Washington: Lawmakers consider first-ever tax on the sale of personal info

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In early February, Rep. Norma Smith introduced House Bill 1904, which would establish a new 3.3 percent business and occupation tax (B&O) on businesses that sell or exchange the personal information of Washingtonians, while also exempting the sale of personal information from the state’s sales and use taxes. 
Asserting that “[w]e must make inroads where we can in an effort to safeguard your private information,” Rep. Smith, on her website, justified the measure as one that would “help offset the significant new cost of cybersecurity, data protection and new educational industry demands.” To that same end, she also introduced House Bill 1421, which would protect consumers’ payment credentials in business transactions with state agencies by prohibiting the agencies from storing these payment credentials on state data systems, and requiring them to eliminate any existing payment data from their systems by July 1, 2020. 
The House Technology & Economic Development Committee and the House Committee on Finance both passed the measure, on March 1, 2017, and March 14, 2017, respectively. 
According to the revenue estimate in the fiscal note, the state general fund would realize an additional $3.1 million in fiscal year 2018, and $15.8 million in fiscal year 2019. However, local jurisdictions would experience a sales tax loss of $1.5 million in fiscal year 2018 and $7.8 million in fiscal year 2019. The measure would affect 20,000 existing taxpayers and 5,000 potential new taxpayers, and cost the Department of Revenue $394,100 to administer and implement in fiscal year 2018. 
The measure defines personal information as “information that identifies, relates to, describes, or is capable of being associated with, a particular individual.” This includes, but is not limited to, these items:
  • Names;
  • Physical addresses;
  • Mailing address, or location information;
  • Phone numbers;
  • Email addresses;
  • Internet protocol addresses;
  • Physical characteristics;
  • State license or identification numbers;
  • Federally issued identification numbers or information;
  • Financial institution identification numbers or information;
  • Insurance, medical, employment, and educational information;
  • Browser habits, consumer preferences; and 
  • Any other data attributed to an individual and used for marketing, or for determining access and costs related to insurance, credit, or health care.
HB 1904 is grounded in these three assumptions:
  • The sale of personal data is a $300 billion business in the United States;
  • Washington's share of the activity is 2.2 percent of the U.S. total based on population; and
  • This activity is growing at 5 percent per year.
Not surprisingly, some businesses oppose the measure. GeekWire reported that Representatives of TechNet, the Association of Washington Business, the Consumer Data Industry Association, the Washington Bankers Association and CompTIA all testified against the bill. Among their complaints were the following:
  • The current B&O tax is only 1.5 percent, and Smith’s measure more than doubles it;
  • The tax would cause data brokers to leave the state without protecting people’s private information;
  • The 3.3 percent rate would force data sellers to pay the highest B&O tax rate in the state;
  • The new tax would increase credit bureau costs;
  • No other state imposes a tax specifically on the personal data sellers;
  • The definitions and language in the bill are too broad, which would complicate the law’s interpretation and make compliance more difficult;
The Technology & Economic Development Committee’s House Bill Report notes that taxpayers with a substantial nexus to the state are subject to the B&O tax. This means that a seller need not have a physical presence in the state; instead, a taxpayer is considered to be engaging in activities within the state, and thus subject to the tax, when it generates gross income of a business from sources, such as customers or intangible property, within the state. 
The B&O tax is currently configured to require those nonresident business entities that are organized or commercially domiciled outside of Washington to pay the B&O tax if they have, among other things, either more than $50,000 of payroll or property in Washington, or more than $250,000 of receipts from Washington. 
HB 1904 is scheduled to take effect on January 1, 2018.

Effort to prohibit income tax fails

Another topic on Washington’s lawmakers’ minds was a proposed amendment to the Washington Constitution that would prohibit a state income tax. Washington does not currently have an income tax, but SJR 8204 would go further to amend the state Constitution to prohibit the taxation of individual income. In February, the Senate Committee on Ways & Means passed the measure, but in early March, it failed to receive the two-thirds majority vote necessary, 27 to 22. 
In 1933, the state’s Supreme Court determined that the state’s Constitution prohibits an income tax. But some experts believe that more modern legal scholarship, and United States Supreme Court case law, provide that income is not property, such that an income tax would not violate the Washington State Constitution today. Even so, theLens revealed that some lawmakers thought the effort was pointless, while others are hoping to pass a progressive income tax, and/or related measures to minimize the tax burden on poor and working class people. The regressive cigarette tax is one on their radar.

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