Taxing Zero

Abstract

“Zero-price” transactions—in which goods or services are provided at a cash price of zero—are an increasingly important feature of economic life. Consumers can search the web, use email, listen to music and even trade stocks, all without paying anything out of pocket. But zero-price transactions are not free: for-profit businesses provide products at zero price because they get something valuable from consumers in return. Consumers pay with their time, attention or private information. Zero-price transactions are not giveaways; they are a form of barter exchange.

Under federal income tax principles, barter exchanges are taxable: both parties to the transaction are taxed on the value they receive. This Article considers the treatment of zero-price transactions from an income tax perspective. Should zero-price transactions be taxed like barter exchanges? If so, how should the amount received in a zero-price transaction be valued? And how can the federal government practically collect tax owed on zero-price transactions?