Digital trade in the age of COVID-19
By: Parker Kobayashi
Tags: Trade, Covid 19, Innovation, Tech, Digital

Photo by Austin Distel on Unsplash

Parker Kobayashi

The COVID-19 restrictions have driven individuals, businesses, and governments to use digital services to shop, work, and communicate with others. Late-night television shows use FaceTime, Twitch, and Zoom to produce content for viewers, schools utilize Google Classroom to assign virtual work, and concerned individuals can use artificial intelligence chatbots and apps to help them determine whether they should visit a hospital. These services provide vital assistance to people in the United States and around the world during these difficult times.

At the same time, state legislatures and foreign governments, seeking to increase their revenues, see these innovative firms as inviting targets. Foreign governments view these digital taxes as faucets of ‘free’ money for their coffers and a way to impose their own values on these (mostly) American companies. States see the same promise of revenue, despite the fact that state digital taxes are of dubious legality. Several state legislatures, including those in Maryland, Nebraska, and New York, propose taxing companies on the earned revenue from digital advertising, while governments in Europe and Asia want similar taxes levied on large internet companies. Many of these proposed taxes would be revenue-based and target specific industries, quite different from how governments usually collect taxes on other foreign-produced goods and services.

In the United States, state governments eager to earn additional income from digital taxes will likely find themselves embroiled in a litany of legal challenges. A report from the National Taxpayers Union Foundation details the constitutional concerns and potential violations of federal law associated with Maryland and Nebraska’s digital tax proposals. Both bills place an additional tax on revenue from digital advertising while exempting traditional advertising, which appears to violate the Permanent Internet Tax Freedom Act, a federal law that prohibits states from assessing “discriminatory taxes on electronic commerce.” State taxes that discriminate against out-of-state companies and place higher taxes on the media industry could respectively face challenges based on the Constitution’s Commerce Clause and the First Amendment. Given the legal concerns surrounding digital taxes, state governments will likely spend, rather than earn, money trying to implement them.

Actually levying digital taxes would create serious compliance burdens for smaller firms and likely lead some companies to contract or close. The consequences of the South Dakota vs. Wayfair decision, in which the U.S. Supreme Court ruled that state governments could collect taxes on businesses without a presence in their state, demonstrates the negative impacts of multiple tax regimes. A survey conducted by the American Catalog Mailers’ Association revealed that in the wake of the Wayfair decision, businesses needed to spend hundreds of thousands of dollars on tax preparation software and some considered closing their operations due to the new compliance costs. Multiple digital taxation regimes will likewise harm small businesses and innovators trying to bring a new service to market.

Digital taxes will also harm consumers by raising the prices of online subscriptions and making it more expensive for other businesses to utilize online services. Within the past several years, nearly half of American states placed taxes on streaming services, including Netflix, Disney Plus, Hulu, and Spotify among others, which passed the tax off to consumers in the form of a higher subscription price. Taxing services that do not charge consumers, including Google, Facebook, and Twitter, will lead these companies to pass the tax increase onto their advertisers who will in turn raise the cost of their services and products for consumers. An analysis of the French Digital Services Tax projects that consumers and companies that use digital platforms will bear the vast majority of the tax burden, with major tech firms bearing a relatively small fraction.

Outside of the United States, foreign governments use digital taxes to target American firms in a misguided attempt to protect their domestic economies from competition. The United States Trade Representative’s office details several countries, including Austria, France, India, and Turkey, pursuing a digital services tax. In Europe, the tax is known informally as the ‘GAFA’ tax, an acronym for Google, Apple, Facebook, and Amazon. Members of the French government, including the Minister of the Economy and the Secretary of State for Digital Affairs, made their intentions more explicit, using the ‘GAFA’ in public statements and arguing that the tax would protect Europe from becoming a “submissive continent” to American digital companies. In Australia, the government proposes a “link tax” to redistribute advertising revenues from Facebook and Google to domestic newspapers that struggled to adapt to the digital economy. Ironically, these policies will only strengthen the ‘GAFA’ companies position around the world by burdening European startups and growing tech companies with tax bills and compliance regimes that limit their ability to innovate and expand.

The COVID-19 pandemic demonstrates, in a stark way, the benefits of remaining connected to others, shopping online, and sharing information. Policymakers who advocate for taxes on digital services will make it more difficult for people to stay connected and share information, while also increasing costs on businesses which are already struggling to survive in extreme and unforeseen circumstances. The current need to isolate and work remotely makes online tools a necessity for people, so government policies should not make it more difficult and expensive to use these digital services. If governments want to ensure that their citizens can weather future crises and continue to prosper during normal times, they should avoid policies that discourage innovation and burden taxpayers and instead look to create conditions that encourage the development of new technologies.