California Explores New Ways to Tax the Internet

California’s proposed “data extraction mitigation fee” is quite the euphemism, given that it’s essentially a tax, not a fee, and its intended purpose doesn’t align with what it actually taxes. This proposal, along with the Journalism Preservation Act, represents two measures in California aimed at taxing tech companies to support local journalism.

The data extraction mitigation fee mirrors Maryland’s digital advertising tax, currently tangled in legal disputes likely due to its potential unconstitutionality and conflict with federal law. Similarly, the Journalism Preservation Act faces its own constitutional challenges, resembling a Canadian law that taxes links to media outlets—a strategy that has proven largely ineffective in bolstering local journalism but effective in hindering major tech companies from linking to such media.

SB 1327 and AB 886

Both bills surprisingly cleared the California Senate with a supermajority vote last week. SB 1327, the digital advertising tax, now moves to the Assembly, while AB 886, the link tax, returns there for consideration in an amended form.

Under SB 1327, California would levy a 7.25 percent gross receipts tax on in-state digital advertising for companies with global revenues exceeding $2.5 billion. This tax targets advertising networks and platforms—from search engines to social media networks to streaming services—with the primary cost likely passed down to businesses advertising through these platforms. Despite the remittance by large corporations like those based in Mountain View or Menlo Park, the true impact could disproportionately affect smaller businesses like cafes in Carmel-by-the-Sea. (For deeper insights on the economic ramifications of digital advertising taxes, refer to this resource.)

In today’s landscape, where 77 percent of U.S. business advertising is digital, the bulk of online ads—from multinational corporations to local businesses—occur on platforms liable under this proposed tax. Consequently, most of the tax burden is expected to land on advertisers, who may in turn transfer some costs to consumers, depending on market dynamics and competition. Studies of similar taxes in France suggest consumers could shoulder up to 55 percent of the added expense through higher prices.

Moreover, such taxes could disincentivize ad-supported models in favor of subscription-based content, potentially raising costs for hybrid models blending subscriptions and advertising.

Legal issues

But beyond economic concerns, these bills also raise significant legal issues. They likely conflict with the U.S. Constitution’s Commerce Clause and run counter to federal laws like the Permanent Internet Tax Freedom Act, which aims to prevent discriminatory e-commerce taxes. Maryland’s attempts to navigate these legal waters by redefining their tax on digital advertising contracts have faced skepticism, suggesting California might avoid similar legal challenges by reconsidering its approach.

Meanwhile, Assembly Bill 866, the Journalism Preservation Act, proposes a “usage fee”—effectively a tax—on tech firms for hosting content that links to California local news outlets. Revenues generated would support qualifying media, though companies could bypass this tax by negotiating directly with news outlets—an impractical solution given the multitude of local news providers.

While intended to aid local media, such measures risk unintended consequences. Penalizing tech giants for linking to local news could prompt them to block such links altogether, undermining rather than bolstering local journalism. Google and Meta’s actions in Canada, where a similar law led to link blockades until agreements were reached, highlight the potential pitfalls of such policies.

Advocates argue these taxes are crucial for supporting democracy by sustaining local journalism. However, taxing information sharing and risking link blackouts to news outlets could weaken—not strengthen—our democratic infrastructure. California’s already complex tax system would only be burdened further by these untested, potentially detrimental measures.

Ultimately, these proposals amount to taxes on the internet, impacting not only tech giants (many headquartered in California) but also businesses advertising online and consumers using digital services. Such measures historically have been avoided by states, considering the broader implications for economic growth and innovation.

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