France Is Backing Down From Its Digital Tax, States Should Do the Same

France has agreed to back down from its so-called “digital tax,” in which it would apply a three percent tax on revenue earned by large (mostly American) companies in the country from digital services. In return for President Trump putting aside threatened retaliatory tariffs, France suspended this new levy at least through the end of this year. That’s a positive development, but states that had been following France’s lead in proposing their own digital taxes should again follow in French footsteps and set their digital taxes aside.

Though France’s digital tax proposal has been the most high-profile version, digital tax proposals have been popping up all over the developed world recently. The United Kingdom and Canada are considering their own versions, as are several other European countries. This trend of poor policymaking has now migrated to a few U.S. states, including Maryland and Nebraska, which have proposed similar tax hikes.

There are clear legal issues with these schemes. The Permanent Internet Tax Freedom Act (PITFA), which President Obama signed into law in 2016, prohibits states from levying “discriminatory taxes on electronic commerce.” As most states do not tax traditional advertising, taxes on digital advertising would likely qualify as a violation of PITFA.

These proposals manage to run afoul of the Constitution, as well. Both states’ taxes, but especially Maryland’s (which includes a gross revenue threshold which would be hard for Maryland-only businesses to reach), would primarily raise revenue from larger, multi-state businesses not based in the taxing jurisdiction. This could potentially be seen by courts as an undue burden on interstate commerce, a violation of the U.S. Constitution’s Commerce Clause.

Not even the First Amendment is safe from digital advertising taxes. The Supreme Court has historically frowned upon taxes that single out mediums relied upon by news agencies, and news sites often rely heavily, if not exclusively, upon digital advertising. The Court may well view digital advertising taxes as an unconstitutional restriction upon the freedom of speech.

But even if they were constitutional, targeted taxes on tech companies represent bad policy that should never have migrated across the pond. European Union digital taxes were justified as ensuring tax fairness, but in reality they accomplish anything but. Claims that EU digital companies are exploiting tax loopholes to avoid taxes are unfounded — the average effective tax rate of digital businesses is only 0.3 percent off of the effective tax rate of traditional businesses. Rather, they represent an attempt to squeeze a growing industry for extra tax revenue.

In following the EU’s lead, states would create a bias against digital firms in their tax codes. As a matter of policy, taxes should not discriminate against certain industries or types of transactions. Creating a new type of tax targeted only at one type of business and not at others in similar situations violates every principle of simple, fair taxation in existence.

But more specifically, digital taxes threaten the advertising-based model of the internet that has created so many new services for consumers. Many of the most widely-used websites on the internet are funded through advertisements, including news sites and social media. These websites are available for free consumption because the taxman is not engaging in gimmicks such as trying to tax the “value added” by consumers posting and engaging on social media sites.

States followed France’s lead in proposing digital taxes. They should now follow France again in backing down from them, lest they hurt their own residents and consumers.