A Big Tech Showdown in Arizona

The state is attempting to pass a bill that would allow app developers to avoid taxes from Apple and Google. Some Democrats are opposed.

A Big Tech Showdown in Arizona
Apple store in Scottsdale, Arizona

The American Prospect
 is a nonprofit, independent magazine covering public policy and politics. Sludge is re-publishing this article.

Arizona is playing host to the latest battle for Big Tech reform, as its House of Representatives considers a statewide change to the Apple and Google app stores.

Currently, on the app stores for both Apple’s iOS and Google’s Android, apps that collect any charges from their downloaders, like subscriptions or in-app purchases, have to pay either a 15 or 30 percent processing fee on that charge. If you’ve ever wondered why you can’t sign up for Netflix or Spotify Premium on your mobile phone app, it’s because these companies are trying to navigate around that 30 percent tax. Instead, these companies direct you to their websites, where instead of paying Apple or Google, they pay one of the hundreds of payment processing companies whose fees range from 1 to 4 percent. The Apple/Google 30 percent processing fee is also much higher than Arizona’s current state sales tax, which is 5.6 percent.

Arizona’s HB 2005 would make it illegal for any processing fee to be collected by mobile app stores if the customer lives in Arizona or if the app seller is based in Arizona.

“Mobile phones and native apps on those mobile phones have crowded out the web as an application distribution platform. The majority of application usage by the mainstream happens on their phones,” says David Heinemeier Hansson, co-founder of Basecamp and Hey.com, an email app, in an interview with the Prospect. “For most people, the most important computer they own is their phone.”

Heinemeier Hansson testified before the Arizona House Appropriations Committee at the end of February about what it would mean for his software business to not have to pay the 30 percent app store fee, which he calls a tollbooth set up by Apple and Google on the road of mobile phone app use.

When Heinemeier Hansson started his business in 2004, most of his customers were using the web to access his subscription team management software and now email service. But today, 77 percent of his subscribers are using his product on the iOS app, with most of the other 23 percent on Android. Opting out of either of the app stores because of these processing fees would essentially mean ending his business, he says.

This is also an issue for consumers, Heinemeier Hansson adds, because Apple has encouraged his company to increase its prices to compensate for the processing fee charge. And in the same way it’s impossible for his business to leave the smartphone app stores, he adds that it’s not easy for consumers to make changes to their mobile phone app use either.

Smartphone operators have expanded into so many other products that consumers are less likely to ever abandon one operating system for another. Apple, for example, not only sells iPhones but an ecosystem of products like fitness products, banking tools, tablets, and computers, and it boasts a high customer retention rate.

“No one is ever going to change over one app. Or two apps, or five apps, or ten apps,” Heinemeier Hansson says. “These are not mobile customers in the sense that they can pick up and leave. The amount of uprooting you have to do in your life to switch between the two platforms is so monumental that I think most people would rather move apartments or change their bank than try and do that.”

Underlining the point, if HB 2005 was passed, Heinemeier Hansson says he would seriously consider picking up his business and moving it to Arizona. If his company was headquartered in the state, then it could avoid the app store processing fees when providing the service to all of its customers on the same app store that they’re already used to using.

Arizona’s bill is among several state-level efforts to address the Big Tech business. There are similar app store reform bills in Hawaii and Minnesota. North Dakota’s app store bill, which challenged the processing fee and would have allowed users to open up app downloads from outside of the official app stores, was recently voted down, after Apple, Google, and their lobbyists suggested that it would tie up the state in expensive litigation, according to The New York Times.

Lobbyists for the Big Tech companies are now focused on Arizona’s bill. Apple’s lobbyist Rod Diridon has joined forces with local influencers ahead of the HB 2005 vote, according to Protocol. The lobbying team includes Kirk Adams, former Speaker of the Arizona House of Representatives and former chief of staff to Gov. Doug Ducey (R). Apple also abruptly joined the Arizona chapter of the Chamber of Commerce, which is lobbying against the bill.

Apple and Google spend millions on lobbying the federal government every year, separate from individual donations or fundraising by their employees, so supporters of the Arizona bill anticipate equivalent financial investments in these state-level efforts.

Normally, conservatives adopt a hands-off attitude toward big business, while Democrats argue in favor of the little guy. But the fights over Big Tech have upended traditional alliances. HB 2005, introduced by state Rep. Regina Cobb (R) passed with bipartisan support, 7 votes to 6, in the House Appropriations Committee on February 22. House Minority Whip Charlene Fernandez (D) voted no on HB 2005 in committee, along with three other Democrats. She did not respond to a request for comment.

A second Arizona Democrat, César Chávez, pronounced in the Appropriations hearing, “It is not the obligation or the responsibility of the state legislature to get involved in the midst of litigation,” referring to a California antitrust lawsuit. Other Democrats called it more of a federal than state issue.

The constitutionality of the bill, another potential Democratic concern, is no longer in question, after a unanimous vote from the House Rules Committee. Lawmakers can register their final opinion on the bill when it comes to the floor for a vote as soon as this week.

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