The New Jersey legislature might soon take up a proposal to adopt the nation’s first data taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.. If so, it will be considered in haste, as only 13 legislative days remain in the current biennial session, which ends January 13th at noon.
Under S 4908, sponsored by the New Jersey Senate President, corporations would be taxed based on the number of New Jersey residents whose consumer data they possess, under a progressive taxA progressive tax is one where the average tax burden increases with income. High-income families pay a disproportionate share of the tax burden, while low- and middle-income taxpayers shoulder a relatively small tax burden. schedule with significant tax cliffs. For instance, for companies with data on at least 2 million but fewer than 3 million New Jerseyans, the tax is $50,000 plus $0.10 per person, but at 3 million, it becomes $150,000 plus $0.15 per person.
This leaves a significant disjunction, since the tax is just under $350,000 for data on 2,999,999 consumers, but jumps to $600,000 for 3 million consumers, an increase of $250,000 in tax liability for collecting data on one additional person. The proposed tax contains 10 such cliffs, the largest of which yields $950,000 in additional tax liability for one additional user or consumer. At the highest point, businesses could pay $0.725 per user or consumer, though in practice their liability could be far higher because the tax’s design could result in the same user being counted many times.
The tax would be imposed upon any business that “collects, maintains, uses, processes, sells, or shares consumer data, other than consumer contact information, in support of its business activities,” a definition broad enough to capture online retailers, streaming services, credit card issuers, airlines, search engines, social media, and even large brick-and-mortar retail chains.
Many people are understandably concerned about the extent of consumer data collection, which has fueled the rise of browsers and other online tools promising greater anonymity and less tracking. But S 4908 doesn’t strike a blow for greater privacy protection, because it is a tax on all consumer data beyond contact information.
The proposed tax is incredibly broad and almost impossible to administer. Consumer data is not just an online advertising network’s tracking of a person’s online activities. It is also a retailer’s list of customer names and addresses, or a grocery store’s loyalty card database, or really any identifying information a company has on its customers, down to details of their transactions directly with that company. It could even include aggregate sales data that companies use to adjust their offerings.
Online retailers will, of course, have records of their customers’ past transactions at a minimum, and that’s data. Banks and credit card companies, by definition, have records of customers’ charges and transfers. Social media platforms host content posted by users: again, data. Streaming services know what you’ve watched and use algorithms to suggest similar films, shows, or music. Grocery store loyalty cards track purchasing activity to offer deals and discounts. Any service with any level of personalization cannot operate without some data collection.
However much some may want to distinguish between types of consumer data, taxes aren’t a good instrument for that, and S 4908 makes no such effort. Functionally, this is simply a tax on any business with a large number of users, consumers, or website viewers in New Jersey. And it’s one under which picking up one more user could come with a massively higher tax bill.
A consumer is presumed to be a New Jersey resident for purposes of the tax if data “as on record with or available to a taxpayer, indicates that the consumer has a New Jersey home address, a New Jersey mailing address, or an Internet protocol address connected with a New Jersey location.” The IP address requirement is particularly nebulous, particularly since nothing in the bill requires that consumer data be associated with a known person.
Someone accessing an internet service from their phone while on the New Jersey Turnpike might be caught by the definition, requiring the company to remit tax on them that far outstrips anything they might make from the person’s subscriptions, purchases, or ad-viewing. If the company knows the user has a home address elsewhere, they could rebut the presumption that the IP address renders them a New Jersey resident, though the administrative hassle of doing so is significant. The bill requires submission of “satisfactory evidence to the Director of the Division of Taxation” for each such person, which is functionally impossible unless regulations go beyond the bill text to allow such users to be excluded in the first place.
Furthermore, for someone who accesses a website or service for which the company does not have a name or address, tax would have to be paid—even if that person is only in the state briefly. Similarly, a New Jersey resident who accesses services from multiple locations—their home, their office, their phone pinging off multiple towers, perhaps random IP addresses generated by virtual private networks—could create a large number of “users” on which a company could have to remit tax.
In three pages of bill text, most of which is concerned with establishing the convoluted rate structure, New Jersey lawmakers would create a new tax that could require businesses to submit documentation for every one of their users or consumers who ever accesses the internet from New Jersey, and potentially to pay taxes on the same users many times over. This is a compliance and administrative nightmare; it would result in substantial double (and triple and quadruple) taxation. And it will spawn countless tax disputes and undoubtedly lead to litigation challenging the tax as a whole.
Even if the bill could somehow apply only to the intended count of users or consumers, it would still be deeply flawed. Consumer data collection, as defined here, is inextricable from the ordinary course of business. Functionally, this is just a per-consumer tax on large companies that are already subject to ordinary taxes.
S 4908 is based on dubious premises and made worse by its poor design. Whether intended for serious consideration in the waning days of the current biennial session or to lay the groundwork for an effort next session, this data tax deserves critical scrutiny by lawmakers.
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