A Mythical License to Blog

My friends at Philly Startup Leaders were burning up cyberspace last week with passionate posts to the listserv about an item that recently got picked up by blogs and conservative newspapers around the nation, as well as by the Philadelphia Inquirer. It seems that the city has contacted a number of Philly-based bloggers who reported marginal advertising income from their blogs on their federal income tax returns (we’re talking under $100 per year, folks, not the Huffington Post) to demand that they buy business privilege licenses and pay business (gross receipts and net income) taxes.

The licenses, which grant you the privilege to operate a business in the city and pay business privilege taxes (BPT), cost $300 (for a lifetime license) or $50/year. Since you need a city account number to pay BPT, and you can’t get one without a business privilege license, the city hits you twice, and you’re essentially buying the right to pay BPT (unlike in other cities which generously comp you the right to pay business taxes). Furthermore, as Councilman Bill Green acknowledged in a post to the PSL listserv, Philadelphia frequently doesn’t inform you of the $50/year option.

This was the most revealing part of Green’s post, most of which was a canned plug for a tax reform proposal put forward by him and Councilwoman Maria Quinones Sanchez, which they claim will favor Philly-based businesses over those headquartered outside the city by raising the threshold for payment of BPT, eliminating the net income portion of the tax and raising the level of the gross receipts component. (Mayor Nutter is studying the proposal.)

For me, the PSL discussion highlighted several core issues. First, let me be clear: legally, there is no new “blogger tax” or “blogger license.” You do NOT need a license to write a blog in Philadelphia, only to earn money from one. Our cash-strapped city simply applied existing business regulations in a ham-fisted manner, giving itself (as it often does) a very public black eye. (The same goes for Philadelphia’s Eliot Ness-style war on cupcake trucks.) Until PSL took up the issue, nobody seems to have thought much about whether bloggers are businesses or creative hobbyists, and what differentiates the two. (According to Councilman Green, the city is considering adopting an IRS-style test.)

Shaking down bloggers, confiscating cupcake trucks, and grabbing revenue from wherever it can are prime examples of the functioning of our Uncreative Economy, a closed world of special-interest groups, bureaucrats, politicos and tired and dwindling old industries. Is it any wonder that we are widely perceived as boorish and uncreative, not to mention hostile to business and entrepreneurship? Are you surprised that the intellectual capital nurtured at Penn, Drexel and Temple flees to New York, Austin, Boston and Silicon Valley and that the hallmark of a homegrown company’s success is leaving Philadelphia?

Unserious Entrepreneurs and Why It’s Better to Have Money Than to Not

A few of my fellow PSLers made two other points which I want to address. First, entrepreneurs derive real quality-of-life and economic benefits from having easy access to the thrumming social, cultural, intellectual and aesthetic infrastructure that is Philadelphia. Short commutes, the ability to ride the No. 48 bus to work (as I do every day), Buddakan being immediately downstairs from my office in Constitution Plaza, access to the creative and entrepreneurial ferment of Wharton, proximity to New York and D.C. without the astronomically high rents — aren’t these things worth $300 or $50/year?

Of course they are. But we’re already paying business taxes, among the highest in the nation, for these benefits. Hitting up entrepreneurs – or worse, hobbyists trying to eke out a few extra shekels in the midst of the worst downturn since the 1930’s — for an additional fee for the privilege of paying business taxes is clueless and disdainful.

Some PSLers also contended that $300 is not a lot of money, and that anyone unwilling to shell out such a nominal sum isn’t really serious about entrepreneurship and shouldn’t be in business in the first place. This is dead wrong, in my view. For one thing, it puts the aficionado who writes an opera blog out of sheer love for the art form and uses Google AdSense for aperitif money in the same category as Comcast or a rapid-growth tech startup that has just closed $20 million in venture financing.

Secondly, $300 is a lot of scratch even for a genuinely forward-looking startup. My clients fund their initial roll-outs from work income, severance and/or savings. In the evolving media space which is my professional ether, what puddles of funding exist must go toward development of the alpha and beta sites, branding, incorporation costs — and legal fees. Speaking of incorporation costs, I recently set a client up with a cheap Delaware registered agent ($99/year) rather than the standard national corporate service companies, who typically charge $275-$325 per year. The difference, $200 per year give or take, was significant to him.

This particular client told me he was sleeping on a friend’s floor to save money while the company was being set up. He is an extremely intelligent and focused entrepreneur with a nimble mind. You will not hear me call him a dilettante for wanting to save $200. That’s three or four hours of developer time, or an Amtrak ticket to attend an angel meeting.

Gargling Creative Capital

It is a privilege to build a business in Philadelphia. That’s why my office window looks out on the site of Ben Franklin’s house and I have woven (or my designer has) the street grid of Center City into my firm logo. A privilege, however, is not the same as a necessity. Nor is managing decline the same as leading. If the city doesn’t stop gargling its creative capital, those talented men and women will grab the first cupcake truck out of here.

A sad day for Philadelphia, to be sure, but what makes it noteworthy for purposes of this blog is that the city is threatening to sue Facebook, MySpace and Twitter for failing to monitor the postings that, according to police, arranged for the mob to convene in the Gallery (the indoor shopping mall at 11th and Market Streets) for a fight. This raises the same website immunity issue under 47 U.S.C. § 230 in the Communications Decency Act (CDA) that I blogged about in connection with last summer’s lawsuit against Domelights.com.

The CDA immunizes a provider of an “interactive computer service” from liability for most state and federal claims arising from objectionable content posted by third parties: “No provider … of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.” See 47 U.S.C. § 230(c)(1)). Websites fall within the statutory definition of an “interactive computer service.”

The CDA immunity was enacted to promote robust and unfettered free speech on the Internet by insulating website operators and ISPs from defamation claims and other actions which are triggered by objectionable content originating with third parties and for which the site operator or ISP merely provides a forum or conduit. It would be difficult or impossible for the operator of a website with thousands of users to pre-screen all posts for tortious or other unlawful content, and the law does not require this. Courts have held the CDA immunity to preclude a wide variety of claims against websites relating to offensive, tortious and even dangerous activities of their users, including, in a recent decision involving MySpace, an alleged failure to implement security measures to prevent sexually predatory behavior by users against other users. However, a website runs the risk of being deemed an “information content provider” (and falling outside the scope of CDA website operator immunity) if it has a role in creating or soliciting the objectionable content.

Therefore, unless Facebook, MySpace or Twitter somehow had a hand in creating or soliciting any posts that incited the mayhem, it is difficult to see how the city could prevail in a claim for damages against them. This is how it should be. Social media provides networking tools and services to expand group communications, but like broadband and cell phone service, social media is morally neutral — it can be used for good (e.g., the Twitter Revolution in Iran) or ill (a mob of teenage thugs gathering at the Gallery for a fight).

If the operators of social media started losing expensive lawsuits because of their failure to monitor posts for hints of flash mob activity, they would have to charge for their services or go out of business. Internet privacy would probably also take a big hit as Facebook, MySpace and Twitter stepped up their monitoring and sharing of posts with law enforcement authorities. CDA website operator immunity was specifically intended to avoid such chilling effects on free speech.

More generally, the city of Philadelphia’s threats against social media betray the unfortunate mindset of big government nowadays that antisocial and self-destructive behavior must always be the fault, in whole or in part, of some business or society, not (or not simply) that of the persons engaging in the antisocial or self-destructive behavior. For example, childhood obesity is the fault of McDonald’s and other disseminators of “exploitive advertising,” not the fault of kids who eat Big Macs every day or their parents who let them. Plaintiffs’ lawyers aid and abet this erosion of personal responsibility and accountability by filing suits against businesses for failing to fulfill some fictitious duty to prevent every conceivable social harm.

At the risk of inciting political controversy, I respectfully disagree. The way to handle incidents like last week’s mayhem is not to sue technology companies on the West Coast, but to police known flashpoints such as the Gallery more aggressively and to mete out severe punishment for uncivilized behavior, which means jail time, not probation or community service. (In Philadelphia, the penalty for violating probation is often more probation, but that’s a separate issue.)

As a Center City resident who lives several blocks from the Gallery, I certainly share the city’s outrage over this latest flash mob incident. That is why I support the Philadelphia Police Department, the SEPTA transit police, and the Office of the District Attorney. But we’ve got to solve our own problems in Philadelphia, so let’s not pick on social media.

Arts and culture were and continue to be at the forefront of the Center City renaissance that began with the rejuvenation of the Avenue of the Arts (a.k.a. South Broad Street) under then-Mayor Rendell in the mid-1990s. Despite our status as a faded manufacturing city and former financial center, we continue to be blessed with a world-class orchestra, opera company and Art Museum, in addition to many theaters and festivals exhibiting everything from Broadway plays to Shakespeare to modern dance to avant-garde satires. And, of course, there are our renowned historical and science museums (and smaller chestnuts like the Rosenbach and the Atwater Kent that defy easy categorization) as well as our wonderful zoo. This buoyant concentration of arts and culture stimulated the growth of the Center City restaurant scene that, in turn, has transformed a once-decaying urban center into a magnet for young professionals and affluent empty-nesters, fueling the condo boom of the early and mid-2000s and generating thousands of jobs and millions of dollars in tax revenue.

The proposed arts tax threatens to smother this growth at the original source, and at a time when Philadelphia is already reeling from the worst budget crisis in nearly two decades, a softening of the condo market, and the loss of thousands of jobs in the Great Recession. Arts organizations have already been triply hammered by the recession, since their ticket sales have declined markedly due to households’ loss of disposable income, donations and grants are down, and those organizations fortunate enough to have endowments have seen these endowments shrivel with the collapse in the stock market in late 2008 and early 2009. The arts tax, therefore, comes at the worst possible time. Imposing an 8% sales tax on tickets cannot fail to squelch attendance at concerts and shows, resulting in further layoffs of staff and cutbacks in activities at the Philadelphia Orchestra and other performing arts organizations as well as fewer suburbanites coming into Center City, which, of course, is bad news for the restaurants and bars (and their employees) who rely on the concert and theater crowd.

Even disregarding the beneficial effects of a robust arts community and the unfairness of taxing a sector that is already suffering, as a student of economics I can’t understand why the folks in Harrisburg thought that the arts tax would be such a winner from a revenue generation standpoint, as compared, say, with a tax on Eagles tickets. There is a concept called elasticity of demand which is a huge factor for businesses in deciding whether or not to raise the price of their products (not that government ever felt it needed to run like a business, of course!). Elasticity of demand is the slope of the demand curve — in other words, how much will the quantity demanded of a good or service decrease as the price to the consumer goes up? As a general rule, you want to tax industries with highly inelastic demand (i.e., where demand doesn’t drop off steeply as you raise taxes), since this enables you to raise revenue without killing the industry that is your revenue source. Cigarettes are a good example of a product with a fairly inelastic demand curve. People will pay exorbitant sales taxes to keep feeding their nicotine monkey. On the other hand, if you tax a product with a highly elastic demand curve, you will eliminate tons of jobs while raising little or nothing in the way of tax revenue on the net. In fact, you may even reduce total tax revenue if the wound to the industry and the local economy is so severe that the falloff in individual and business income taxes exceeds the extra money raised in sales taxes.

While I admit I haven’t conducted a scientific study, I have a strong suspicion that the demand curve for orchestra and opera tickets is more elastic than the one for Eagles tickets or tickets for the next Hannah Montana flick (God help us all). As a huge Eagles fan myself, I can tell you that many fans will stop taking their children to the dentist before they give up their Eagles tickets. Indeed, the alacrity with which the tickets sell out each year indicates that the supply is not sufficient to meet existing demand and you could raise the price of tickets further. On the other hand, a recession-wracked couple who already have to spend $50 on parking and a babysitter to come into Center City, not to mention the cost of dinner, may well decide to stay home if the price of their concert tickets goes up another $5 apiece due to Harrisburg’s failure to manage its finances. Bad news for them, bad news for the arts, bad news for Philadelphia — and bad news for Harrisburg, which doesn’t get any additional tax revenue.

As of yesterday (October 1), there was some indication that the arts tax may be scrapped. The House Rules Committee dropped it in their latest revisions to the FY 2010 budget, setting up a fight with Governor Rendell (who should know better) and the State Senate and throwing the fragile state budget compromise into doubt. The next couple of days, therefore, will be critical.

The Greater Philadelphia Cultural Alliance has frantically mounted a counterattack against the arts tax, a shady bit of backroom dealing which wasn’t disclosed until the very last moment. You can find the contact information for your state legislators at their website by clicking here. Now is definitely the time for your elected representatives to hear from you, particularly if you love Philadelphia the way I do and want to keep it prosperous, fresh and cool.