A Moon Tax: Out of This World?

Kevin Brown, an associate with Morrison & Foerster LLP, discusses his proposal for taxing moon-based activity.

Read Brown's piece in Tax Notes, "Tax the Moon That the Earth May Prosper: How to Tax Lunar Occupation."

In our “In the Pages” segment, Steven N.J. Wlodychak, the former indirect state and local tax policy leader for EY, discusses his recent Tax Notes piece, “Why Aren’t U.S. States Subject to International Tax Treaties?”

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Credits
Host: David D. Stewart
Executive Producers: Jasper B. Smith, Janelle Julien
Showrunner: Paige Jones
Audio Engineer: Jordan Parrish
Guest Relations: Christa Goad

Transcript

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David D. Stewart 0:01

Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: One small step for tax. As they say, "Shoot for the moon. Even if you miss you'll land among the stars." Well, my guest this week seems to have taken that a bit to heart. He recently published an article exploring the idea for moon-based, or should I say moonbase, activity. Here to talk about it is Kevin Brown, an associate with Morrison & Foerster LLP's tax group in Boston. Kevin, welcome to the podcast.

Kevin Brown 0:35

Hi. Thanks for having me.

David D. Stewart 0:36

All right. Before we dig into the possibility and the mechanics of the moon tax , could you give us a bit of background about yourself and how you became interested in the subject?

Kevin Brown 0:45

Sure. Before entering the legal field, I was a high school English teacher for seven or eight years. I have a deep love for language and for literature, and so law school seemed like an obvious choice once I wanted to maybe expand my career opportunities. I got to law school and a friend of mine who was already out of law school and practicing tax said, " Take a federal income tax class. You won't regret it. At the very worst, you'll learn some interesting stuff that you can talk about every time April 15 rolls around." And so I took the class and I absolutely fell in love with federal income taxation. It was so interesting, so much more philosophical and epistemological than I thought it could ever be. And I guess the way that I ended up getting into moon tax was my first year of law school a lot of my former colleagues and my friends would say, "What are you interested in practicing after law school?" And as you know, a mere 1L I had no idea. I was just dipping my feet into all these different 1L curricular buckets. And so as a joke really I started just saying, "Oh, I'm going to be doing moon law ." And that would kind of throw them off. And eventually the joke got around enough that people really started asking, "Is that a thing? Is moon law real?" That prompted me to actually look a little bit into it and the types of laws and treaties governing outer space activity of which there's not a ton, but there's enough to get a nice conversation going. And the more that I looked into it, the more fascinated I became. And so when it came time, I was thinking about writing some articles and the moon tax just seems like an edgy and simple enough idea that people seem to always want to hear more about it . That's why I decided to start with the moon tax.

David D. Stewart 2:30

Yeah. It's sort of interesting. Every time I talk to somebody about their journey into taxation, it always starts with, "I took federal personal income tax or whatever, and then immediately just jumped into every tax subject possible."

Kevin Brown 2:40

Yeah. And I mentioned that I was an English teacher before coming to law school because what I ended up realizing is that the practice of tax involved so much close reading, so much parsing of language, so much placing certain words in their proper context given the application that you're investigating, it came full circle from my teaching of literature where I'd be parsing a poem [or] teaching Shakespeare. And so I find that a lot of the skills that I actually had in my career in education were super applicable to the practice of tax. And so that's been one of the things that's really drawn me in.

David D. Stewart 3:14

Turning back to the moon tax specifically, it's been nearly 50 years since humans have been on the moon. So why is this an issue that we should be considering today?

Kevin Brown 3:24

Well, I think that we're in a period right now where it really only seems like a matter of time — and I don't think it's going to be a ton of time — until we really are seeing people going up to the moon and putting stuff down on top of it, either as part of their business or whether it's different governments around the world setting up operations there on a kind of semipermanent basis either to conduct research or to aid in the refueling of ships that are going out on longer missions. And so I think that space, the lunar space, is going to be something that we're going to actually see in the next two decades, probably a lot of activity commercially and governmentally. And so I just started thinking what are the tax implications of that?

David D. Stewart 4:04

Now as I mentioned at the top of the episode, you recently published a piece with Tax Notes on this subject, which we'll link to in the show notes. Can you explain your proposal for what a moon tax might look for? Who's going to be paying it and that sort of thing?

Kevin Brown 4:16

So I'll try to give you a concise version and then we can go into any of the specifics that you want to because that's a big question. But I think that the first time that we try this — if we try this — we should make it as simple as possible and easy to administer as possible to collect and report. And so that's why I landed on just really using an excise tax on use of the lunar surface. So the U.S. Geological Survey has already mapped the lunar surface. You split it up into a grid. You can make a box on the grid any size you want. One square kilometer is a nice size. And so if you put something on grid number 18568, you are charged a certain annual levy for your right to use that part of the moon. And we can get into how it's collected, and who collects it, and who spends it, but simple administration. If you're there on the moon in a moon unit, which would be one of the parts of the moon grid, you have to pay a nominal fee to be there.

David D. Stewart 5:15

As you were considering options for taxing lunar activity, did you look into perhaps a profit model? Or is that what you're trying to simplify and that's why an excise tax is what you're going for?

Kevin Brown 5:26

I think that an excise tax definitely helps with the simplicity aspect. I think that if you were going for a different model, which you could. You could make it sort of income-based. You could peg it to the value of things that you produce through your occupation of the moon. Let's say that you put a machine up there, and the machine pops out widgets, and those widgets are going to have some sort of fair market value. You could say the tax is a certain percentage of the output value of whatever you're producing on the moon. But I think that that has its own sort of complications. And I think it's very important that the tax doesn't, to the least extent possible for anyone who wants to put stuff up on the moon and do business on the moon, it shouldn't present any sort of substantial obstacle financially to them doing that, which is why I think the excise tax at a flat rate per moon unit just seems like the simplest choice .

David D. Stewart 6:16

Now how would it apply if let's say the base is occupying one of these moon units. How would you determine they're using additional space beyond where the base immediately is?

Kevin Brown 6:26

That's a great question. And I think that whatever organization was administering this tax and enforcing it they're going to put some satellites up there that are going to be kind of swirling around the moon and just periodically taking photos or video feed of what's going on in the lunar surface. And I think one model is that you could leave it totally up to whatever it's your governmental organization that does this. But I also think it would be cool if you opened it up — opened the feeds up — or at least opened like the bank of photos up to the general public [and] all of the world to the same kind of extent that anyone could log onto Google Maps and really get fairly up-to-date picture of anywhere on earth. You can do the same with the moon and you can kind of crowdsource it. And so you could provide some sort of very minimal, but economic incentive to people who are interested in this sort of thing and who wants it to kind of help with enforcement. I'll say more about how I think the revenue should be spent later, but the people who participated in this way, maybe the lunar oversight authority — which is the fictional body that I came up with to administer the tax — maybe in exchange for your monitoring what's going on in the moon and logging it in a publicly accessible database, the lunar oversight authority will make a micro donation to a charity of your choice or something like that.

David D. Stewart 7:39

Now let's explore a little bit about this oversight authority idea. So you would think that governments would get together I suppose, and create some body to administer this task?

Kevin Brown 7:48

That's the theory. I'm basing most of this off of the law of the sea , which we get from international agreement called UNCLOS. I think it's the Convention on the Law of the Sea of the U.N. Over a hundred governments around the world already have gotten together to figure out how to administer use of the deep seabed that lies so far off of any nation's coast that really no one can claim total sovereignty over it practically because it's just too deep and too far away. So governments have already done this in the context of the sea. And I don't think it's much of a stretch to say that they would come together to do it where the moon is concerned or other celestial objects are, too.

David D. Stewart 8:26

What would this entity then end up doing with the revenues that they collect in your sort of theoretical idea?

Kevin Brown 8:30

Right. Well, the idea while I was writing this article — obviously we were in the midst of the pandemic — and I was reading the news about how our own government and other governments who are funding the World Health Organization at varying levels. They're pulling funding. And I think the WHO itself was kind of scrambling to mitigate all of the different problems that the pandemic raised that usually it would be addressing under less stressful circumstances. And so I said, "Wouldn't it be great if when the world has a problem that really no individual nation can substantively address on its own — and that can be a pandemic, that can be climate change, it could be a whole host of that — wouldn't it be great if the world kind of had its own coffers that it could dispense to organizations that have demonstrated excellence at solving those kinds of problems? I think that the World Health Organization, especially during the pandemic, it just clicked. That made a lot of sense. So I don't think the money has to absolutely be spent any which way, but I think that — and we can get into this — but I think if you're drawing this revenue from an asset like the moon that truly belongs really to no single sovereign, then it belongs to everybody and everybody should benefit from whatever revenues collected.

David D. Stewart 9:45

What do you see as the prospects for governments actually coming together and doing something like this? Do you think that this model of the convention on the seas is something that is reproducible?

Kevin Brown 9:55

Well, I'm always optimistic that the more advanced our global civilization gets, the more willing countries will be to collaborate in the common interest. So I really do hope that it is something we see. As far as what I'm basing my optimism on, we already do have as you mentioned over 50 years ago, there were a lot of treaties about use of the moon, about use of Antarctica, more recently about use of the deep sea bed, where countries have come together. And they have expressed that there is a common interest that is vested in all mankind in using these spaces responsibly as global actors. And when the possibility arises like with the law of the sea, for some sort of quasi-tax to be levied on activity there that that benefit can flow back to everybody. So I think that it's already been done in different ways, obviously not very thoroughly, but I think that there's a lot of potential and a lot of precedent for a situation like this.

David D. Stewart 10:53

Now your idea deals specifically with the moon, but can we deal with other celestial bodies in the same way? I'm assuming that there's going to be asteroid mining coming in the future. Is that something where this idea would work as well?

Kevin Brown 11:03

I think so. Originally the paper that I published with Tax Notes International had a much broader scope, but I realized it was just too large so I narrowed it just to the moon. The moon is a nice image. Everybody knows the moon. And some things can seem a little more far-fetched , but yes, I think that there already have been several attempts to commercially mine asteroid. I think that's actually one case from like Texas where someone tried to assert his rights to minerals recovered from an asteroid and it was ultimately dismissed, but this is something people are trying to do. And beyond asteroids, I think that there has been an increased interest in Mars and potentially sending people there one day. It's so far away you'd need to have some sort of quasi-permanent settlement there. But I think that we should think not only about concrete objects, but also positions within space. So there are different grades of orbit above the Earth: low orbit, middle, and high. And people are trying to put things up there like space hotels nowadays. And so I think that the same sort of concept with, "We're going to let you be there if you want, but we're going to tax your right to be there because there's a finite amount of space."

David D. Stewart 12:12

Now the excise tax concept covers specific occupation of the moon. Would you anticipate that they would need to establish additional taxes for perhaps an extractive industry?

Kevin Brown 12:22

Well, like I said before, I think that in the initial stages of any sort of tax on people doing things up on the moon, you don't want to impede any certain industry. I think that really right now it's kind of an industrial Wild West where there's a lot of opportunity and the more taxes you start piling on top of things, I'm totally aware that the less enticing it will be to go do business up on the moon. To directly answer your question, I think that will individual nation states who have some sort of claim to jurisdiction over whatever actor goes up onto the moon and starts pulling resources out of its surface? I think that's very likely. But I think that in order not to discourage responsible commercial activity up on the moon, piling too many taxes right away up on the moon might discourage commercial activity.

David D. Stewart 13:10

Down here on Earth we are already having a fair amount of difficulty establishing tax rules, especially around the digital economy and that sort of thing where we have a bunch of jurisdictions trying to get together and figure out how to make things work. So is there really an appetite for adding a new version of tax that we now have to negotiate on a multilateral basis?

Kevin Brown 13:30

I think so. I think that there are two strong foundations for why a tax like this should exist. One is that I think in international law — by no means agreed upon what exactly it means — there's this principle called the common heritage of humankind principle. And it states that there are places beyond the reach of any single nation state and that in these places, because no one state can govern — or it wouldn't be a good idea for one to try to because everybody else would want to have a say — the only real way to monitor activity there would be for many, many states to come together and to agree. But I think that's the situation that we're in with the moon. And even though this common heritage of mankind, humankind principle is kind of wishy-washy and no one's quite sure exactly what it means, it's already embedded in the Antarctic treaty, with the law of the sea, and the outer space treaty, which you mentioned that was initially formulated back over 50 years ago. So I think that there is this principle in international law that would support a moon tax because if it is the common heritage of mankind then the benefit of it must flow to all mankind. And how do you do that? It seems to me like a tax is the easiest way. And by making the tax simple hopefully you won't be creating more problems that outweigh the benefits you're getting. And I think the other argument is that the moon — just like Antarctica and just like our deep sea floor — is an incredibly valuable natural resource that we need to take steps to preserve. And if we let anyone who wants to go up there and leave their moon trash all over the lunar surface, that would create a huge environmental liability that really everybody for generations forever would suffer from. So I think especially an excise tax on occupation would say, "Listen, if you go up there and you make a big mess and you're occupying a bunch of moon units with your trash, you have an ongoing liability to repay humankind for your littering."

David D. Stewart 15:23

Well, Kevin, this is a fascinating idea and thank you very much for being here and talking about it .

Kevin Brown 15:28

Thanks a lot. It's been a pleasure being here and really enjoyed talking to you, Dave.

David D. Stewart 15:34

And now, instead of coming attractions, a special announcement. The submission period for the Christopher E. Bergin Award for Excellence in Writing will be closing soon. This annual award recognizes superior student writing on unsettled questions of tax law and policy. Eligible students must be enrolled in an accredited undergraduate or graduate program during the academic year. Submissions are due by June 30, 2021. Visit taxnotes.com/students for more details. That's taxnotes.com/students.

In the Pages

David D. Stewart 16:05

Now for a closer look at what's new and noteworthy in our magazines, here's Tax Notes State Editor in Chief Jéanne Rauch-Zender.

Jéanne Rauch-Zender 16:12

I'm here with Steven Wlodychak, the former indirect state and local tax policy leader for EY. Welcome to the podcast, Steve.

Steven Wlodychak 16:19

Glad to be here, Jéanne.

Jéanne Rauch-Zender 16:20

I'm excited to chat about your recent Tax Notes State article, “Why Aren’t U.S. States Subject to International Tax Treaties?” Let's start with the big questions, shall we? Why aren't U.S. states subject to international tax treaties, Steve?

Steven Wlodychak 16:34

You know, I'm asked that question a lot by people around the world literally. I've had clients from all around the world ask the question, and my initial response is, "Have you ever read the treaty between the United States and your country?" And the answer invariably is, "Well, of course I have." And then I said, "Well, have you really read the treaty?" And they go, "Well, not really." And then I say, "Take a look at Article 2 of the tax treaty." And I like to use the example — the Swiss-U.S. treaty is the best example of all because surprisingly you'll find it interesting that the United States and Switzerland, even though Switzerland's a really small country in the center of Europe in a mountainous, beautiful area of Europe, one of my favorite places to visit, and the United States is this vast continental federal structure, they actually do have a lot in common because both countries are basically federations . We have states. They have cantons. And their constitutions work very much the same. But when you read the Swiss tax treaty, if you take a look at the Swiss side of the treaty, the Swiss side of the treaty actually says that the treaty applies to federal communal and cantonal taxes. In other words, the municipal and local taxes are all covered by the tax treaty. And then if you flip to the U.S. side of the treaty, the U.S. side of the treaty simply says applies to the federal income taxes. That's it. So by the express terms of the treaty, the state taxes are not covered by the treaty. And we've had cases over the years that contain a court case. For example, the Seminole state case in state taxation, which endorsed California's method of combined reporting. The justices there pointed out in the majority opinion that the international tax treaty simply do not apply to the states by their very terms. So I think that's kind of a big surprise to a lot of folks both people overseas as well as Americans, not realizing that the tax treaties do not apply to the states.

Jéanne Rauch-Zender 18:20

Yeah . So was that your purpose behind writing on the topic? To help provide clarity?

Steven Wlodychak 18:25

Well, it's two-fold. Because number one is the express issue here, which is dealing with the international tax treaties and trying to help clients understand the issue with respect to state and local taxes. But secondly, the international tax treaties reflect this concept of sovereignty, right? In other words, the Swiss government and the United States government come together and they agree that we have to limit double taxation among the countries. And there are fundamental features there when these treaties apply and when a country is limited on imposing its tax. The key of these treaty provisions is a concept called permanent establishment. And if you read these terms, which are universal around the world, it basically talks about the idea of having a physical presence in the jurisdiction. Now you can automatically see where that's very different from our concept of state taxes, particularly in response to the Wayfair decision that just came out a few years ago, where under femoral decisions under the commerce clause, the U.S. Supreme court reversed over 50 years of a ruling saying a physical presence was required. And so now on top of that, the second issue is now the state concepts of nexus of whether a tax applies are completely divorced from international tax precedents. And that's another thing that I think is important is you still have essentially the states being not subject to the same rules that apply all around the world with respect to levying their taxes. And I think that creates great confusion not only among people trying to invest in the United States, but also Americans just dealing with their home states and saying, "Why? Why do we have these rules? Why do we have this concept of economic nexus which doesn't apply in the rest of the world?" I should qualify that though, because if you follow what's going on in the international realm with respect to the OECD and this new concept of a global minimum tax, it's really interesting because now the nations of the world are coming together and sort of aligning with the state concept that even if you are exploiting a jurisdiction economically with no physical presence, you do have an obligation to support the government there. And again, I just think it's a nice survey to see the differences between international and state taxation and how they kind of coalesced. And at the same time, how they differ.

Jéanne Rauch-Zender 20:23

I agree. It's an excellent article. I highly recommend for our audience and our readers. Before I let you go, where can our readers find you online?

Steven Wlodychak 20:33

Well, I'm still at steven.wlodychak@ey.com. I'm working as a contractor working on activities for our clients from time to time. I'm still available there and happy to answer any questions on issues.

Jéanne Rauch-Zender 20:47

Thank you so much for joining me today, Steve. It's always a pleasure working with you. You can find Steve's article online taxnotes.com and be sure to subscribe to our YouTube channel Tax Analysts for more in-depth discussions on what's new and noteworthy in Tax Notes. Again, that's Tax Analysts with an S. Back to you, Dave.

David D. Stewart 21:07

You can read all that and a lot more in the pages of Tax Notes Federal, State, and International. That's it for this week. You can follow me online at @ TaxStew, that's S-T-E-W and be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts .org . And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.