New York plans 5% corporation tax on gross receipts

On January 21, A. 9112 was presented to the New York Assembly. An identical related Senate bill, S. 6102, was referred to the Senate Committee on Budget and Revenue after being introduced in May 2019. The bills would impose an additional 5% tax on the gross income of “any company that derives revenue from data”. individuals in that state share with those corporations. The bills do not provide further detail or limitation on the scope of the proposed new tax wording.

The bills would also establish a six-member Data Fund Board to invest the tax revenue collected and distribute the net profits “to each taxpayer in the state” in a manner determined by the Board. If enacted without amendment, the bills would enter into force 180 days after their enactment.

As written, the proposed tax in New York would unconstitutionally apply to all income earned worldwide by a company deriving data revenue from New Yorkers. A state tax on a multistate business must “be equitably allocated to reflect the activities conducted within the state.”

The tax as drafted is so broad that it would apply to virtually all businesses. Every company collects data and uses it to market or make a sale, and any company whose revenue comes from data from New York customers would be subject to the new tax on its total revenue. “Data” is a broad term. If a business collects zip codes or phone numbers at checkout, requests an email address to join a mailing list, counts customers entering or leaving the store, collects website clicks or open data, or requests information from customers, such as their size or shipping address, before making a sale, it would apparently be subject to this tax. For many of these companies, a tax on gross receipts at a rate of 5% would wipe out all profits, which would equate to a corporation tax of over 100%. At this point, a fee to engage in data collection could become so punitive that it violates the due process clause. Another obvious due process problem is that the lack of definitions and broad scope of this proposal could invalidate it on grounds of invalidity for vagueness.

Any serious attempt to address these constitutional issues, such as specifically applying the tax only to big tech companies, would add new problems under the Permanent Internet Tax Freedom Act (PITFA). A tax on the digital use of data while non-digital use of data is not taxed in the same way would violate the PITFA prohibition on tax discrimination against e-commerce.

First Maryland, then Nebraska, now New York. The repeated introduction of taxes targeted at digital businesses in early 2020 appears to be the start of an alarming trend of legally suspect tax proposals that we are watching closely.

© 2022 McDermott Will & EmeryNational Law Review, Volume X, Number 22

Luisa D. Fuller