Gov. Ned Lamont said in a press conference on Thursday that he’d be willing to consider a proposed tax on large digital advertisers like Google and Facebook.
I think it deserves a look,” Lamont said, adding that the state at one time relied on corporate income tax for 20 to 25 percent of its revenue. “Now, very few companies pay it, and certainly not those big, digital out of state companies.”
Lawmakers have introduced two bills — H.B. 6187 and S.B. 821 — that would “establish a ten per cent tax on the annual gross revenues derived from digital advertising services in the state for any business with annual world-wide gross revenues exceeding ten billion dollars.”
But those proposals have met opposition from a number of retailers and Connecticut Retail Merchant Association, who say that the cost won’t be borne by Google or Facebook, but will be passed down to smaller businesses across Connecticut.
Tim Phelan, president of the Connecticut Retail Merchant Association, sent a letter to Lamont in March, asking him to oppose the legislative proposal. Twenty-one retailers signed the letter.
Phelan said that the large corporations aren’t just going to absorb these extra costs.
“The smaller retailer is now going to see their advertising rates go up, and at a time when the consumer is looking all over the place for where to shop and how to shop, particularly on social media sites,” said Phelan. “We have to be there.”
Karen Munson, owner of Munson’s Chocolates, which has eight locations in the state, said that the timing of the bill was an added problem, given businesses are struggling with both a loss of revenue during the pandemic and the need to shift even more toward online advertising.
“This tax has nothing to do with recovery for us. It’s going to have the opposite effect,” she said.
According to Munson, in the last year her business shifted 100 percent of its advertising to digital media. The majority, she said, to Amazon, Facebook and Google.
“It’s a challenge to reach consumers,” she said, explaining that to reach a new generation of “cord-cutters” online advertising has become critical.
Phelan estimated that his members spend between 30 and 40 percent revenues on digital advertising. Munson estimated the costs at about 30 percent for her business.
“It’s the wrong tax at the wrong time,” said Phelan.
State Rep. Sean Scanlon, D-Guilford, was more supportive.
“I don’t see why that would need to be passed onto them,” he said. “I think these companies are making a truly staggering amount of money … I don’t think that this tax would necessarily even be a drop in the bucket for them.”
Google reported revenues of more than $181 billion in 2020. Amazon reported $386 billion of revenues in 2020, an 84 percent increase from the previous year.
Scanlon said that language could be added to the legislation to prevent the larger companies from passing the cost down to their customers.
State Rep. Holly Cheeseman, R-East Lyme, who has proposed similar legislation, said it was worth debating tax policies and business structures that can address the growing digital economy.
“I thought it was worth having the conversation, because we do see huge — billions and billions of dollars of digital advertising revenue derived from these platforms,” said Cheeseman.
Cheeseman also said that she’d spoken with business owners and that she understood these policies could have a negative impact on smaller businesses. She said that was not the intent of the bill.
“I am the last person to want to do something to harm small business,” said Cheeseman.
But she also said that large corporations like Google and Amazon were in themselves threats to brick-and-mortar retailers.
“Maybe this would get more money into the pockets of Connecticut residents to spend on their local businesses, who knows?” she said.
“A Fool’s errand”
In February, Maryland became the first state in the country to pass a law taxing digital revenue. Other states like New York, Indiana and West Virginia have advanced similar legislation. Big tech lobbyists and the U.S. Chamber of Commerce filed a lawsuit against the Maryland law, claiming that the taxation model was unconstitutional.
Richard Pomp, a member of the faculty at the University of Connecticut School of Law specializing in tax law, said that passing a digital advertising tax like the Maryland law would be “a fool’s errand,” given that the idea is already facing litigation and questions of constitutionality.
“There are better ways to have gone about this,” Pomp said.
If the Biden administration could address the issue on a national level, Pomp said, rather than leaving it on a state-by-state basis, it could stop these companies from pitting states against one another in a competition for business.
But Cheeseman said she didn’t think the federal government was inclined to propose this type of tax. In fact, the United States has threatened to impose tariffs on countries that impose taxes on the tech giants — arguing that it would “discriminate” against large U.S.-based companies.
On a state level, Pomp said that a better model than Maryland would be New York, which has proposed a data mining bill that would levy a five percent tax on companies that collect data on New York State residents. He said that states could also collect corporate taxes or sales taxes on all forms of advertising, including those of multi-billion dollar companies.
But Pomp said there is no way to stop the tech companies from then passing down the costs of additional taxes onto smaller businesses that advertise with them.
“It’s all a matter of leverage and market power,” said Pomp. “It’s more than likely it will increase what customers pay. There’s no way to protect against it.”
Munson agreed that the tax would inevitably affect businesses like hers.
“On the surface, it sounds so appealing and so easy,” she said. “It completely ignores what’s going to happen with that tax.”