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Digital Service Tax

November 14, 2018

​Fenwick tax partner Larissa Neumann talked to Law360 about the issue of whether there should be digital service tax.

Neumann noted that this issue isn’t new — in fact, the Fifth Circuit and Tax Court had ruled in a case over 70 years ago that the Piedras Negras Broadcasting Company’s income came from its physical broadcasting facility in Mexico and was not taxable by the IRS as U.S.-sourced income, even though the vast majority of the company’s advertisers and listeners were from the U.S.

Against this backdrop is the fact that the United Kingdom and the European Union are considering digital service taxes—which would tax the revenue from online companies for activities that can be connected to users in those countries—as well as the U.S. Supreme Court’s ruling in South Dakota v. Wayfair establishing that states were no longer bound by standards requiring a physical presence as they collect sales tax.

There continues to be discussion whether the economy has changed to the point where the Piedras Negras findings no longer apply, or whether the case remains relevant as policymakers continue their debate where value is truly created—on the web or in the cloud.

"It establishes that we don't need to create new rules; these are the rules and they've worked well," Neumann said.

She told Law360 that policymakers would be tempted to look to the users or advertisers as the source of income, but the principle still holds that the value is truly generated where a platform is created or maintained.

"Nobody's going to advertise on something that's not a valuable platform. They pay because you have a good platform,” Neumann said.

The full article is available on Law360 (subscription required).​

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