Internet Ads Are a Popular Tax Target for Both Parties

This story was originally posted by Stateline, an initiative of the Pew Charitable Trusts.

Last month, Robert Reeve, a digital tech worker from Washington, D.C., went to visit his mom in Michigan for a week. Shortly after, ads for a brand of toothpaste his mom uses—and that he also used during his stay at her house—popped up in his Twitter feed.

Outraged, Reeve posted a Twitter thread explaining how tech companies can determine whether your phone was in an unusual location, then mine nearby phones for data and use the information to send you targeted ads.

“We never talked about this brand [of toothpaste] or Googled it or anything like that,” he posted.

Reeve hit a nerve: His modest Twitter account ballooned from about 500 followers to 39,000 and his thread has earned more than 116,000 retweets.

The proliferation of unwanted internet ads and Big Tech’s staggering pandemic profits have fueled bipartisan efforts to tax digital ads or find other ways to capture revenue from tech companies’ mining of personal information.

Many Democrats are offended by tech titans’ stratospheric wealth and would like to tap the magnates’ business fortunes to help people at the bottom of the economic ladder. Many Republicans are outraged by what they perceive as social media’s anti-conservative bias, including the banning of former President Donald Trump from Twitter and Facebook. Members of both parties object to the internet companies’ invasion of privacy and monetization of personal information.

“As a conservative legislator I typically despise taxes, but with growth of social media and bias against certain viewpoints, taxation is a way we can usually get to fairness in the system,” said Arkansas state Sen. Trent Garner, in an interview. The Republican introduced a bill that would tax internet ads and use the money to fight cybercrime. “This is a direct way for Arkansas to address the needs of its citizens,” he argued.

Maryland, which has a Democratic-led legislature, was the first state to pass a law creating a digital advertising tax, approving the bill in February over Republican Gov. Larry Hogan’s veto. In Maryland’s wake, nine other states have considered similar measures.

The Internet Association, a trade organization made up of internet behemoths from Amazon to Zillow, has led a fierce lobbying effort against the bill, calling it “discriminatory.”

“This is a case of legislative overreach, punishing an industry that supports over one hundred thousand jobs in Maryland and contributes tens of billions of dollars to its economy each year,” the group said in a statement.

It joined the U.S. Chamber of Commerce and several other groups representing the tech industry in filing a lawsuit in federal court to block the Maryland law.

The Maryland lawsuit has not dissuaded other states: At least nine are considering levies on internet ads or the use of personal data, according to the Tax Foundation, a think tank that argues for more broadly based taxes, rather than levies on one sector of the economy. The details of who would pay vary by state.

In response, Washington, D.C., lawyer Stephen Kranz, a partner at McDermott Will & Emery who is representing the plaintiffs in the Maryland lawsuit, has a warning for other states: “Following Maryland lands you in court,” he said in a phone interview with Stateline.

Kranz said he is tracking state legislation and is keeping an especially close eye on Connecticut, where a couple of internet tax bills are gaining steam. “We are prepared to litigate in Connecticut if that becomes necessary,” he said.

The Tax Foundation’s Jared Walczak, vice president of state projects, argued that taxing digital ads is unfair to businesses because “it’s an additional layer of tax on an already-taxed activity. Despite the expectations of state lawmakers, most of the burdens will be felt within states … by the customers themselves.”

Kranz speculated that if a tax was assessed on ads that support internet streaming services, for example, all streaming services would become subscription-only, making them unaffordable to lower-income consumers. And Walczak said some of the bills could run afoul of the federal Internet Tax Freedom Act, which is designed to prevent taxing internet access.

Kranz said state lawmakers who think internet companies are not paying their fair share of taxes should raise corporate taxes across the board. But those kinds of tax changes don’t stir up public passion like internet taxes do.

Arkansas’ Garner said he introduced his bill after hearing from a constituent, through a post on the legislator’s Facebook page, who urged him to address the issue of social media ads. “Once that one person did that, I found there was a big grassroots discussion around it,” he said in a phone interview.

“Social media has run unchecked. They are not being good players in the system,” he said. “Whether by taxation or other methods, we have to address the situation.” While the legislature has adjourned for the year, the issue is not going away, he said, and he plans to bring it up again in 2022.

On the other side of the political spectrum, Connecticut state Rep. Anne Hughes, a Democrat who co-chairs the Progressive Caucus, co-sponsored a broad bill that would tax internet companies with at least $10 billion in advertising revenue in Connecticut, based on gross revenue, using the Maryland bill as a model.

Hughes said progressives are “looking for ways to responsibly raise targeted revenue, especially on those actors that have profited enormously in this pandemic.” She is specifically targeting Facebook, Google and Amazon, she said.

That sentiment is shared by Washington state Rep. Shelley Kloba, a Democrat who represents the suburbs of Seattle where a Google campus is located. She has no qualms about taking on the tech giant and has carried a bill that would impose a 1.8% tax on the sale of consumer data, which is data often used to generate targeted ads like the one Reeve saw. The bill is probably dead for the year, she said, but the conversation is just starting.

She said the purpose of the legislation is “to provide some revenue we can generate for the people of Washington state to benefit the people of Washington state. This is a raw material that is being extracted from them that they are not getting anything for.”

She said it’s one thing if she gives her local bath and kitchen store her credit card information, her address and her email so she can make an online purchase. She would have willingly handed over personal data so she could enjoy the convenience of buying online, she said. But it’s quite another if that information is then given to others who bombard her with ads.

At a March hearing of the Connecticut legislature’s Joint Finance, Revenue and Bonding Committee, Christopher Gilrein, executive director of TechNet for the Northeast, said the bills to tax internet ads were misplaced. TechNet represents technology CEOs from tech companies of all sizes.

“This type of punitive tax policy aimed at a single industry would likely discourage companies of all kinds from innovating, investing and locating in the state, concerned that they may be the next target of the state’s ire,” he testified.

“Connecticut businesses depend on digital advertising to keep customers informed of their offerings, hours and more. Particularly after a year that saw up to one-third of the state’s small businesses close due to COVID, the last thing the state should consider is increasing the cost to reach their customers.”

He mentioned that Maryland’s tax is in court and strongly suggested Connecticut’s would land there too, if passed. An email to the organization went unanswered.

“Of course, they sued [in Maryland],” Hughes said. “This is just the most powerful lobby on Earth. They commodify browsing history, they sell all that data [for targeted ads] and Connecticut needs to be getting its fair share of tax.”

Nobel laureate Paul Romer, a professor at New York University who has studied internet taxation, rejected the idea that taxing ads would disadvantage low-income people by prompting more companies to charge for internet searches or move to subscription-only models.

“People can’t afford it? This is such utter b.s.,” Romer said. “People pay for cars, food, clothing. Somehow, it’s a matter of public policy that we not charge people for a digital search. It offends me, the flagrant dishonesty of the firms when they go out and lobby for what they are doing.”

Romer said state efforts to tax internet ads are an example of the theory that when there is “something that’s harmful that people are doing, it’s a good candidate for a tax.” The internet has demonstrated repeatedly that it is harmful, he said, by proliferating inflammatory rhetoric across the political spectrum. That makes it ripe for taxing, he said.

“You have people on the right worried about Trump being banned, you have people on the left worried about the Russians’ [disinformation campaign]. You take those two sides, there is something they can finally agree on.”