Digital Tax Avoidance Among the Masses

by Ugh

Warning: some free form thoughts on online social media platforms, tax policy and tax avoidance. 

Individual countries around the world have begun enacting specialized tax regimes targeted at "digital" businesses.  These include things like digital services taxes, digital advertising taxes, a tax on digital transactions, and various other taxes aimed at the usual suspects, Google, Facebook, Apple, Netflix, Amazon, etc.  

To generalize, the primary complaint among countries implementing these sorts of taxes is that these companies have a significant "presence" in their jurisdiction - either via sales and/or data sourcing (or both) - and yet pay little or no tax to those jurisdictions because such a presence doesn't rise to the traditional international standard for those countries to tax those companies' profits.*  Most in the international tax community consider these kinds of targeted taxes as "bad tax policy," which seems right to me. 

OTOH, these sort of taxes are aimed at these companies from an intuitive sense that the companies, or I will argue "someone," more broadly is getting away with something tax wise.  I think that's right but I think these countries, by aiming the taxes at such "digital" companies, are missing the target.  Instead, I would argue that the ones getting away with tax avoidance in the digital arena are the billions of users of these online platforms.  

Many of these platforms offer their service for "free."  But it's not really free.  Instead, in exchange for access to Facebook's platform, or gmail, or any of the other online services that you can use for no-charge, you are turning over some portion of your personal data.  So in fact your access to Facebook is a barter transaction, where Facebook gives you access to its online platform in exchange for your data.  In that way the average user acts as a "supplier" to Facebook, who then uses that input (the data) in its profit making business and pays taxes on its corporate profits.

But the real tax avoider in this situation are the Facebook (or gmail, etc.) users.  They have used an asset of theirs - data - in which they have zero basis and upon an exchange of which they should (in theory) owe tax based on the difference between the value of that data and that (zero) basis.  Instead, this transaction goes untaxed.  Moreover, these "free" (i.e., untaxed) online platforms have displaced a massive amount of economic activity that would have otherwise been subject to tax.  

Take "free" online email, for example.  Now you can communicate with friends, relatives, colleagues, strangers, businesses, etc. instantaneously and at only the cost of an internet connection (which also enables many other activities).  Formerly, you would have had to place a phone call, which could be taxed, or write a letter, which required a stamp, plus paper, envelopes, and a pen - all purchases which would have been subject to tax (and on which the producers of those products would pay tax on their profits).  Multiply this by any number of things one gets for "free" online. But those transactions have been replaced by this tax-free barter transaction of data in exchange for services.  

So my theory is that a large part of the big revenue drop for countries is due to their policy choice - conscious or unconscious - to refuse to tax users on the value of their use of online platforms.  Now, there may be good reasons for this, mostly practical, but I don't think one of them is that there is no exchange of value going on between users and these online platforms.  These sorts of things have tremendous value to users - ask yourself if you were told that your Facebook, gmail, Amazon, etc. account was going to be deleted tomorrow, how much you would pay to ensure it wasn't deleted?  

Anyway, some rambling from me since I'm just back from a conference on this exact subject and no one mentioned the possibility of taxing users.  Plus, I see stupid comments from Presidential candidates saying things like Facebook "use[s] us, and we’re their commodity, and we’re not getting anything out of it..."  Except, you know, access to Facebook!  An online platform that costs hundreds of millions, if not billions, of dollars to build and maintain....

*Generally, a foreign company must have a "permanent establishment" in a jurisdiction for that jurisdiction to tax the profits of that company, and such establishment required an actual physical presence in the country (or the company must have an agent authorized to conclude contracts on its behalf operating in the country).  

Comments

[Hartmut]

What about the fees payed to the internet service provider? And how many stamps, envelopes, paper and pens could I buy for the price of the computer I use to go on the internet? Not to forget the electricity needed to power the thing (or to recharge a mobile device).

[Ugh]

All true but there were computers before the internet, and were more expensive to boot. And fees to go online, true as well, which are indeed taxed, but I don't think think enough to make up for the displacement that has gone on.

Note I think that it would be impractical to try and tax this exchange, and indeed taxing the companies directly as a substitute may be one alternative solution to taxing the users.

At the conference I attended someone brought up the example of Uber and how it has effectively outsourced its quality control function to its users by having them rate drivers/cars. You could value that and then impose a tax equivalent to a percent of the cost savings to Uber of not having to perform that function in-house.

[Snarki, child of Loki]

The sales-tax differential between "brick'n'mortar" stores and online stores has both impacted local tax revenues and hurt local businesses (which then also hurt local tax revenues).

Time to level that playing field, but it's completely understandable that a small-time internet retailer doesn't want to deal with 1000 different taxing authorities, each with their own unique rates and rules.

[Snarki, child of Loki]

Ugh,
I think the Uber vs. taxi issue is worse than just 'consumer reviews'. There's also vehicle safety and criminal background issues, which consumers have zero ability to 'review', except when horrific events occur.

Perhaps if Uber and Lyft were subjected to legal responsibility for their 'contractors', with automatic triple damages. THEN they'd make damn sure that their service is good, but whining about 'out of control litigation', from the usual sources, means that that only mass shootings in Uber HQ will have any effect.

That's just the way Amerikans roll in 2019, amirite?

[wj]

Generally, a foreign company must have a "permanent establishment" in a jurisdiction for that jurisdiction to tax the profits of that company, and such establishment required an actual physical presence in the country (or the company must have an agent authorized to conclude contracts on its behalf operating in the country).

Requiring "physical presence" made more sense when it was difficult to impossible to conduct commerce without it. Technology has changed the world (again), and the law is struggling to figure out how to deal. A challenge compounded by the general ignorance of technology on the part of lawyers and politicians generally. May take another 20 years, until kids who grew up with this stuff have replaced the Baby Boomer fossils.

[Michael Cain]

...the Baby Boomer fossils.

I resemble that remark.

[wj]

Me, too. ;-)

[Nigel]

But the real tax avoider in this situation are the Facebook (or gmail, etc.) users. They have used an asset of theirs - data - in which they have zero basis and upon an exchange of which they should (in theory) owe tax based on the difference between the value of that data and that (zero) basis.

Facebook makes what, around $20 annually per user ?
That is hardly an amount realistically to include in one’s tax return...

[Scott P.]

I am somewhat confused as to what is proposed to be taxed. I guess the fair-market value of Facebook and free email? Not sure how you put a figure on that. It would be interesting if one tried, as it would suggest GDP and median income figures ought to be much higher than they are usually calculated to be.

[CharlesWT]

These sorts of things have tremendous value to users - ask yourself if you were told that your Facebook, gmail, Amazon, etc. account was going to be deleted tomorrow, how much you would pay to ensure it wasn't deleted?

The consumer_surplus for Facebook, Google, Twitter, etc. must be in the hundreds of billions of dollars.

[Ugh]

wj - Requiring "physical presence" made more sense when it was difficult to impossible to conduct commerce without it.

The counterpoint is that there have always been remote sales, or at least for the past 100+ years, so what has changed?

Nigel - Facebook makes what, around $20 annually per user ?
That is hardly an amount realistically to include in one’s tax return...

Don't know about the figure, but yes it may be de minimis for an individual user, but $20 per user across hundreds of millions (or even more than a billion) of users is real money. So, what to do?

Scott P. - I guess the fair-market value of Facebook and free email? Not sure how you put a figure on that. It would be interesting if one tried, as it would suggest GDP and median income figures ought to be much higher than they are usually calculated to be.

Placing a value on Facebook use and "free" email is a practical difficulty, as I note above. But yes, if there is a large barter economy it would (I think), not be captured in the GDP statistics, but I'm not sure on that point.

[russell]

I'm not sure how you would attribute service usage to individual people, without the participation of the platforms. In other words, absent Facebook tracking and reporting usage information, I don't see how a tax-levying agency would discover or capture it.

It would kind of a big lift, as a practical matter.

[wj]

The counterpoint is that there have always been remote sales, or at least for the past 100+ years, so what has changed?

In a word: volume.

Sears Roebuck catalog sales were immensely important to those in rural areas. Heaven knows we read those catalogs when they arrived. But as a fraction of even just total Sears sales, never mind total retail sales? Nothing even remotely comparable to what Amazon alone, not to mention other on-line retailers, does as a fraction of total sales today.

[byomtov]

Wait a minute.

Let's say I watch ordinary broadcast TV. I get the show for "free." What does the broadcaster get out of it? My attention to commercials, an asset in which I have zero cost basis.

Should we have been taxing the value of TV shows to viewers ever since TV started, and radio too?

While we are at it, what about newspapers? We don't get them for free, but we do get them, or did, at well below their production and distribution costs, again in exchange for attention to ads.

And besides the news, even the ads were in some cases quite valuable. There is a rumor that someone once got a job by responding to a "Help Wanted" ad, and that another fellow got a good price on a used car, bypassing the dealer, from the "Used Cars for Sale" section.

[CharlesWT]

For two years Sears even sold farm tractors. They tried to undercut the price of other tractor brands by putting rebuilt Ford Model A engines in them. An upside was that they were one of the first tractors to have electric starters.

[russell]

Sears used to sell houses. Like, houses by mail. The truck would show up with the materials and plans, and you'd put it together or hire someone to do so.

My old man lived for the Sears catalog when he was a kid. And after he and his sibs read every page a million times, they used it for toilet paper.

[CharlesWT]

Yeah, the female underwear section was as close to porn as most people could get.

[John D. Thullen]

Mucaad Ibrahim

[Scott P.]

Sears Roebuck catalog sales were immensely important to those in rural areas. Heaven knows we read those catalogs when they arrived. But as a fraction of even just total Sears sales, never mind total retail sales? Nothing even remotely comparable to what Amazon alone, not to mention other on-line retailers, does as a fraction of total sales today.

You underestimate Sears. In 1931 Sears catalog sales amounted to 1% of GNP. Amazon in 2017 had sales of 178 billion, about 1% of the US GNP. So they are, in fact, comparable.

[wj]

Scott, thanks for the info. Dare I hope for a link (I'm guessing there may be other fun stuff there...)?

[CharlesWT]

You underestimate Sears. In 1931 Sears catalog sales amounted to 1% of GNP.

Big frog in a much smaller pond. I think, at one time, US Steel was about 5% of GNP.

[hairshirthedonist]

How much of GNP was spent on cell phones in 1931 as opposed to drinks in speakeasies?

[Ugh]

byom: Let's say I watch ordinary broadcast TV. I get the show for "free." What does the broadcaster get out of it? My attention to commercials, an asset in which I have zero cost basis.

Should we have been taxing the value of TV shows to viewers ever since TV started, and radio too?

Good points. I'd say your attention paid to TV commercials doesn't involve an actual one-to-one exchange between you and the broadcasters in any ordinary sense of the term. Whereas clearly people are exchanging data for access to Facebook, gmail, etc. (or at least they are now, perhaps they were not when those platforms were first formed). The same for radio.

While we are at it, what about newspapers? We don't get them for free, but we do get them, or did, at well below their production and distribution costs, again in exchange for attention to ads.

This is also a good point, but at least there was a subscription that could be taxed (or not, as was often the case, and there was also the $$ spent on production and distribution costs). But now I can exchange data for much the same information (I guess), without there being anything for the government to tax.

More broadly, I think in theory taxing users on the value of the data they exchange with these online platforms would solve a lot of issues - including those beyond the tax world* - but I think it's impractical and probably counterproductive.

*I mean, if there was some sort of $ out-of-pocket cost for sitting on Facebook or twitter all day beyond the phone and internet connection, I think we all would be better off.

[bobbyp]

Ugh,
Interesting stuff. Let me ask a dumb question.

1. If you are a sentient human being with an internet connection, you most likely have data.

2. Much to your surprise, this data is an asset.

3. Various firms have monetized your asset.

4. Therefore, we must tax the asset?

5. Would this not apply any other time you release this data? Say, for example, signing up for Ron Paul's newsletter?

Would it not be better to tax the asset when it is sold...much like a capital gain?

Just askin' Thanks!

[Pete]

I don’t want to get off-topic, but I think we have to address what FB, Alphabet, Amazon, are. These corporations have so much money and info - and the ability to utilize those resources... These are new animals.

They are extranational and cross many disciplines and I’m not bright, so I don’t know what that means. But taxation & commerce seems very secondary to a larger issue here.

Facebook has performed “experiments” on manipulating opinion and emotion. They’re not just selling refrigerators to the predisposed.

[Turbulence]

Interesting stuff indeed Ugh.

Let's take GMail just to be concrete. Google doesn't use gmail for ad mining anymore, but how much does it cost them? The free limit is 15 GB of data; they probably store that at least 3 times for redundancy and I can buy a 4 TB drive for $120, so that data costs them $1.36. Now, durable storage isn't their only cost: they need to pay for CPU time, memory, networking, etc., plus staff. But they're really good at automation which means they don't have much staff*, and email isn't particularly CPU/memory/IO intensive, so they're costs are probably under $5/year. And that's the worst case: most people will use much less than the free allotment, and those who use more will pay (and presumably pay tax on that payment!). So I guess the feds are losing, what, a few nickels per year? That seems...not significant.

*(I visited a FB datacenter. The facility was vast. The cafeteria [FB does free meals for employees] was about the size of my living room + dining room + kitchen. That gives you a sense of how few people were needed for operations.)

[Ugh]

bobbyp - 2. Much to your surprise, this data is an asset.

3. Various firms have monetized your asset.

4. Therefore, we must tax the asset?

I'd say we only tax the asset when you exchange it for something, like access to Facebook. You as a sentient human being with data would not be taxed before the exchange.

5. Would this not apply any other time you release this data? Say, for example, signing up for Ron Paul's newsletter?

In theory, but again this gets into the practical issues of whether and how to tax such an exchange.

Turbulence: so they're costs are probably under $5/year. And that's the worst case: most people will use much less than the free allotment, and those who use more will pay (and presumably pay tax on that payment!). So I guess the feds are losing, what, a few nickels per year? That seems...not significant.

Thanks for this, Moore's law and it's counterparts in the digital age continue to astonish. So I guess there are two forces at work. The displacement of "traditional" means of exchange/commerce that governments used to be able to tax with the current digital business model, along with the increasing efficiency of such means.

So, looking at it from today, perhaps the feds are missing a few nickels per year (per user) if you value on your terms, but from 25 years ago they are missing quite a bit more. This is tremendous from an efficiency/productivity standpoint, but from a "fund the government" standpoint can be problematic. CharlesWT notes above that this might be massive consumer surplus - good generally but also something available to be taxed.

Thanks for the comment Turb.

[bobbyp]

I'd say we only tax the asset when you exchange it for something

Since the initial exchange is essentially a "barter exchange" taxing it is problematic and can only be assessed by comparing it to some other similar exchange that has some established market value (?)

And that's the rub....there are no "similar" market comparables?

[hairshirthedonist]

I'm guessing "if you value on your terms" means that the value of the data can be unrelated to (or something more than) the cost of storing it.

[russell]

I'd say we only tax the asset when you exchange it for something, like access to Facebook.

How would "we" know that any given person had used Facebook?

Watch their profile?
Put a meter on their cable modem?
Ask Facebook for the information?
Why would Facebook tell the feds about usage for purposes of taxation when that would create a disincentive for people to use Facebook?

I don't understand how this would work, in practical terms.

[wj]

And that's the rub....there are no "similar" market comparables?

But Facebook, et al., make money by selling your info to others. Wouldn't that be a comparable market? Granted, you'd have to look at the sum total from all the times that they sold your info. But still, a reasonable start for figuring at least average value.

Now if we want to get to the reality of some people's data being worth more than others, that's a bit more complex. But I'll wager that the companies that are making billions selling it have great algorithms to value it. So, again, we have a market to look at. I

t's not exactly a public market. But at least the data exists. And if it exists, no doubt a law can be crafted to acquire access to it. (Even if it involves metaphorically pointing a gun at those who have it. :-)

[hairshirthedonist]

Moreover, these "free" (i.e., untaxed) online platforms have displaced a massive amount of economic activity that would have otherwise been subject to tax.

Thinking about WRS at 12:02 PM and the above, and given the near-ubiquity of social-media use of some kind or another, why not simply raise income taxes slightly to account for this (assuming that doing so is at all important)?

[hairshirthedonist]

Does anyone remember, back when email was social media before there was social media, the phony chain-email about the federal government imposing a one-cent (or some such) tax on every email you sent?

[byomtov]

As bobbyp says, there is no established market value for the service, and no way to set one.

Also, the value to an individual user will vary hugely. I have both a FB and a twitter account. I never use either. What are you going to tax me on?

[hairshirthedonist]

Check out this link. It's like a Model T.

http://www.cnn.com/2002/TECH/internet/04/01/e.mail.hoax/

[Tony P.]

My own dumb question:

Are we talking about a government revenue problem, or a "social engineering" problem?

I know that the "social engineering" aspect of taxation is frowned upon by many, but of course it's an unavoidable consequence of any tax code I can imagine.

"Social engineering" in this context has to do with whether you tax "digital" businesses, or "large" businesses, or micro-vendors (aka individuals); and whether you do it in order to limit monopoly, or to help out small businesses, or to reduce eyestrain in the population.

As hairshirt points out, simply raising the income tax would address the government revenue problem. That would have its own "social engineering" consequences, of course.

--TP

[Snarki, child of Loki]

Ah, for those long-ago days when we'd get chain e-mail to "recycle junk e-mail and profit!!1!"

[Nigel]

The EU appear to have hit on a reliable means of taxing the internet quasi-monopolies...
https://www.theguardian.com/technology/2019/mar/20/google-fined-149bn-by-eu-for-advertising-violations

[CharlesWT]

That brings Google close to $10 billion in fines from the EU in just a few years. At some point, does Google just flips the switch on Europe?

[John D. Thullen]

Or, they could do the novel thing and obey the law by changing their business practices and stop fucking with their customers.

[Ugh]

bobbyp: Since the initial exchange is essentially a "barter exchange" taxing it is problematic and can only be assessed by comparing it to some other similar exchange that has some established market value (?)

And that's the rub....there are no "similar" market comparables?

Yes, it's hard to value an asset if no one is exchanging it for cash. On barter exchanges my thoughts always go to things like farmers paying for services from the dentist with chickens. People would say, "Hey there's no cash so no income for either party" which seems clearly incorrect, same thing with Facebook. I think there were a lot of barter exchanges set up in the 1970s/early 1980s where service providers and/or merchants would exchanges services for services or services for goods and try to escape any tax liability.

These "exchanges" were essentially put out of business by the IRS wising up and issuing a specific form for reporting barter transactions.

(the example used on the IRS website is exchanging plumbing services for dentist services)

hsh: I'm guessing "if you value on your terms" means that the value of the data can be unrelated to (or something more than) the cost of storing it.

Yes and of course, right? The wonderful picture of my 5YO younger son was stored in the cloud and now it's gone - what would I pay to get it back? More than it costs iCloud to store it, certainly.

russell: How would "we" know that any given person had used Facebook?
...
Why would Facebook tell the feds about usage for purposes of taxation when that would create a disincentive for people to use Facebook?
I don't understand how this would work, in practical terms.

Yes lots of practical problems. The feds could require information reporting from Facebook - which, if I understand their current policy correctly, requires a "real" person to open an account - as they do across the spectrum of businesses on many many things.

But all tax reporting is a disincentive to engage in the underlying activity requiring reporting, I would say.

[Ugh]

hsh: Thinking about WRS at 12:02 PM and the above, and given the near-ubiquity of social-media use of some kind or another, why not simply raise income taxes slightly to account for this (assuming that doing so is at all important)?

Of course. Also potentially raising the VAT rate (in jurisdictions that have one), or really any other tax measure that makes up for the decline in government revenue.

byomt: Also, the value to an individual user will vary hugely. I have both a FB and a twitter account. I never use either. What are you going to tax me on?

Funny, my organization raised this specific point in their comments. In theory any "digital" tax would be tailored to the intensity of use, but how to measure that raises many practical issues of the kind russell notes. You could devise a "free online platform access tax" which taxed you merely for having an account, but would that work/be efficient/practical?

I dunno.

[wj]

The feds could require information reporting from Facebook - which, if I understand their current policy correctly, requires a "real" person to open an account - as they do across the spectrum of businesses on many many things.

But all tax reporting is a disincentive to engage in the underlying activity requiring reporting, I would say.

And a disincentive to use Facebook would be a bad thing why, exactly?

[byomtov]

These "exchanges" were essentially put out of business by the IRS wising up and issuing a specific form for reporting barter transactions.

But the services exchanged were services that were also sold for cash, so there was a reference point for valuing them. Not so here.