Continuing the unpleasant theme of aggressive state tax proposals, a bill has surfaced in the New York Assembly (following a companion bill that was introduced in the New York Senate last Spring) that seeks to impose a five percent tax on the “gross income . . . [from] every corporation that derives income from the data individuals of this state share with such corporations.” The new data tax is being proposed for inclusion in Section 209 of the New York Tax Law, which is the current general imposition provision for the Article 9-A New York Franchise Tax (i.e., New York’s version of a corporate net income tax for general corporations). Unlike the bills proposed in Maryland and Nebraska, this proposal is not targeted at corporations that engage in digital activities; its target audience is all corporations (except perhaps those that are subject to tax under different articles of the New York Tax Law). Funds from this tax are to be directed to a new “data fund” for eventual distribution back to New York taxpayers, so New Yorkers can “share in the wealth that is created from their data” according to the bill sponsors. While the proposal devotes significant time to the establishment of this data fund, it contains no guidance on the parameters of the tax.
All we know is that the tax would be imposed on the gross income of corporations that derive income from data shared with them by individuals of New York State. The use of the term “gross income” is in sharp contrast to the New York Franchise Tax base, which is generally the business income of a corporation. The business income of a corporation is the income required to be reported to the United States Treasury Department (generally, U.S. federal taxable income) subject to certain state-specific addition and subtraction modifications, including subtractions for “investment income” or other types of exempt income. Business income is then apportioned to New York. In choosing to tax “gross income,” this proposal does not appear to allow for offsetting deductions and seemingly ignores the concept of apportionment, an omission that creates a serious constitutional infirmity. Additionally, the New York Tax Law does not contain a definition of “gross income,” therefore a question arises as to the appropriate tax base: worldwide or U.S.?
Another question is whether New York’s statutory economic nexus provisions apply to this tax. By carving the tax out from the general Franchise Tax, questions arise regarding what level of activity is sufficient for the imposition of the data tax. For example, does merely deriving income (for example, from a customer outside of New York) that is connected to the data of New York individuals subject a corporation to this absurd tax? The proposal also does not define the critical phrase “individuals of this state.” For example, does this refer to New York residents, the location of the individual at the time they provide the data, or individuals with some other connection to New York? Under any of these interpretations, the individual’s status may not be readily determinable by a corporation gathering data shared by that individual.
What is clear is that states seem to feel emboldened after Wayfair. Unfortunately, while Wayfair may have eliminated the physical presence nexus standard it did not eliminate fundamental Due Process and Commerce Clause constraints on state taxation or the need for well-reasoned and sound tax policy.