
Sarkozy proposes ad tax on Google - rglovejoy
http://www.ft.com/cms/s/0/1df484d4-fbc7-11de-9c29-00144feab49a.html
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grellas
The propensity of governments to want to impose opportunistic forms of
taxation (and other potential burdens such as localized regulatory rules) is
strong. The problem is one of ubiquitous commercial activity that touches
multiple local jurisdictions, each of which might choose to say, "if it
crosses our borders, we want to put our hands on it" (by taxing it, regulating
it, etc.). And that problem is much compounded when the commercial activity
sought to be taxed or regulated remains in a nascent state because taxing or
regulating such early-stage activity is as likely to kill or seriously impair
it as it is to help anyone.

The U.S. had its own history with this issue during the era when it was taking
shape as a country amidst the rising industrial revolution where the several
states sought to assert their individual tax/regulatory authority over multi-
state commercial activities that cut across their borders. This created
serious problems that were not really solved until the Interstate Commerce
Clause (under the federal constitution) finally let the national authority
bring order to the situation.

Today, given that the Commerce Clause has this last century been used
primarily as a basis (for Congress) to justify large expansions in
government's power to regulate interstate commercial activity, we forget that
this Clause was used during its first century mostly to _prevent_ governments
(local and state) from interfering with such activity.

The classic case (Gibbons v. Ogden - opinion by Chief Justice John Marshall in
1824) involved the state of New York's attempt to give a steamboat monopoly to
one firm within its borders, meaning that the multiple steamboat firms
operating on any river that happened to cross through New York would cease
having the capacity to operate lawfully as soon as their navigation path
touched a New York border. The legal argument in support of New York's right
to do this is summed up as follows: "[Ogden] contended New York could control
river traffic within New York all the way to the border with New Jersey, that
New Jersey could control river traffic within New Jersey all the way to the
border with New York, leaving Congress with the power to control the traffic
as it crossed the state line."
(<http://en.wikipedia.org/wiki/Commerce_Clause>)

Of course, such a position would have led to commercial chaos, where local
protectionist schemes (for taxation, regulation, etc.) could have been used in
multiple ways to choke, in this case, the development of the steamboat
industry and many other forms of rising commercial activity made possible by
industrial development. The mercantile mindset of the prior centuries, tied to
shopkeeper activity that was highly localized, was purely protectionist - "we,
the local authorities, will do everything in our power to protect our local
weavers (or whomever) from outside influences." That mindset actually made
sense in the era when most people's livelihood derived from an agrarian
economy, when industry was barely formed, and when whatever industry or
commerce did exist was purely local - in such an era, each local governing
jurisdiction was its own little fiefdom and could further or impede commerce
pretty much as it liked with only its local citizens feeling the impact. Such
thinking made no sense for an industrialized society unless the broader
society were content to watch a limiting or crippling of modern forms of
commercial activity in favor of an endless array of localized interests that
sought to protect themselves at the expense of the development of the whole.
And that is why, at least in the U.S., the old mercantile forms of thinking
largely fell away and the country went on a trajectory of unprecedented
commercial growth throughout the 1800s and beyond.

Of course, state and local governments need the power to tax and regulate. The
key to the new thinking was that they could not impose _discriminatory_ forms
of regulation or taxation that unduly burdened interstate commerce. This laid
a foundation where we today take the basic principles for granted and do not
even think about them (for example, we would regard it as laughable for, say,
the state of New York today to try to say, e.g., that Bing has an exclusive
monopoly to conduct web-based search services on transactions affecting
residents within its borders).

So we today have a tension between the legitimate right of state and local
governments to tax and regulate activities within their borders, on the one
hand, and the outer bound on that activity (mostly through the Interstate
Commerce Clause) preventing taxation/regulation that is discriminatory and
unduly burdensome on interstate commerce. That tension is not always easily
resolved, however, as the lines are often blurry on whether what the local
governments are doing falls within one category or the other.

Concerning the Internet, therefore, Congress passed a moratorium back in 1997
on any form of discriminatory taxation on e-commerce activity by state or
local governments and the thinking behind this was precisely that the U.S.
government did not want to see a young industry choked off or devoured by a
bunch of rapacious local jurisdictions trying to get their hands on it for
their own local purposes.

The situation with France today wanting to impose discriminatory taxes in
favor of its local interests raises parallel issues to those dealt with by the
U.S. as described above. And the fate of e-commerce activity will ultimately
depend on whether a rational system can be put in place to prevent such
activity from unduly interfering with it while still allowing the various
jurisdictions affected by it a reasonable scope to regulate/tax in a way that
is not discriminatory and unduly burdensome.

When it comes to national sovereignty, however, there is no check on
discriminatory activity at the macro level comparable to the U.S. Commerce
Clause and it is possible (indeed probable) that many countries such as France
will seek to impose old mercantile forms of thinking on modern e-commerce that
could potentially seriously harm such activity.

Don't know what the solution may be. But these are the key issues and the
stakes are pretty high.

~~~
graphene
Thanks grellas for another insightful post; It's not the first time I've
enjoyed reading your opinion a legal aspect of technology.

In this case, I think it's interesting to note that the French may have gotten
this idea into their heads too late; Google (to take the most prominent
example) carries far more economic clout now than it would have in 1997, or
the early steamboat companies would have had in the 1800s. Consider the
implications of Google deciding not to pay the tax, preferring to ignore all
queries from French IP addresses; While this would leave a huge space for
aspiring French search companies, that can't be the effect Sarkozy is hoping
for, can it?

~~~
grellas
Thanks very much for the kind words - don't know what Google can do but I
agree it has a lot more leverage today than it would have had in its early
days. Whatever happens, it will be interesting to see how this unfolds.

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xenonite
google cache:
[http://209.85.129.132/search?q=cache:5Vg1jqkHi_QJ:m.ft.com/c...](http://209.85.129.132/search?q=cache:5Vg1jqkHi_QJ:m.ft.com/cms/s/0/1df484d4-fbc7-11de-9c29-00144feab49a.html%3Fcatid%3D75%26SID%3Dgoogle)

