New York Joins the Digital Tax Bandwagon

New York is the latest state to release a flawed digital tax proposal. Following in the footsteps of Nebraska and Maryland, New York’s digital tax proposal is the largest, potentially encompassing a large swath of New York companies if adopted. 

Proposed by Senator David Carlucci and Assemblywoman Stacey Pheffer Amato, the tax would create a 5 percent tax on the gross income of any corporation that “derives income” from New Yorkers. Any revenue generated would go into a newly-created “New York data fund,” which would provide dividends to New Yorkers. 

Whatever its justification politically, structurally the tax is a mess. Gross receipts taxes are frowned upon by economists of all ideological stripes. By not allowing companies to deduct their costs, the tax base is much too broad. Both profitable and unprofitable companies are taxed and over time, the tax is assessed on the tax itself; economists call this “tax pyramiding.” 

What it means for people is higher costs for consumers and fewer job opportunities for workers. The tax is also horribly regressive. These flaws are why only a handful of states (DE, NV, OH, OR, TX) use gross receipts taxes. 

Even worse, the rate set by this proposal is astronomical for a gross receipts tax. Most gross receipts tax rates are below 1 percent, only a few exceed that. Ohio’s, for example, is 0.26 percent. The rate in Texas is 0.75 percent. Five percent would be the highest in the nation. The second-highest is Washington State, which taxes nuclear waste at 3.3 percent. While not ideal, that tax wouldn’t come close to causing the economic calamity of New York’s proposal, which could encompass most businesses operating in the state, not merely a subset of energy companies.  

Additionally, this tax would layer on top of New York’s existing tax system, which is one of the most burdensome in the country. New York’s corporate income tax rate is 7.1 percent. This proposal would then add a new 5 percent gross receipts tax, making the Empire State even more uncompetitive. Delaware is the only state that has both a corporate income tax and a gross receipts tax. Their corporate income tax rate is higher than New York’s at 8.7 percent, and their gross receipts tax is a mere fraction. The top rate is 0.7468 percent. New York would stand out and not in a good way. 

Even more problematic is that the bill doesn’t define the terms “data” or “income derived,” leading to significant uncertainty about its true scope. These taxes have been discussed as ways to punish Big Tech, but many companies outside of Big Tech use consumer data in one form or another. After all, what is data? Is it your home address? Your email? Your IP address? A copy of your signature? 

Think about all the companies that have even one piece of that information. It isn’t just Big Tech. My neighborhood gym has this information about me. So does my favorite neighborhood restaurant. My favorite bakery has my address to mail me coupons. These are all locally-owned, mom-and-pop businesses; they aren’t Big Tech. And yet they could all be subjected to a new gross receipts tax under this new legislation.

When California passed its consumer privacy law last year, an estimated 570,000 businesses were impacted using a similar definition of income as what I’ve outlined above. Reportedly, restaurants in California began giving customers copies of privacy notices when they dined. 

New York should stop this digital tax trend before it spreads too far. Adopting this proposal would raise costs for consumers, reduce job opportunities for New Yorkers, and tax many mom-and-pop businesses out of existence.