The Tortured Logic of Digital Services Taxes

The temptation to impose digital services taxes (DSTs) on America’s Big Tech giants is proving hard for governments all around the world to resist. At a time of tight national budgets, there’s cash to be grabbed. DSTs are often politically popular as many citizens believe that tech companies (and America) should be punished for various real and imagined sins. There’s also understandable envy at Big Tech’s wealth and scale. Most recently, DSTs have become a useful bargaining chip in high-stakes trade negotiations.

But from a legal perspective, these motivations are largely irrelevant. Instead, policymakers must justify why they should be allowed to tax the major digital companies very differently from the leading firms in other industries. This challenge explains why so much of the DST debate has centered around obscure and abstract notions of a company’s “physical presence” and whether the company’s users “create value.”

International trade law has long stipulated that companies can only be taxed in countries where they have a physical presence and where value is created. Digital businesses don’t necessarily need a physical presence in every country, but they clearly have a strong virtual one in most. Legally, that’s a plausible stretch, but DST defenders must also argue that, while digital companies don’t create new value in many countries in which they operate, their users do. This claim takes us into much murkier and academic territory.

Theorists have been debating the nature of economic value for centuries without a clear consensus, and the nature of user-created value seems to be similarly in the eye of the beholder. There are at least three relevant forms:

• Activity. Just about every consumer activity can lead to some form of value creation. When you buy a car, a washing machine, or groceries, you can easily create value for others in the form of transportation, clean clothes, or nice meals. Social media content, messaging services, and blogs can be seen in a similar creating-value-for-others light.
• Skills. Companies have long sought to leverage the knowledge and skills of their users, which is why many firms support user groups, brand ambassadors, product evangelists, and other forms of customer interaction and feedback. Digital users create similar value whenever they upload an instructional video to YouTube, edit a Wikipedia page, post a product review, or become an influencer in some other way.
• Data. While DST supporters like to stress the value of the user data digital service providers accumulate, just about every modern company seeks to leverage its user data to profile, target, and serve its customers. Whether this data comes from transactions, surveys, focus groups, analytics, algorithms, machine learning, or the Internet of Things, it’s not unique to digital service firms.

DST proponents argue that while digital and non-digital companies both leverage user-created value, it’s significantly greater in the former. But this is more a difference in degree than in kind. More importantly, does anyone really believe that this abstract debate compellingly explains why tech companies should be taxed radically differently than other sectors? It’s obvious that DST supporters are making the user-value argument much more out of necessity than conviction. No matter how flimsy, it provides legal cover for policymakers to do what they want.

That’s why it’s important for opponents of such unprecedented cash grabs to argue more coherently and effectively against the logic of digital uniqueness. Since digital is not unique, there’s no logical reason why the United States couldn’t impose an “Analogue Production Tax” (APT) on European companies that sell in the United States but don’t produce here. Perhaps we should start with a 5 percent tax on all Porsche profits in America since their profits are not currently taxed by the U.S. Treasury but user value is certainly added in the United States.

Thankfully, President Trump called out this DST nonsense when he cancelled trade talks with Canada unless they got rid of their DST plans. Canadian Prime Minister Carney did the smart thing and repealed it. Now the president should do the same with the rest of America’s trading partners.