Legal Problems with Digital Taxes in the United States and Europe

18 Pages Posted: 2 Feb 2023

See all articles by Ruth Mason

Ruth Mason

University of Virginia School of Law; Max Planck Institute for Tax Law and Public Finance

Date Written: February 2, 2023

Abstract

This chapter considers potential legal challenges to digital taxes in the European Union and United States. Because they apply only to companies with very large revenues and to very narrow revenue streams, digital taxes may apply mainly to nonresident companies or companies engaged in interstate, rather than merely in-state, commerce. This may constitute discrimination-as-applied in violation of the laws of the United States and the European Union. In the European Union, the taxes could violate the prohibition in the fundamental freedoms on nationality discrimination, which prevents a Member State from discriminating against a company established in a fellow Member State. And in the United States, digital taxes may discriminate against international or interstate commerce, which could violate the dormant Commerce Clause doctrine of the U.S. Constitution. Indeed, a court in Maryland has already held Maryland's digital tax to discriminate. Additionally, federal law in the United States that forbids taxing electronic commerce more than other types of commerce may preclude state digital taxes, as the Maryland court also held. To reduce the likelihood of digital taxes being held unconstitutional or in violation of the Treaty on the Functioning of the European Union, U.S. and EU Member State should consider: (1) lowering the revenue thresholds for triggering digital taxes and (2) applying them to a broader base, and in particular one that has not been manipulated to tax out-of-state digital operators while excluding in-state digital operators. In both places, it is important that enacting legislatures refrain from expressions of protectionist intent.

Keywords: digital tax, tax discrimination

Suggested Citation

Mason, Ruth, Legal Problems with Digital Taxes in the United States and Europe (February 2, 2023). Available at SSRN: https://ssrn.com/abstract=4346279 or http://dx.doi.org/10.2139/ssrn.4346279

Ruth Mason (Contact Author)

University of Virginia School of Law ( email )

United States

Max Planck Institute for Tax Law and Public Finance ( email )

Marstallplatz 1
Munich, 80539
Germany

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