By Adam B. Thimmesch
It is an oft repeated adage that if you are not paying for a product, then you are the product. This comment has traditionally been directed at products like Google, Facebook, and Instagram, but it is not just large software companies that are making use of consumer data as “payment” for their services. NPR recently published a story about a café in Rhode Island that is taking this one step further. They sell coffee in exchange for data.
According to the article, students and faculty at Brown University are the only customers allowed at the shop, and students get free coffee by allowing the coffee shop to gather and sell their data. The students also receive corporate pitches from the café’s workers. (Apparently professor data is not so valuable. They have to pay.) According to the article:
To get the free coffee, university students must give away their names, phone numbers, email addresses and majors, or in Brown’s lingo, concentrations. Students also provide dates of birth and professional interests, entering all of the information in an online form. By doing so, the students also open themselves up to receiving information from corporate sponsors who pay the cafe to reach its clientele through logos, apps, digital advertisements on screens in stores and on mobile devices, signs, surveys and even baristas.
I have previously written about the implicit personal data barters that are making up a growing part of the worldwide economy, but this coffee shop is engaging in a much more naked version of the practice. The barter isn’t hidden through the use of tracking programs, cookies, or other forms of hidden data mining. The coffee shop discloses exactly what is happening.
Why is this so interesting to me as a tax scholar? As I detail in my article, this type of barter is fundamentally no different than traditional, taxable barter exchanges. Technically, then, the students generate income when they receive coffee in exchange for their data and time, the coffee shop generates income on the sale of its coffee, and the transactions should be subject to the state’s consumption tax.
The income tax consequences follow from the breadth of Code Section 61 and the IRS’ long-standing position on barter exchanges. With regard to sales taxes, Rhode Island law imposes sales tax on all “sales of retail.” The term “sales” is specifically defined to include barters. The resulting tax is based on the “sales price,” which includes “the total amount of consideration, including cash, credit, property, and services, for which personal property or services are sold.” That seems broad enough to apply to barters involving data and certainly those involving the provision of services (e.g., agreeing to listen to pitches from corporate sponsors). The proper characterization of personal-data barters is unclear, but they seem to fall within these definitions under any construct.
Having said this, I recognize that actually taxing these transactions would be incredibly difficult, and the idea is of the sort that gets the public rolling their eyes at academics. There are obvious problems of valuation, identification, administration, and politics. The impact of such a tax could also likely be felt most heavily by those with lower levels of income. There are many reasons why data transactions will not ultimately be taxed directly.
But it is important to recognize that these transactions are escaping tax. At least initially, that is. The companies collecting consumer data will ultimately pay tax when they monetize those data, but the companies can shift where that income is reported under current international and state tax sourcing rules. The personal income tax and the consumption tax, of course, are likely lost forever.
I think that these distortions and exemptions, along with the growing market in personal data, require that we consider how we are going to address these transactions in the future. Providing an implicit tax exemption for these transactions will not only buttress this economy in data, but it might counteract our efforts to protect individual privacy and to raise consumer awareness of the transactions that are taking place. It also undercuts efforts to provide more explicit markets for personal data, which would be much easier to tax. (Consider, for example, personal data banks, which would centralize these transactions and maybe require direct cash compensation for the use of data. We certainly know how to tax that type of exchange. Should we impose a tax “penalty” on transaction structures that allow consumers more control of their information?)
Do I want to tax your Google search? Not exactly. Do I think that Google should obtain a tax advantage over other software companies by selling its products for data rather than for cash? Absolutely not. This coffee shop story is quaint, but it highlights this growing market for data and how it could undermine our traditional tax instruments. It is worth thinking about whether and how we should account for that in our revenue system.