Nebraska Shouldn’t Tax Social Media Accounts

Under LB 1025, Nebraska would implement a first-in-the-nation tax on social media accounts, at rates of up to $6 per account per year. Other states have considered similar taxes, but no state has adopted a social media tax to date, and with good reason. The proposed tax could deprive Nebraskans of free access to online services and undermine consumer privacy, and its design will result in substantial double taxation and extremely high compliance costs. 

The legislation imposes a graduated-rate tax based on the number of users in the state, and includes a series of tax cliffs. Growing from 249,999 to 250,000 users, for instance, increases a social media company’s tax liability by $240,000. Above 500,000 in-state accounts, the tax cost is $0.50 per account per month, or $6.00 per year. In practice, however, the tax is likely to apply to far more accounts than there are actual in-state users. 

A user is presumed to be in Nebraska if their home or mailing address is in the state, or, in the absence of a known address, if they access the social media website or app from an IP address in the state. Most social media accounts, of course, are free and do not require identity verification or a mailing address to sign up, meaning that social media companies would have to fall back on IP addresses in many cases. 

This raises an obvious issue: IP addresses change. A nonresident scrolling through social media on their phone at Eppley Airfield or when catching a game at Memorial Stadium would ping using a Nebraska IP address, and would count—at least initially—as a Nebraska user for purposes of the tax, as would any account using a virtual private network (VPN) that resolves to Nebraska. 

Companies would be allowed to submit documentation rebutting this assumption (presumably by showing that the vast majority of the account’s access was from other states), but this involves incredibly high compliance and administrative costs, and substantially impairs the privacy of social media accountholders, as it would require sharing location documentation for every nonresident account (without a known mailing address) that accesses social media from within the borders of Nebraska. 

Many social media accounts are anonymous, and many users have more than one account on the same platform, all of which would increase tax liability and may prompt companies to require identity verification, impose new restrictions on creating multiple accounts, or put more features behind “walled gardens,” at least for Nebraska-based users, where subscription charges for premium features defray the costs of the tax. 

Moreover, if other states follow Nebraska’s lead, companies could end up paying the tax on the same user in multiple states. Nebraska’s bill contains a credit for taxes paid to other states under other future social media taxes elsewhere, but only if the tax is “identical”—an absurdly high bar under which the credit only applies if the other state’s future tax is an exact clone of Nebraska’s. 

Revenue from the Nebraska social media tax would be deposited into a new Juvenile Mental Health Support Fund, but the legislation does not provide any indication of how that money would be spent to support youth mental health, or whether these funds would increase overall mental health spending or simply offset existing expenditures on mental health. 

Based on the experience of other states, earmarking funding from a new tax for a good cause doesn’t always increase the funding for that cause, since money is fungible and the new funds can simply reduce the need to use existing general fund dollars for that purpose. Even if the bill’s supporters fully intend this bill to increase juvenile mental health funding, the absence of any language about how the money should be spent means that it would be susceptible to budgetary games. 

Treating social media as innately harmful and taxing it accordingly, moreover, is misguided. There are certainly unhealthy uses of social media, as there are with many things. But social media also connects friends and families, serves as a community bulletin board, provides educational content and do-it-yourself (DIY) videos, and provides many other services that people clearly believe improve their lives. 

This bill could push some additional social media features behind paywalls, or undermine privacy by requiring more account information, but it wouldn’t meaningfully address any of lawmakers’ possible concerns about unhealthy uses of social media or of the internet more generally, nor is there any guarantee that the revenue raised would actually increase funding for youth mental health services. 

The bill is therefore overly broad in many ways: it imposes heavy taxes on free services on which many Nebraskans rely, taxes more accounts than there are Nebraska accountholders, and applies to many beneficial uses of social media. 

The tax code should not discriminate against particular activities or services without a compelling reason. No such justification exists for this distortionary, administratively complex tax on social media accounts.