Legislative Update

Internet Taxes Approved by Senate

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Two bills to impose new taxes on electronic commerce advanced in the Senate this week despite concerns raised by technology platforms and other business representatives about the legality of the measures.

On June 27, the Senate voted 27-7 to approve SB 1327, by Senate Revenue and Taxation Committee Chair Steve Glazer, imposing a 7.25 percent tax on “data extraction transactions” – defined as revenue generated from the sale of digital advertising where user data is exchanged – for taxpayers with gross receipts in California exceeding $2.5 billion. Revenue from the tax increase would be used to provide a tax credit for local news providers or eligible broadcast stations for costs associated with producing local news coverage.

CalTax is leading a broad coalition in opposition to SB 1327, arguing that the tax would be subject to numerous legal challenges due to its violations of federal law and the U.S. Constitution. Several challenges to a similar law in Maryland are pending in the courts, CalTax noted.

The California legislation would be challenged as a violation of the Internet Tax Freedom Act, as it would impose a discriminatory tax on electronic commerce. SB 1327 also would significantly impact the operating costs of small businesses by increasing their advertising costs.

Glazer, who characterized the proposed tax as a “data extraction mitigation fee,” focused his testimony on provisions regarding the role of journalism in keeping government accountable to citizens. He argued that without such credits, the state’s democracy would be in peril.

Several lawmakers expressed concern about the unintended consequences of the tax hike. Senator Tom Umberg remarked that the Legislature could overreach in its efforts to tax online platforms.

“One of the challenges that we have, though, is coming to a place where we support credible journalism, and we make sure that content is still available online,” Umberg said. “If we overreach, if we try to strike an amount or place that is too far, we’ll see that there’ll be no coverage. The content won’t be carried. The marketplace will make that determination.”

Senator Bill Dodd said he has concerns about the lack of “guardrails” to ensure that only California-based newsrooms would receive revenue from the tax hike.

Despite the concerns Dodd and Umberg expressed, they joined 24 Democrats and one Republican – former Senate Republican Leader Scott Wilk – in support of the bill.

SB 1327 now moves to the Assembly.

Another digital tax, AB 886 by Assembly Member Buffy Wicks, was approved by the Senate Judiciary Committee with a 9-2 vote on June 25. The bill requires internet platforms with 50 million or more monthly users or annual revenue exceeding $550 billion to pay an annual tax – labeled as a “fee” – to journalism providers operating in the state.

The tax paid by online platforms would either be a flat charge to compensate digital journalism providers (the as-yet-unspecified amount would be adjusted annually for inflation), or online platforms would be mandated to participate in a “final arbitration process” with media outlets that produce articles to determine an “arbitration award” based on newsroom size.

AB 886 cleared the Assembly in 2023 but was parked in the Senate Judiciary Committee until this week’s hearing.

“The California Journalism Preservation Act directs the very largest tech platforms operating in our state to compensate journalism publications for accessing their content,” Wicks testified. “Platforms are provided a choice: either pay journalism providers a predetermined annual fee or enter into arbitration and pay an amount decided by a neutral party.”

Media expert and professor Jeff Jarvis warned the committee that the bill “is likely unconstitutional.”

“The government-imposed ‘fee’ on ‘accessing content’ is a tax on reading, and the retaliation clause compels speech, which is not free speech,” Jarvis said.

Jarvis suggested that the committee consider alternatives, including tax credits for local newsrooms or grants facilitated by the state.

Google Vice President of Global News Partnerships Jaffer Zaidi noted that since 1998, the company has sent billions of unique users to news providers. He warned that if AB 886 becomes law, it will have major impacts on Google’s business model.

“The bill would … break the fundamental and foundational principles of the open internet, forcing platforms to pay publishers for sending valuable free traffic to them, which they choose to receive,” Zaidi testified.

Senator Henry Stern asked whether AB 886 was close to being workable for online platforms. Zaidi said the “blunt force” approach is unworkable for the company, but added that Google is open to providing alternative options to support local journalism.

Senator Roger Niello remarked that the news industry had changed dramatically in recent years due to how residents consume news and the consolidation of newsrooms under conglomerates, which necessitates the industry’s adaptation. He said there could be unintended consequences if AB 886 is approved.

“The thing is the bill seems to assume the platforms will simply comply and not change their behavior,” Niello said. “And as we have seen in other attempts in Europe, Australia, and, more closely, Canada, a dynamic analysis suggests that they don’t just comply. Once you pass legislation and it impacts a marketplace, you can’t control how the marketplace reacts to it.”

In a letter to the committee, CalTax outlined concerns with the proposal.

“The Internet Tax Freedom Act, implemented by the Obama administration and Congress in 2016, prohibits discriminatory taxes on ‘electronic commerce,’ broadly defined as ‘any transaction conducted over the Internet or through Internet access, comprising the sale, lease, license, offer or delivery of property, goods, services, or information, whether or not for consideration,’” CalTax noted. “Under the Internet Tax Freedom Act, the ‘fee’ imposed by AB 886 generates revenue that would be distributed for governmental purposes and is thus a governmental charge covered by the Act.”

AB 886 was sent to the Senate Appropriations Committee.