Digital Service Tax, Consumption Tax and the Reverse Application of the Step Transaction Doctrine

Both France and Italy have recently introduced Digital Services Taxes (DSTs) that are aimed to tax digital sales by giant U.S. technology firms such as Amazon and Facebook in their local jurisdictions. Yet these countries, as well as any other other country with a Value Added Tax (VAT), and states in the United States, might have additional taxing rights due to their consumption tax (VAT in Europe and sale taxes in the United States). This is due to the reverse application of the step transaction doctrine, which reveals the reality of the interaction between Facebook and its users. Under such application, the seemingly “free” transaction between Facebook and its users is expanded to two distinct transactions. Under the first transaction, users are paying a monthly subscription fee to Facebook for access to its platform. Since this service is consumed in the place where the users reside, it should be subject to VAT or sales tax. The second transaction is the licensing payment from Facebook to its users for the right to collect and use their data and information. Generally, this transaction should not be subject to VAT or sales tax, to the extent that the users are private individuals. The additional revenue that is subject to the consumption tax in a specific state or country under this analysis should be estimated based on the revenue Facebook is currently making from advertisements to users in that state or country