What’s Going On With Digital Link Taxes?

Who killed local and print journalism? The industry will tell you that Google and Meta are at fault because of their massive transformation of information sharing — and tight control over digital advertising.

Google and Meta will tell you that they’re not to blame; rather, the internet fundamentally changed how we encounter and consume news and information.

Either way, many in the media industry (and some politicians) think someone needs to be held accountable for print journalism’s waning fortunes. Some of them think Google and Meta should pay for the news content posted on their platforms — a link tax, if you will.

In the digital tax world, digital services taxes and digital streaming taxes have commanded the lion’s share of attention. However, it would be a mistake to overlook link taxes, which are gaining momentum both in the United States and internationally.

Link tax legislation generally requires large digital companies like Google and Meta to pay a fee to journalism outlets for the privilege of showing or linking to news content on their platforms.

The policy justification for these regimes is largely as follows: Digital giants fundamentally changed information sharing and digital advertising to the detriment of journalism publishers, which are now struggling with sagging ad and subscription revenues.

Meanwhile, digital giants benefit — and profit — from sharing news on their platforms. Hence, it’s only fair that digital giants adequately compensate news outlets for their work.

While it is undeniable that platforms like Google and Meta have successfully navigated and shaped a new economic medium — the internet — the question is, do they owe journalism outlets for being successful in a landscape that the outlets have struggled to conquer? This raises a larger question: As economies change and new mediums emerge, are the victors supposed to remunerate the less fortunate?

Link taxes could trigger a slippery slope of arguments about why large digital companies should compensate other industries struggling because of the advent of the internet. Should platforms like X (formerly known as Twitter) or Reddit be taxed for changing the news landscape by becoming sources of instant, real-time news and information for users around the world?

Do book publishers now have a claim in the wake of e-books? Or the music industry in the wake of online streaming services? This is a new iteration of digital taxation that’s worth watching.

Canada

Canada is not pleased about the state of its news sector. Over the past decade, the country has watched its news and print publication sector shrink and subscriptions decline. Some outlets that have managed to stay in business are struggling to stay afloat because of declining advertising revenues.

But it’s not a case of natural attrition or routine business cycles; according to the government, it has been difficult — and in some cases impossible — for some publications to overcome the disruption that the internet wrought on print advertising.

Who is to “blame” for this predicament? The government is pointing at Google and Meta.

Those two companies command about 80% of digital advertising revenues in Canada. This adds up to extremely hefty sums: In 2021 online advertising revenues in Canada exceeded C $12 billion, and over C $14 billion in 2022, according to the government.

Digital platforms are making a killing in the advertising space because consumers are largely reading their news online. The problem, in Canada’s eyes, is that news businesses aren’t being fairly compensated for the work they are creating.

“Canadian news businesses continue to produce content that attracts web traffic and adds value, while seeing their advertising revenues dwindle as a result of the market control exerted by large digital platforms,” the government recently said.

To resolve this problem, Canada is turning to taxation. Over the summer, Canada enacted a link tax — the Online News Act — that will go live on December 19.

And the government has not been shy about its intended targets: large U.S. social media sites and search engines. Specifically, it’s targeting Google and Meta. That tax has such a high revenue threshold that Google and Meta are the only companies to which it will apply.

Bill C-18 (the Online News Act)

Canada says it is trying to promote fairness in its digital news marketplace.

For Canada, fairness means that digital platforms must pay news outlets for posting their content. Those payments, it says, can help shrink a growing imbalance between news platforms and digital platforms. And the government says digital companies can either comply willingly or be forced to pay up.

The Online News Act creates a bargaining framework so digital intermediaries and news platforms can negotiate appropriate payments for news content. The primary hope is that the parties will be able to voluntarily reach commercial agreements.

However, if both sides can’t agree at the bargaining table, then digital platforms must submit to a mediated mandatory bargaining process, according to the government. If that mediation doesn’t work, then each side must submit a final offer to an arbitration panel, which will choose the winning bid.

Basically, if digital intermediaries want to be exempt from mandatory arbitration, they need to broker commercial agreements that news outlets will be happy with. The government says the commercial agreements must be “fair,” and the definition of fair is simply that the compensation in an agreement must be within 20% of the average relative compensation of all agreements, according to draft regulations.

There are a few important aspects of the Online News Act. One is that it applies to digital intermediaries that benefit from a “significant bargaining power imbalance” over news businesses in several respects:

(a) the size of the intermediary or the operator;

(b) whether the market for the intermediary gives the operator a strategic advantage over news businesses; and

(c) whether the intermediary occupies a prominent market position.

Second, the legislation only applies to digital platforms listed by the Canadian Radio-Television and Telecommunications Commission (CRTC).

Third, the Online News Act defines eligible news businesses — those qualified to bargain with digital platforms — as the following:

(a) a qualified Canadian journalism organization. This can be based on subsection 248(1) of the Income Tax Act or an organization that is licensed by the CRTC under paragraph 9(1)(b) of the Broadcasting Act as a campus station, community station or native station. It can also be based on other categories of licensees established by the CRTC with a similar community mandate;

(b) an outlet that produces news content of public interest primarily focused on matters of general interest and reports of current events, including coverage of democratic institutions and processes, and

(i) regularly employs two or more journalists in Canada, which may include journalists who own or are a partner in the news business and journalists who do not deal at arm’s length with the business,

(ii) operates in Canada, including having content edited and designed in Canada,

(iii) produces news content that is not primarily focused on a particular topic such as industry-specific news, sports, recreation, arts, lifestyle or entertainment, and

(iv) is either a member of a recognized journalistic association and follows the code of ethics of a recognized journalistic association or has its own code of ethics whose standards of professional conduct require adherence to the recognized processes and principles of the journalism profession, including fairness, independence and rigor in reporting news and handling sources; or

(c) operates an Indigenous news outlet in Canada and produces news content that includes matters of general interest, including coverage of matters relating to the rights of Indigenous peoples, including the right of self-government and treaty rights.

It is clear from this list that lawmakers are primarily focused on national and local news outlets. Even so, the parameters could apply to an incredibly broad number of outlets, raising the issue of compliance burdens for digital platforms.

Proposed Regulations

The legislation leaves open several questions, like which kinds of digital platforms are subject to the Online News Act. Upcoming regulations are expected to provide some clarity for digital platforms and news outlets.

Canada is seeking feedback on the regime in a consultation that runs until October 2.

Under the proposed regulations, digital platforms subject to the Online News Act must meet all the following thresholds:

• earn at least C $1 billion in annual global revenue;
• operate in a search engine or social media market involving the distribution and access of online news content in Canada; and
• operate in a strategic market identified above and has 20 million or more average monthly unique visitors in Canada or average monthly active users in Canada.

However, an exemption is available: Digital platforms can be excused from the mandatory bargaining and arbitration processes if they show the CRTC that they have successfully negotiated voluntary agreements with news outlets that “make a sufficient investment in supporting the production of Canadian news and that adequately cover the diversity of communities in Canada.”

Precisely what it means to make a “sufficient investment” that adequately covers diversity is an open question, but one that will be key for digital platforms.

The Online News Act gives digital platforms two options — voluntary agreements or a mandatory bargaining process. But in reality, digital platforms have a third option: They can choose to pull out of the market. And that’s what Google and Meta are doing, at the expense of consumers.

Google and Meta Strike Back

Unsurprisingly, neither Google nor Meta has responded kindly to the law. In a statement, Google said the Online News Act “exposes us to uncapped financial liability simply for facilitating Canadians’ access to news from Canadian publishers.”

Google is particularly upset because it says Canada’s law is overly broad, applying to both news links and content. The company told the government that it should only apply in instances in which news content is displayed.

Adding insult to injury, Google says, other digital platforms and social media users share news for free.

As a result, the company said it will no longer post links to Canadian news from its Search, News, and Discover products in Canada once the law goes live.

Google also said it will no longer be able to provide its Google News Showcase product in Canada. Meta also announced in a statement that it would stop showing news on Instagram and Facebook to its Canadian users.

International Approaches

There’s precedent for Canada’s decision. Several countries have either discussed or enacted similar regimes, but Canada’s link tax most closely resembles one enacted by Australia. Canada says it chose to adopt that approach after seeing that some Australian news outlets were able to successfully bargain with Google and Meta.

Australia’s News Media and Digital Platforms Mandatory Bargaining Code was created in 2021 and has three main elements.

First, it encourages digital companies and news outlets to ink their own commercial deals. Second, it provides a framework for good-faith negotiations and mediation if independent talks break down. Third, it outlines a mandatory arbitration process if negotiations and mediation are unsuccessful.

Australia says it created the law to help remedy a “significant bargaining power imbalance” between Google, Meta, and Australian news businesses. That statement raises a few questions.

First, what is a “significant bargaining power imbalance,” and who determines whether it exists? The legislation and supplemental material are quiet on what constitutes a significant imbalance.

That said, in an explanatory memorandum, the Australian Competition and Consumer Commission said Google and Facebook are “unavoidable trading partners” for the country’s news outlets, and that that dynamic gives the duo more bargaining power.

The Australian Treasurer is in charge of determining whether a digital platform benefits from a superior bargaining position and might be subject to the code. Another factor in that calculus is whether the platform already remunerates news outlets for their content.

Second, how well has the Australian code remedied the imbalances? According to the government, Google and Meta have signed over 30 voluntary commercial agreements with news organizations representing many different facets of the country’s news industry.

However, the negotiations don’t always work. Meta, for example, stopped its negotiations partway through 2021 because of a limited budget for content negotiations. At the time, the company said some news outlets simply would not receive a deal from Meta.

Some news outlets have told the government that one or both companies refused to negotiate with them constructively, or even to negotiate at all. The Australian radio industry has been particularly critical of the scheme.

Commercial Radio Australia told the government that “much of the commercial radio industry has experienced significant difficulties in engaging Meta and Google in commercial negotiations. Few benefits have been received as a result of the Mandatory Bargaining Code: 90% of commercial radio networks have been unable to strike a deal with Google; and 95% of commercial radio networks have been unable to strike a deal with Meta.”

In the United States, there are two similar bills winding their way through the legislative process. One is before Congress, and the other is before California state lawmakers. The federal bill — the Journalism Competition and Preservation Act, S. 1094 — is a bipartisan bill sponsored by Senators Amy Klobuchar, D-Minn., and John Kennedy, R-La. The bill is sitting before the Senate, after the Senate Judiciary Committee approved it in June.

The bill is meant to aid small to mid-size news outlets: those with up to 1,500 full-time employees and non-network news broadcasters. Under the terms of the legislation, those outlets would be able to organize with other outlets and negotiate the pricing, terms, and conditions by which their content is shared on online platforms. Should those negotiations fall through, the bill provides for private rights of action and establishes requirements for arbitration in limited circumstances.

It also targets the largest digital platform providers: those with at least 50 million monthly domestic users, or at least 1 billion monthly users worldwide.

Meanwhile, the California Journalism Preservation Act would require “journalism usage fee payments” from online platforms to news outlets. Massachusetts lawmakers are discussing a similar bill — the Act to Modernize Funding for Community Media Programming — that would impose a 5% tax on streaming entertainment services and use the proceeds to fund community media.

New Zealand is considering legislation — the Fair Digital News Bargaining Bill — that would operate similarly to the Canadian and Australian measures. Public submissions close on the bill November 1, and if it is enacted it will go live July 1, 2024.

Meanwhile, the United Kingdom doesn’t have a link tax, nor does it appear to be close to enacting one. But the idea has previously been floated by politicians like former U.K. Labour Party leader Jeremy Corbyn. Corbyn wanted to tax Google and other digital companies to help fund public-interest journalism.

Lawmakers introducing link taxes are clearly optimistic about the revenue — and job creation — that these measures might generate. But Germany and Spain both provide cautionary tales.

In 2013 Germany introduced a link tax and Google in response required German publishers to opt into appearing in Google News results. A year later, Spain created a link tax and Google shut down its Google News service in the country for several years.

In Spain, news outlets suffered a drop in online reader traffic and in Germany, many news outlets decided to opt into Google News and waive the fee requirement.

Complex Rules, Uncertain Payout

Clearly, digital outlets have increasingly been forced to navigate complex and differing sets of rules reflecting very different design choices on things like eligibility, exemptions, and the amounts to be paid.

For example, Australia’s approach is rather subjective, and it places a lot of the decision-making power in the hands of the Treasurer, who is responsible for determining which digital platforms are subject to the act and whether they are eligible for an exemption.

Canada’s approach is more objective and determines eligibility and exemptions based on regulatory criteria. Its scope is also different. One of Google’s objections to the Canadian law is that it applies to news links in Google search, which makes it broader than Australia’s measure. Google negotiated with Australian lawmakers to narrow the application of the law to news content posted on its Google News Showcase product.

Also, platforms are facing these compliance burdens without clear assurance that link taxes will achieve their stated goals. The expectation among lawmakers is that link taxes will derive enough revenue to maintain journalism jobs, or even create new ones, but they are largely stepping out on faith. The payouts simply may not be large enough to support those goals.

In Australia, both Google and Meta have said that some news outlets have “unrealistic” expectations about the amount of payments they can expect. Google told lawmakers that some negotiations broke down because publishers rejected offers that were based on the market.

The congressional bill introduced by Klobuchar and Kennedy does not include estimates on potential job creation. Rather, it would require the U.S. Government Accountability Office to evaluate whether and how the legislation is affecting journalism employment.

Meanwhile, there have been spotty findings from Australia on the employment effect of its news bargaining code. It’s estimated that the link tax has generated $200 million in additional payments to news platforms, and some outlets have reported that they have hired more staff as a result of the payments.

However, news outlets may use the resulting revenue at their discretion, so it’s not a given that the money will consistently be used to create more jobs.

And in Canada, the government estimates that the Online News Act could generate about C $320 million annually, mostly for medium and large outlets.

Conclusion

Digital giants remain a target for unilateral taxation, and the proliferation of link taxes shows how lawmakers around the world are employing creative ways to try and exact payments from those companies in the name of fairness.

That creativity is unlikely to disappear anytime soon — fairness is an amorphous concept and lawmakers will continue to manipulate it to justify tax measures on digital companies, even tenuously. And so, the slippery slope continues to widen.