scrutiny and therefore unlikely to survive judicial review. Even as an exercise of commercial speech, subject only to intermediate scrutiny under Central Hudson Gas & Electric v. Public Service Commission, such a tax is unlikely to be sustained. Restrictions on commercial speech must be no broader than necessary to directly further a substantial government interest. Under these circumstances, improving K-12 education is likely a substantial government interest, but the program could not be considered narrowly tailored. There are other means of raising the necessary revenue without burdening commercial speech of only large technology companies.
Maryland’s tax also raises other, non-First Amendment concerns. As written, the bill could be construed as a violation of the commerce clause of the Constitution, because it would create the possibility of double taxation of the same single economic activity if every state were to adopt a similar regime, violating the “internal consistency” test. A final source of legal concern for the policy is the Permanent Internet Tax Freedom Act, or PITFA. PITFA prohibits state taxation of internet access as well as discrimination against online commerce. The taxation of digital advertising, but not traditional forms of advertising, could be seen as a discrimination against online commerce in violation of PITFA.
The French example and advertising industry outcry against the Maryland proposal suggest that taxation of digital advertising will be a difficult prize to win. Significant political, economic, and legal hurdles remain. However, in an era of declining state revenues and K-12 funding crises, novel solutions must be sought. The digital advertising industry, reaping incredible profits, represents a tempting source of revenue for states dealing with these demands. However, as constructed, the policy presents serious legal shortfalls. This is not to say that the taxation of a major economic activity ought to be abandoned as a policy proposal. Rather, the specific construction of the statute needs to be reconsidered as the Maryland legislature moves forward. For example, a modification in the way that “in the state” is determined for the purposes of the tax could eliminate the concern of double taxation and, therefore, the commerce clause concerns. Where modest redrafting could save the policy from its legal challenges, it seems imperative to do so given the high stakes underpinning the policy.
Jordan Neubauer anticipates graduating from Boston University School of Law in May 2020.
The U.S. Postal Service is Staying Alive (for now)
During the Spring, President Trump has brought to the spotlight a little-discussed, quite unsexy policy dilemma: how to save the U.S. Postal Service.
In a series of Tweets, the President accused Amazon of unfairly taking advantage of the U.S. Postal Service. The first of these Tweets appeared on his Twitter feed on March 29th, and seemingly accused Amazon of shirking its tax responsibilities and free-loading from the government delivery service:
“I have stated my concerns with Amazon long before the Election. Unlike others, they pay little or no taxes to state & local governments, use our Postal System as their Delivery Boy (causing tremendous loss to the U.S.), and are putting many thousands of retailers out of business!”
President Trump also seemingly accused the Washington Post, which is owned by progressive billionaire Jeff Bezos, of engaging in secret lobbying. Although it is not entirely clear to which type of lobbying President Trump was referring in his March 31st Tweets, he seems to imply that the Washington Post is Amazon’s lobbying arm or propaganda machine that is helping Amazon to rip off the post office:
“While we are on the subject, it is reported that the U.S. Post Office will lose $1.50 on average for each package it delivers for Amazon. That amounts to Billions of Dollars. The Failing N.Y. Times reports that “the size of the company’s lobbying staff has ballooned,” and that...
“…does not include the Fake Washington Post, which is used as a “lobbyist” and should so REGISTER. If the P.O. “increased its parcel rates, Amazon’s shipping costs would rise by $2.6 Billion.” This Post Office scam must stop. Amazon must pay real costs (and taxes) now!”
After several news outlets, including the New York Times, published articles rebutting his statement that Amazon is not paying taxes (Amazon paid $957 million in income taxes in 2017) and is costing the U.S. Post Office billions of dollars per year, President Trump again asserted that he was correct, tweeting in part, “Only fools, or worse, are saying that our money losing Post Office makes money with Amazon. THEY LOSE A FORTUNE, and this will be changed.”
A few days later, he again tweeted that, “Amazon should pay these costs (plus) and not have them bourne by the American Taxpayer. Many billions of dollars. P.O. leaders don’t have a clue (or do they?)!” However, if one thing is clear, it is that the U.S. Post Office is not funded through taxpayer dollars, but through its own revenue. Still, the President is correct that the post office is losing money every year, specifically $2.7 billion in fiscal year 2017. However, it is unlikely that the bulk of that loss was incurred by conducting business with Amazon.
According to the U.S. Postal Service’s annual report for fiscal year 2017, its biggest losses came from fluctuating forces outside of its control. “The controllable loss for the year was $814 million, a change of $1.4 billion, driven by the $775 million decline in operating revenue before the 2016 change in accounting estimate, along with the increases in compensation and benefits and transportation expenses of $667 million and $246 million, respectively.” Mail volumes declined by 3.6%, while employee benefits and transportation costs have increased. On the other hand, the report indicated that package mail is up by 11.4%, providing “some help to the financial picture of the Postal Service as revenue increased $2.1 billion.” However, that growth has not been able offset other losses.
In other words, package companies like Amazon may actually be helping the U.S. Postal Service, even if they are receiving discounted shipping rates. By law, the Postal Regulatory Commission ensures that all items sent through the U.S. mail are profitable. Therefore, even if the U.S. Postal Service gives a discount to Amazon, those shipments will still be profitable to some degree. Whether the U.S. Postal Service should charge higher rates is a separate issue.
Postmaster General and CEO Megan J. Brennan described the report’s findings as “serious though solvable.” So, how can the government hope to save an agency that has not had a net surplus since 2006? The U.S. Postal Service is hopeful that H.R. 756, which was introduced to the House of Representatives by Rep. Chaffetz in 2017, and is being sponsored by Rep. Garrett in 2018, will pass and provide some relief by reforming postal service benefits, operations, personnel, and contracting. In addition, the Postal Regulatory Commission must adopt a new pricing system to generate additional revenue.
U.S. Senator Bernie Sanders has also pitched some ideas in the past, which are now catching the public’s eye in light of the President’s recent Tweets. Senator Sanders recently told Vice News that the post office should expand its services to generate more revenue. For example, the U.S. Postal Service could offer gift-wrapping services to capitalize on package shipments around the holidays. Additionally, "[t]he postal service could make billions of dollars a year by establishing basic banking services so lower-income people have access not to these payday lenders but to someplace where they can be treated with respect."
This idea is not new. In fact, until 1966, many U.S. post offices did offer simple banking services. Moreover, other countries such as Japan, the United Kingdom, France, and Italy currently use similar systems of postal banking with success. Senator Sanders emphasized that the post office must survive or else Americans living in rural areas, where it is not profitable to deliver mail, will face a decrease or elimination of mail services.
One former postmaster added that “[a]bsent a public infrastructure like the postal service network, it’s likely that both of these private sector firms (Fedex and UPS) would either refuse to serve many areas of the country or they would use their powers as an oligopoly to control prices.” In other words, if the U.S. Postal Service goes out of business, other mail carriers may be unable to fill the gap, or may only do so at inflated rates.
With so much at stake, it is daunting to imagine America without the U.S. Postal Service. We can only hope that Congress will step in and make the necessary reforms before it is too late.
Caitlin Britos anticipates graduating from Boston Univeristy School of Law in May 2019.