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DIGITAL ECONOMY

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SALT Trends in Taxing the

This article looks at recent initiatives designed to certain digital activities, such as streaming services, third-party delivery platforms, and digital advertising and, conversely, the potential challenges to such initiatives.

JENNIFER W. KARPCHUK AND ILYA A. LIPIN

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As e-commerce booms, mended the bill, stating: “This is a great should be front and center in taxpayers’ services shift more to vir- day for American consumers. The U.S. minds and, as the digital economy con- tual formats, and products Senate passed the Permanent Tax tinues to evolve, more challenges involv- are increasingly delivered Freedom Act with a strong bipartisan vote. ing this issue are likely. by various digital means. This confirms a national consensus that One of the major state and state and local on Internet access Alocal tax trends in recent years has been should be taken off the table once and for Netflix and Tax: attempts to tax the evolving digital economy. all . . . I hope the bill is enacted soon — Streaming Services Growing budget shortfalls resulting from Americans need and want the certainty A recent trend in the digital arena has the coronavirus pandemic will incentivize that the digital world will be spared the been the taxation of streaming services. states to raise revenue through enforce- taxman.” For instance, during 2015, Chicago ment, liberal interpretation of current pro- PITFA provides for two key protec- amended its law to impose its 9 percent visions, broadening the base and imposing tions: (1) it places a prohibition on the amusement tax on streaming services. In new taxes on digital goods and services. taxation of internet access; and (2) it pro- Labell v. City of Chicago,2 several taxpay- Although states may seek to tax this po- hibits a state, or a political subdivision of ers challenged the constitutionality of tential new revenue stream, they may be a state, from imposing multiple or dis- Chicago’s amusement tax as it relates to subject to legal challenges. This article looks criminatory taxes on electronic commerce. internet based-streaming services, such at recent initiatives designed to tax certain “Electronic commerce” is defined as “any as Netflix and Hulu. The taxpayers ad- digital activities, such as streaming serv- transaction conducted over the Internet vanced two main arguments: (1) the or- ices, third-party delivery platforms, and comprising the sale of property, goods, dinance requires customers of streaming digital advertising and, conversely, the po- [or] services.” Thus, the same tax rate must services to pay the amusement tax, even tential challenges to such initiatives. apply to items, regardless of whether they though the ordinance fully exempts users are purchased over the internet or through of automatic amusement devices (juke traditional commerce, such as at a brick- boxes, pinball machines, video machines) The Internet Tax Freedom and-mortar store. For example, PITFA from taxation; and (2) the ordinance fully Act and the Digital Economy likely would be violated if a state taxed or partially exempts live theatrical, mu- During 1998, the internet was in its in- the sale of digital books but exempted the sical, and cultural performances at the- fancy and today’s internet giants were just sale of physical books. aters and other venues from the emerging – was founded in Sep- As the digital economy continued to amusement tax but taxes streaming serv- tember 1998; had just gone pub- expand, states sought creative ways to tar- ices that provide access to similar or iden- lic in 1997 and by 1998 had opened its get perceived lost revenue from digital tical theatrical, musical, or cultural second distribution facility; and Netflix sources. In a 2013 case, Performance Mar- performances over the internet. was founded in 1997, but its streaming keting Association v. Hamer,1 the Illinois In reaching its decision that the services would not be created for another Supreme Court was called upon to ex- Chicago ordinance does not violate the 10 years. Despite the novelty of the in- amine the applicability of PITFA to on- PITFA, the Illinois Appellate Court dis- ternet, the line “direct marketing.” The online direct tinguished the holding in Performance (“ITFA”) was signed into law in 1998. Both marketing at issue was marketing or ad- Marketing, concluding that, unlike per- the Clinton administration and the U.S. vertising by which a person or organiza- formance marketing services, which are Congress shared concerns about the pos- tion that published or displayed an identical regardless of whether they are sibility that state and local tax govern- advertisement (referred to as an “affili- performed via the internet or over-the-air ments would seek to target electronic ate”) was paid by the retailer when a sale broadcasting, streaming services are not commerce and internet access as areas for was completed (commonly referred to as the same as automatic amusement de- taxation and that such taxation could sti- “click through nexus”). Illinois had a law vices or live cultural performances. In fle the development of internet commerce. that required out-of-state internet retail- support of its conclusion, the court noted These concerns led to the adoption of the ers using Illinois online marketers to col- that whereas streaming services are pri- ITFA. lect on sales to Illinois residents. In marily used privately in the home or on The ITFA originally was a moratorium invalidating the law based on ITFA, the devices owned and maintained by the pa- on taxation. The law was extended sev- court reasoned that the Illinois law im- tron, automatic amusement devices are eral times until 2016 when it became per- posed use tax collection obligations on used publicly, outside the home and are manent and was renamed the Permanent out-of-state retailers that used online mar- owned and maintained by businesses. Internet Tax Freedom Act (“PITFA”). When keting without imposing similar obliga- The court also held that in-person live PITFA was passed as part of the Trade Fa- tions on retailers utilizing print or cultural performances can be distin- cilitation and Trade Enforcement Act of broadcast marketing. guished from performances delivered 2015, the commissioner of the Federal In considering potential challenges to through streaming services because live Communications Commission com- taxing the digital economy, the PITFA performances encourage patrons to visit public spaces where they can view the live cultural performance but also fre- Jennifer W. Karpchuk is a shareholder and co-chair of Chamberlain Hrdlicka’s SALT practice in the firm’s Philadelphia, Pennsylvania office. She can be reached at [email protected] or 610-772-2314. quent other Chicago businesses such as Ilya A. Lipin is a managing tax director and Philadelphia SALT practice leader at BDO USA LLP. restaurants, bars, and hotels.

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Some issues arise out of the court’s de- However, taxpayers will have another ciated nonuniform state and local tax rules cision. First, a tax is discriminatory under bite at the “apple” in Chicago. Apple and may be an unwelcome surprise for the the PITFA if it applies to electronic com- Spotify both had cases that were stayed parties responsible for collecting and re- merce but is not imposed on similar goods pending the outcome in Labell. With the mitting the tax on food, as well as associ- or services delivered through other means. benefit of seeing the outcome of Labell, ated delivery and processing fees (which The court in Labell creates a higher bur- the taxpayers in the Apple litigation may sometimes can amount to 25%-30% of the den that requires the streaming service be able to develop a better argument and transaction). Post-Wayfair nexus con- to be the “same” as its nontaxed counter- succeed in a PITFA challenge. Apple is siderations, tax rate differences due to part—a requirement that is absent from challenging the application of Chicago’s sales across state and local jurisdictional the PITFA and far more stringent. Sec- amusement tax to its music streaming lines, intra- and interstate sourcing rules, ond, it is not difficult to envisage identi- services on several grounds, including the local food and beverage taxes, and spe- cal streaming services that could be PITFA. The taxpayers challenge in Labell cial district taxes create additional com- disproportionately taxed. For example, if related to television, movies, and music. plexity that needs to be addressed.3 a Chicago theater holds a live perform- Apple may be able to achieve a different re- For instance, in Pennsylvania, the De- ance of Broadway’s Hamilton, the Chicago sult than in Labell by focusing solely on partment of Revenue announced that per amusement tax will not apply, but if the music. There is no exact live equivalent their administrative policy, the third-party same content is available to users via Dis- to television and movies, whereas with delivery service is responsible for col- ney+, the tax will apply. The content being music the same content is delivered re- lecting on the entire purchase, transferred is identical, but following the gardless of whether it is performed live including the order, service fee, and de- court’s analysis, the activities are not the or streamed—the only difference is the livery fee.4 Similarly, in recently published “same” for purposes of the PITFA because means of delivery. This seems to fit administrative guidance, stated one performance is attended in person squarely within the protections of the that multivendor marketplace platforms and will deliver value to local businesses PITFA. Time will tell whether Apple can (MMPs) “are responsible for collecting and the other will not. To require that en- succeed on the heels of Netflix’s PITFA and remitting sales tax on the entire sales tertainment viewed electronically be ex- loss. price of any prepared food sold through actly the same as entertainment performed its platform. This includes delivery charges, live – including having the same impact on mandatory gratuities, and any service the community – ignores the inherent Third-Party Delivery Services charges or fees passed on to the customer.” differences when a service is delivered Using apps and online platforms, con- The guidance defines an MMP as the in- electronically, and it belies the spirit of sumers can order and have meals deliv- termediary between the buyer and seller the PITFA. This issue is more acute now ered from their favorite participating that communicates the offer and accept- since, due to the public health crisis caused restaurants to their doorsteps. While the ance between the buyer and seller and by COVID-19, the number of streaming ordering of food via an app may seem like collects payment from the purchaser and options has increased exponentially. a straightforward transaction, the asso- transmits payment to the seller.5

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Conversely, in Crimson 2 Go, LLC v. Ala. the customer selects items and “checks out” coronavirus pandemic increases the Dept. Rev., Alabama Tax Trib., Dkt. No. S. when the order is completed. The com- chances of an audit in the next several 16-118, 07/07/2016, the Alabama Tax Tri- pany’s terms and conditions stated that “the years. To prepare for potential audits, bunal voided the Department of Revenue’s restaurant is the seller of the food and re- third-party delivery providers should un- audit assessment claiming that the third- sponsible for its preparation and quality” derstand and meticulously document the party delivery provider was buying food and that the company “is only providing scope of their business operations in each from the restaurants and reselling it to its order processing services for a fee.” The in- jurisdiction. Based on the issues discussed customers. The Tribunal held that “the cus- voice displayed the following information: above, it is important to identify the fol- tomers ordered the food from the restau- company’s name, restaurant’s name, prices lowing to determine whether tax may rants, albeit through the Taxpayer’s website, for the items ordered, sales tax on the total apply to the sale and who is responsible and the restaurants ultimately received the food amount, delivery charge (if applica- for remitting the tax to the state: gross receipts from the food sales, less a ble), and tip (if applicable).7 1. Which party is making the sale to the negotiated marketing/service fee retained Given the novelty and popularity of customer; by the Taxpayer for facilitating the sales the service offering, any perception that 2. Whether the third-party vendor is a and deliveries.” With respect to delivery revenue from third-party food delivery marketplace facilitator based on the fees, the Tribunal found that if the third- services is “escaping” taxation, even if due state’s rules; party delivery provider was a “de facto agent to uncertainty or the absence of provi- 3. How the transaction (food, beverages, for the restaurants,” the restaurants would sions imposing tax, may raise a red flag service fees, etc.) is presented on the in- be responsible for collecting sales tax on in the eyes of lawmakers. For instance, in voice and which party reports the trans- such charges. If the provider was not an New York, a legislator sent a letter to the action to the taxing jurisdiction; and agent, the delivery fee would be consid- State Department of Taxation and Finance, 4. Which items and services are subject to ered a nontaxable service.6 urging the Department “to conduct an tax and at what rate. In Private Letter Ruling 17-001 (Nov. immediate audit of the state sales taxes Personal shopper and delivery busi- 17, 2016), the Utah State Tax Commission paid by online food delivery companies” nesses that transport products from gro- determined that a third-party delivery serv- suggesting that “food delivery companies cery stores, department stores, and ice merely acts “as a middle man between the were failing to uniformly collect sales tax pharmacies also are expected to face customer and restaurant and does not make on their delivery and service fees – scrutiny due to similarities in their busi- sales of tangible personal property” because amounting to what could be tens of mil- ness models. it does not take title of the food at any point lions of dollars in unpaid taxes to New during the transaction, and thus is not re- York State annually.”8 State regulators are sponsible for the collection of sales tax. In aware that the major food delivery The Newest Trend: this ruling, a company maintained and op- providers do not charge the same amount Digital Advertising Taxes erated a website where individuals can order of sales tax on identical transactions.9 The A number of states and localities, including food from participating restaurants. The fact that food delivery services is one of Maryland, New York, and the District of restaurants provide a menu with pricing; the businesses that has thrived during the Columbia, have recently considered dig-

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ital advertising taxes. Most of the digital Notably, the dissent in Leathers strongly may undertake to examine the proceed- advertising taxes that have been contem- disagreed with the majority’s opinion. Jus- ings of the Legislature or any branch of plated in other states raise PITFA con- tice Marshall proclaimed: “Because I be- government, and no law shall ever be made cerns because most states do not tax lieve the majority has unwisely cut back on to restrain the right thereof. The free com- traditional advertising services. There- the principles that inform our selective munication of thoughts and opinions is fore, a state that taxes only digital adver- taxation precedents, and because I believe one of the invaluable rights of man, and tising services likely would violate the that the First Amendment prohibits the every citizen may freely speak, write and PITFA. However, digital advertising taxes State from singling out a particular in- print on any subject, being responsible could give rise to unique legal challenges formation medium for heavier tax bur- for the abuse of that liberty.” As explained apart from PITFA. dens than are borne by like-situated media, by the dissent: I dissent.” This Court, recognized that Article 1, The First Amendment Despite the disagreement between the 7 of the Pennsylvania Constitution The first of these legal challenges is the justices, Leathers stands for the proposi- provides protection for freedom of First Amendment to the United States tion that it is permissible under the First speech broader than the federal con- Constitution. Although taxation is not a Amendment for a state legislature to enact stitutional guarantee. We must always be wary of the government’s control of typical First Amendment issue, concerns a taxation scheme that exempts certain the expression of ideas and the pow- over taxation are what gave birth to the members of the media from a generally er to tax is one such control. A tax on principles protected by the First Amend- applicable sales tax. However, a tax dis- magazines that discourages one form ment. During the 1700s, there were per- criminates between speakers and poten- of expression, magazines, in favor of sistent efforts by the British government tially violates the First Amendment if it: another, newspapers, clearly operates to prevent or abridge the free expression (1) singles out the press; (2) targets a small to restrain the use of the printing press to examine the proceedings of of any opinion that was perceived to crit- group of speakers; or (3) makes distinc- government. This is in direct violation icize the British Crown. In 1712, Parlia- tions on the basis of content. If a differ- of the first sentence of Article 1, 7 of ment imposed a tax on all newspapers ential tax scheme has such an effect, the the Pennsylvania Constitution, which and advertisements with the intent of sup- state must show a compelling justifica- states that ‘no law shall ever be made pressing the publication of comments and tion for its action. With respect to the to restrain the right thereof.’ The tax re- criticisms against the Crown. Historians digital advertising taxes proposed by states strains the crucial function of the press as government watchdog and have argued that the American Revolu- and the District of Colombia, taking limits the free communication of tion began in 1765 when the British gov- Maryland as an example11, taxpayers could thoughts and opinions in print. ernment sent stamps for newspaper duties argue that the digital advertising tax pro- to the American colonies in an attempt posed earlier this year singles out com- The dissent’s point emphasizes that to curtail the circulation of newspapers. mercial speech (digital advertising) for taxpayers challenging a digital advertis- These taxes were commonly referred to the tax. Taxpayers also could challenge ing tax should review protections in States’ as “taxes on knowledge.” In 1785, four the tax by asserting that it targets a small constitutions to determine whether they years before Congress proposed the First group of companies since under the pro- may contain a broader provision than that Amendment, the Massachusetts legisla- posed taxing scheme, only companies embodied in the First Amendment. ture imposed a stamp tax on all newspa- with at least $1 million in Maryland- pers and magazines. An advertisement sourced digital advertising and $100 mil- The Dormant tax followed in 1786. However, both taxes lion in global annual revenues would be Another possible challenge to digital ad- were met with such hostility that they were liable for the tax. vertising taxes is a claim that they violate repealed within a few years. Depending on the state, taxpayers chal- the Commerce Clause of the United States With the history of the First Amend- lenging a digital advertising tax may find Constitution. The Commerce Clause ment in mind, there may be arguments further protection in the State’s constitu- grants Congress the Power “[t]o regulate that a tax on digital advertising services tion, which may contain a broader pro- Commerce with foreign Nations, and violates the First Amendment. In Leathers vision than that embodied in the First among the several States.” U.S. Const. art. v. Medlock10, the United States Supreme Amendment. For instance, in Magazine I, § 8, cl. 3. Underlying the Commerce Court examined an Arkansas Gross Re- Publishers of Am. v. Pa. Dep’t of Rev.,12 the Clause is the framers’ “conviction that in ceipts Act, which imposed a 4 percent tax taxpayers appealed an amendment to the order to succeed the new Union would on receipts from the sale of services, in- tax code that repealed the sales and use have to avoid the tendencies toward eco- cluding cable television, but exempted re- tax exclusion for magazines, while con- nomic Balkanization that had plagued re- ceipts for newspaper and subscription tinuing to exempt newspapers. While the lations among the Colonies and later magazine sales. The act was challenged majority of the court did not side with the among the States under the Articles of based on the First Amendment right to taxpayers, the dissent focused on the Penn- Confederation.”13 While the Constitution freedom of expression (as well as the 14th sylvania Constitution and the broader does not expressly limit the power of the Amendment right to equal protection). protections for freedom of the press and states to regulate commerce, the Supreme The court concluded that a tax scheme speech than the First Amendment. Arti- Court has “long interpreted the Com- that discriminates among speakers does cle 1, 7 of the Pennsylvania Constitution merce Clause as an implicit restraint on not implicate the First Amendment un- provides in relevant part that: “The print- state authority, even in the absence of a less it discriminates on the basis of ideas. ing press shall be free to every person who conflicting federal statute.”14 This impli-

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cation is known as the dormant Com- ment being viewed in State A, the digital thereby defeating a single EU-wide digital merce Clause. “By prohibiting States from advertiser does not derive any such direct services tax. Nevertheless, the proposal discriminating against or imposing ex- benefit. Arguably, the digital advertiser prompted some member states to consider cessive burdens on interstate commerce lacks a substantial nexus with State A. Fur- or adopt their own digital services taxes. without congressional approval, it strikes ther, there is likely a lack of a rational re- To date, Austria, France, , and the United at one of the chief evils that led to the lationship between the digital advertising Kingdom (the latter, no longer part of the adoption of the Constitution, namely, tax imposed on the digital advertiser and EU) have formally adopted a digital serv- state tariffs and other laws that burdened the services (or lack thereof) provided by ices tax; the and Spain are interstate commerce.”15 The seminal United State A. considering the implementation of such a States Supreme Court decision address- tax. Additionally, outside the EU, other ing the applicability of the Commerce The Foreign Commerce Clause countries have recently considered or Clause to state or local taxation is Com- In addition to the requirements that must adopted a digital services tax. For instance, plete Auto Transit v. Brady, 430 U.S. 274 be met under the dormant Commerce Turkey has a digital services tax, India has (1977), which established a four-prong Clause, the often forgotten foreign Com- introduced a variation of the tax, and Brazil test to determine whether a state or local merce Clause has two additional require- is still considering the adoption of such a tax imposes an unconstitutional burden ments that must be met: (1) a state should tax. on interstate commerce. This test requires not create a substantial risk of international Digital services taxes typically are de- that: (1) a taxpayer have a substantial nexus multiple taxation; and (2) states should not signed to address a perception that the with the taxing jurisdiction; (2) the tax interfere with the federal government’s existing rules for multinational taxation do may not discriminate against interstate need for uniformity and should not “pre- not fairly tax large multinational corpo- commerce; (3) the tax must be fairly ap- vent the federal government for speaking rations that provide digital services, be- portioned; and (4) there must be a rea- with one voice when regulating commer- cause the income allocation rules do not sonable relationship between the tax cial relations with foreign governments.” accurately reflect the importance of the imposed on the taxpayer and the services Some additional context is useful for pur- users of the services. Thus, the digital serv- provided by the taxing jurisdiction. Fail- poses of this discussion. In 2018, the Eu- ice taxes seek to ensure that all taxpayers ure to meet any prong renders the tax un- ropean Commission released two proposals pay their fair share. The taxes are aimed at constitutional. regarding the taxation of multinational a small number of large digital compa- Digital advertising taxes present a par- corporations that provide digital services. nies. To be subject to a digital services tax, ticularly robust dormant Commerce Clause The first proposal was a permanent solu- a company, viewed at a group level, gen- challenge. For example, assume a seller of tion targeting comprehensive corporate erally must meet a double threshold: a digital advertising contracts with a customer income . The second was an in- worldwide revenue threshold (for exam- to place advertisements on the internet. terim solution, which took the form of an ple, €750 million in Austria, France, Italy, Thereafter, the customer’s advertisements EU-wide 3 percent digital services tax that and Turkey) and a domestic taxable sales can be viewed on any device throughout would apply to: (1) revenues derived from threshold (for example, €25 million in the country. State A implements a digital the sale of online advertising; (2) receipts France or €5.5 million in Italy). Turning advertising tax. Apart from its customer’s or income from digital intermediary ac- back to the United States, the U.S. Trade advertisement being viewed from a device tivities such as the operation of online mar- Representative has been investigating Eu- within State A, the digital advertiser has no ketplaces; and (3) the sale of data collected ropean digital services taxes. Specifically, other connection with State A. While the from online users. The Commission’s pro- during 2019, the U.S. Trade Representa- digital advertiser’s customer might certainly posal failed to garner the requisite unani- tive investigated France’s newly enacted derive economic value from its advertise- mous consent of all EU members states, digital services tax and concluded that it was discriminatory. As a result, the U.S.

1 998 N.E.2d 54 (Ill. 2013). Restaurant Delivery Service, Opinion No. 20180926 Trade Representative proposed imposing 2 2019 Ill. App. (1st) 181379. (March 26, 2019). tariffs of up to 100% on $2.4 billion worth 3 The Tax Foundation Fiscal Fact No. 538 Jan. 2017 - Punch- 8 Letter to the New York State Department of Taxation, Brad of French imports, such as makeup and ing the Meal Ticket: Local Option Meals Taxes in the States, Hoylman, New York State Senator, 27th District, January wine. Tensions deescalated in January https://taxfoundation.org/punching-meal-ticket-local- 3, 2020. option-meals-taxes-states/ 2020 after the United States agreed to defer 9 Noah Lichtenstein, “The Hidden Cost of Food Delivery,” 4 Pennsylvania Department of Revenue, Third Party De- March 16, 2020. https://techcrunch.com/2020/03/16/ the tariffs while France agreed to post- livery Businesses, https://www.revenue.pa.gov/Gener- the-hidden-cost-of-food-delivery/ pone collection of its digital service tax alTaxInformation/Tax%20Types%20and%20Informa- tion/SUT/Pages/Third-Party-Sales-Deliveries. 10 499 U.S. 439 (1991). until the end of 2020 as the countries tried aspx#:~:text=Pennsylvania%20law%20requires%20third 11 H.B. 732, which would have imposed a digital advertis- to negotiate a potential multilateral al- %2Dparty,as%20delivery%20and%20service%20fees. ing tax in Maryland, was ultimately vetoed by Governor 5 ternative at the Organization for Eco- Nebraska Department of Revenue, Information Guide, Larry Hogan during May of 2020. Prepared Food and Beverage Delivery Service, January nomic Cooperation and Development 12 2020, https://revenue.nebraska.gov/sites/revenue.ne- 654 A.2d 519 (Pa. 1995). (“OECD”). Hopes for an amicable reso- braska.gov/files/doc/info/6-535.pdf. 13 Hughes v. Oklahoma, 41 U.S. 322325-26 (1979). 6 lution disintegrated on June 12, 2020 when It is important to note that, in this opinion, the Tribunal 14 United Haulers Assn., Inc. v. Oneida-Herkimer Solid Waste stated that “[t]his case again confirms that the seemingly Management Authority, 550 U.S. 330338 (2007). the U.S. Treasury Secretary sent a letter simple sales tax is sometimes one of the most theoret- 15 to the finance ministers stating that OECD ically difficult taxes to correctly apply and administer.” Comptroller of the Treasury v. Wynne, 135 S. Ct. 17871794 7 A similar conclusion was reached by the Arkansas De- (2015). discussions regarding a global approach to partment of Finance and Administration in Sales Tax and 16 Miller Bros. Co., 347 U.S. 340344-45 (1954). taxing the digital economy had reached

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a stalemate and that the United States tion of tax upon a taxpayer whose con- but two states have some form of a uni- would not accept even interim changes nections with a state are inconsequen- formity provision, which generally re- affecting U.S. technology companies. The tial. Second, even assuming there is a quire taxes to be uniform. For instance, letter repeated previous threats to retal- minimum connection with a state, the Pennsylvania’s Uniformity Clause pro- iate if countries implement their own dig- Due Process Clause further requires that vides that “all taxes shall be uniform upon ital services taxes. the measure of the tax fairly reflect the the same class of subjects within the ter- As the above discussion illustrates, the taxpayer’s activities in the state. Similar ritorial limits of the authority levying the United States has been overt in opposing to the Commerce Clause analysis, there tax and shall be levied and collected under digital services taxes. If states choose to are legitimate questions regarding whether general rules.” There is an argument under enact such taxes, those actions undoubt- or not a digital advertising tax would pass the Equal Protection Clause that there is edly would undermine federal foreign pol- muster under the Due Process Clause. It a lack of a rational basis for enacting a icy and prevent the federal government is questionable whether a sufficient min- punitive tax on advertising provided via from “speaking with one voice” in inter- imum connection exists for a digital ad- digital means and similarly, there is an ar- national affairs, resulting in a strong po- vertiser whose only connection with a gument under uniformity clause provi- tential foreign Commerce Clause violation. state is the fact that its customer’s adver- sions that there is a lack of uniformity in tisement is viewed on a device in the state. taxing only digital advertising. The Due Process Clause Further, even assuming such remote ac- Another potential challenge to digital ad- tivities do create the requisite minimum vertising taxes is the Due Process Clause connection, there would be a subsequent Conclusion of the U.S. Constitution. The Due Process question of whether or not the proposed Streaming services, third-party deliv- Clause provides that no person shall be tax base accurately reflects the digital ad- ery platforms, and digital advertising “deprived of life, liberty, or property with- vertiser’s limited activities within the state. are three high value industries that are (or out due process of law.” The central ques- may be) the targets of state and local tax- tion is “whether the state has given Equal Protection and Uniformity ation. As deficits resulting from the im- anything for which it can ask return.” The The United States Constitution’s Equal pact of the coronavirus are tallied, state Due Process Clause has been applied to Protection and Uniformity Clauses in and local jurisdictions will be exploring the taxation of interstate business in pri- states’ constitutions offer similar protec- means to seal holes in their budgets marily two situations. First, like the Com- tions and arguments. The Equal Protection through increased enforcement of ex- merce Clause, the Due Process Clause Clause, which applies to all 50 states, re- isting laws and enactment of laws tax- requires sufficient nexus: “[D]ue process quires that classifications rest on real and ing novel revenue streams, such as digital requires some definite link, some mini- not feigned differences and that the dis- advertising. This article has explored mum connection between a state and the tinction has some relevance to the pur- various arguments that potentially could person, property, or transaction it seeks pose for which the classification is made be used by practitioners and tax advis- to tax.”16 Thus, the Due Process Clause and that the different treatment is not so ers to challenge some of these taxing ini- has been invoked to forbid the imposi- disparate that it is wholly arbitrary. All tiatives. n

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