The California legislature is proposing a 7.25% tax on “data extraction transactions in the state” through Senate Bill (“SB”) 1327. If enacted, the bill would target businesses that monetize data extracted from users (e.g., social media companies, large search engines, online retailers, etc.). “Data extraction transaction” means: “(A) A taxpayer sells user information or access to users to advertisers” and“(B) The taxpayer engages in a barter by providing services to a user in full or partial exchange for the ability to display advertisements to the user or collect data about the user.”
Unique features of the proposed tax include:
- The tax would apply to the largest digital advertising companies with annual gross revenue of $2.5 billion from California sources alone – only a very small handful of companies would be directly impacted;
- The tax would be apportioned “based on the location of the user” determined by “shipping address, phone number area code, global satellite positioning data, and internet protocol address data …”
- The bill does not prohibit the affected digital advertisers from passing the tax through to their customers on invoice (in contrast to the Maryland “Digital Advertising Gross Revenues Tax”);
- The tax has been characterized by legislators as a “data extraction mitigation fee,” and if enacted, was expected to generate up to $500 million of annual tax revenue to fund local journalism.
- News media entities are excluded from the tax. A “news media entity” is “primarily engaged in the business of newsgathering, reporting, or publishing or broadcasting articles or commentary about news, current events, or culture.”
If passed into law, California would be at the forefront of states targeting large digital advertisers. On May 16, the California Senate Appropriations Committee gave a “do pass” to SB 1327, and the bill was passed by the whole Senate on June 27th. Currently, SB 1327 is being considered by the California Assembly.
Previously, the bill did not appear to have sufficient votes to advance out of the Senate by the required deadline. However, the bill was amended to include an urgency clause, allowing it to survive beyond the normal deadline and advance. Another digital advertising tax bill (Assembly Bill (“AB”) 2829) was proposed earlier this year and mirrored the controversial Maryland digital advertising tax but ultimately stalled in the legislature. The path for a digital advertising tax in California remains uncertain. The result of ongoing litigation in Maryland, along with coordinated efforts to impose new multistate taxes on large digital advertisers, could propel the proposed data extraction tax through the Assembly and into law.
Contact the Authors: Drew Hemmings and Jimmy Lucas
