Strategic Surrogates or Sad Sinners: U.S. Taxation of Bartering in Digital Services

• Published date: 01 December 2021
• Author: Mark J. Cowan,Joshua Cutler,Ryan J. Baxter
• Date: 01 December 2021
• DOI: http://doi.org/10.1111/ablj.12196

American Business Law Journal

Volume 58, Issue 4, 849–890, Winter 2021

Strategic Surrogates or Sad Sinners:

U.S. Taxation of Bartering in Digital

Services

Mark J. Cowan,*Joshua Cutler** and Ryan J. Baxter***

The COVID-19 pandemic caused both a surge in technology use and a deteriora-

tion in government finances. At the same time, big tech companies are under scru-

tiny by lawmakers for tax avoidance, antitrust issues, and other concerns. These

realities call for governments to reassess tax policy toward tech companies and for

tech companies to reassess legal strategy toward taxes. State and federal govern-

ments’ tax bases are eroding because of the noncash, barter nature of modern

transactions. When a taxpayer uses “free”digital services such as e-mail, social

media, or search engines, she pays via access to her personal data or attention.

From a legal and policy standpoint, these barter transactions should be taxed just

as if cash had changed hands, but because it is not practicable to identify, value,

and tax the data and time of each user, they have escaped taxation, giving many

tech companies an unintended tax advantage. To address this unfairness, this arti-

cle proposes a surrogate tax, through which the tech company acts as a proxy to

pay the tax that is technically the liability of its users. In contrast to Digital Ser-

vices Taxes (DSTs), which have been the main focus of policy makers and the

extant literature, surrogate taxes adhere closely to standards of good tax policy,

providing an administrable means of capturing untaxed digital barter while

advancing fairness across the industry’s business models. From a legal strategy

*Professor of Accountancy and Director, Master of Science in Accountancy-Taxation Pro-

grams, College of Business and Economics, Boise State University. The authors thank the

organizers, discussants, moderators, and participants in the 2021 online symposium on Eth-

ical Leadership and Legal Strategies for Post-2020 Organizations, presented by the Tobias

Leadership Center at Indiana University, the Center for Legal Studies & Business Ethics in

the Spears School of Business at Oklahoma State University, and the American Business Law

Journal.

**Assistant Professor of Accountancy, College of Business and Economics, Boise State

University.

***Associate Professor of Accountancy and Director, Master of Science in Accountancy Pro-

grams, College of Business and Economics, Boise State University.

©2021 The Authors.

American Business Law Journal ©2021 Academy of Legal Studies in Business.

849

standpoint, this article argues that tech companies themselves should support sur-

rogate taxes, to avoid facing more onerous, “sin”-like taxes, such as DSTs.

INTRODUCTION

The COVID-19 pandemic caused both a deterioration in government

finances and a surge in technology use. Efforts to fight the coronavirus

and address the associated economic downturn caused the U.S. federal

deficit to triple between fiscal years 2019 and 2020.

1

Likewise, many state

governments have seen increased expenditures with a decline in tax rev-

enue.

2

In contrast, large technology companies have benefited from the

pandemic.

3

Those same companies, such as Alphabet (Google), Amazon,

Apple, and Facebook, are under scrutiny by lawmakers concerned about

antitrust issues and the industry’s impact on society.

4

Once lauded as

providing amazing technological advances, technology companies are

increasingly being viewed as data miners invading our privacy, exploiting

1

See CONGRESSIONAL BUDGET OFFICE,MONTHLY BUDGET REVIEW,SUMMARY FOR FISCAL YEAR

2020 (Nov. 9, 2020).

2

See Heather Gillers & Gujan Banerji, U.S. States Face Biggest Cash Crisis Since the Great

Depression,W

ALL STREET J. (Oct. 28, 2020, 2:45 p.m.), https://www.wsj.com/articles/u-s-states-

face-biggest-cash-crisis-since-the-great-depression-11603910750; see also Louise Sheiner &

Sophia Campbell, How Much Is COVID-19 Hurting State and Local Revenues?,B

ROOKINGS

REPORT (Sept. 24, 2020), https://www.brookings.edu/blog/up-front/2020/09/24/how-much-is-

covid-19-hurting-state-and-local-revenues/.

3

See Dana Mattioli, Big Tech Companies Reap Gains as COVID-19 Fuels Shift in Demand,WALL

STREET J. (Oct. 29, 2020, 9:15 p.m.), https://www.wsj.com/articles/amazon-sales-surge-amid-

pandemic-driven-online-shopping-11604003107.

4

See,e.g., SUBCOMMITTEE ON ANTITRUST,COMMERCIAL,AND ADMINISTRATIVE LAW OF THE COMMIT-

TEE ON THE JUDICIARY,INVESTIGATION OF COMPETITION IN DIGITAL MARKETS:MAJORITY STAFF

REPORT AND RECOMMENDATIONS 132–376 (Oct. 6, 2020) (providing general overviews of

“dominant online platforms”and explaining their societal influence). Societal issues include

concerns about user privacy, the spread of misinformation, suppression of free speech, for-

eign government interference in U.S. elections, the segmentation of society, the modifica-

tion of behavior, addiction to smartphones and applications, and the impact on mental

health. See generally TIM WU,THE ATTENTION MERCHANTS:THE EPIC SCRAMBLE TO GET INSIDE

OUR HEADS (2016); SHOSHANA ZUBOFF,THE AGE OF SURVEILLANCE CAPITALISM:THE FIGHT FOR A

HUMAN FUTURE AT THE NEW FRONTIER OF POWER (2019); The Social Dilemma (Netflix, 2020).

850 Vol. 58 / American Business Law Journal

our behavior, and making a lot of money along the way.

5

The pandemic

has exacerbated the negative views of the industry and added urgency to

the debate over how large technology companies should be taxed. In this

post-2020 reality, governments must reassess their tax policy toward

technology companies, and technology companies must reassess their

legal strategy toward taxes.

The debate over taxing technology companies began in non-U.S. juris-

dictions and the Organisation for Economic Co-operation and Develop-

ment (OECD).

6

Many countries feel that they are not getting a fair share

of the revenue from the industry based on the substantial user bases they

provide.

7

These “market”countries feel that technology companies can

easily shift income to low- or no-tax jurisdictions by the careful place-

ment of their intellectual property.

8

In response, several countries have

proposed, or have adopted, Digital Service Taxes (DSTs) on the gross

revenue from digital services (such as advertising) of companies that

meet certain global revenue and in-country revenue thresholds.

9

Some

5

See TIM HARFORD,THE DATA DETECTIVE:TEN EASY RULES TO MAKE SENSE OF STATISTICS

158 (2021) (noting the “change in the zeitgeist between 2013 and 2016”when “[c]

heerleading gave way to doomsaying”and “[b]ig data went from seeming transformative to

sinister”).

6

A major OECD project, the Inclusive Framework on Base Erosion and Profit Shifting

(BEPS), focuses broadly on multinational enterprises. The OECD defines BEPS as “tax

planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits

to low or no-tax locations where there is little or no economic activity or to erode tax bases

through deductible payments such as interest or royalties.”What Is BEPS?,O

RG.FOR ECON.

CO-OPERATION AND DEV., http://www.oecd.org/tax/beps/about/ (last visited Aug. 20, 2021).

BEPS includes fifteen “action items.”The most relevant here is “Action 1: Tax Challenges

Arising from Digitalisation.”Action 1: Tax Challenges Arising from Digitalisation,O

RG.FOR

ECON.CO-OPERATION AND DEV., http://www.oecd.org/tax/beps/beps-actions/action1/ (last visited

Aug. 20, 2021). Action 1 is concerned with how the international tax system should address

that a local physical presence (previously the touchstone of government taxing ability) is no

longer required when goods and services are delivered digitally. Id.

7

See generally CONGRESSIONAL RESEARCH SERVICE,DIGITAL SERVICE TAXES (DSTS): POLICY AND

ECONOMIC ANALYSIS 4–5 (Feb. 25, 2019) [hereinafter CRS DST REPORT].

8

See id. at 1–3. Governments police shifting by reviewing cross-border transactions between

related parties to ensure they are charging each other fair market value, arm’s length

prices. E.g., I.R.C. § 482. The traditional arm’s length approach can be hard to apply to

modern technology companies because their valuable intellectual property (software, algo-

rithms, etc.) is proprietary and lacks the comparable goods or services needed to establish

an arm’s length price. CRS DST REPORT,supranote 7, at 2–3.

9

CRS DST REPORT,supranote 7, at 3–8.

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