The Netflix Tax: Coming to a Screen Near You

Tax Revolution Institute – by Alex Vidal

Let’s hope you were able to get in all your binge watching before the new year, as online streaming entertainment may very well be the next thing that we enjoy slapped with a tax.

Many cities across the country have found that taxes from utilities have taken a hit with the rise in the number of people who have decided to “cut the cord” from cable companies. During the second quarter of 2016 alone, over 812,000 people cancelled their paid television subscriptions and switched to various streaming services like Netflix, Hulu, and SlingTV, which only require internet access.  

As that telecom tax revenue continues to fall off, cities across the country are losing approximately $50 dollars (much more in larger cities) per cable subscriber in tax. Accordingly, lawmakers have discovered a brand new source of revenue in digital entertainment.

It’s called the “Netflix tax,” and it is beginning to be included as part of different cities’ amusement, sales, and, in some cases, even utilities tax. In 2015, Chicago was the first major city to enact a 9 percent “cloud tax” on digital entertainment services. The tax was already in effect for things like tickets for sports events and movies. Now, it also covers the streaming of online entertainment, like video games and Netflix-type services. The city estimates that the new digital entertainment tax will be worth $12 million dollars per year in additional tax revenue.

Beginning in January, Pasadena, California, will raise their “video services tax” to 9.4 percent, which is effectively adding one dollar to a consumer’s monthly subscription to a service like Netflix or Hulu. This tax is permitted because of a law that Pasadena voters passed in 2008 that placed a tax on cell phones. However, the new tax on streaming services was a surprise to even some Pasadena city officials. Additionally, in January, 10 other California cities (including Alameda and Menlo Park) plan to adjust existing legislation to implement the “Netflix tax” without having to get voter approval again.

While there is no actual tax on Netflix itself in place anywhere yet, cities in California, Illinois, and Pennsylvania have been able to add it without calling it a “Netflix tax” by simply attaching it to existing taxes already being levied.

Even still, there are many people who believe the tax may run contrary to the Internet Tax Freedom Act. This act is meant to preclude broadband service from taxation at both the state and local level. “Telecom revenue is dwindling away because it’s going to broadband,” said Tim Lay, a partner at Spiegel & McDiarmid in Washington, DC, who represents local governments. “Even if broadband is the telecom of tomorrow, you can’t tax that.”

Another major cause for concern is whether or not any kind of digital-services tax actually violates the First Amendment. There were more than 100 television streaming services that were created in 2015 and not all would be subject to the tax. This makes for troublesome issues for courts, who don’t find favor in a tax being applied across the board — in this case, only for some kinds of media. There are also constitutional protections on some existing taxes, which means that any kind of amendment to them would require voter approval.

There is already a class action lawsuit underway over the Chicago “cloud tax.” There is also inequity with how and to whom the tax applies. Obviously, consumers who are opting to “cut the cord” are price sensitive, and not only does the tax affect them, but it would only affect those who live in a taxed location. The smaller streaming services would also find themselves at a disadvantage and the hardest hit when it does come time to collect the tax.

Finally, consumers are rightfully concerned about the “slippery slope” that this Netflix tax may create. Amazon offers a “Prime” membership, which offers discounts on products and shipping fees and also provides a digital service that includes television and movie streaming, music, and eBook delivery. Would a portion of a consumer’s Amazon Prime fee be taxed? Could a traditional written news service that offers video content find themselves in the same position? One thing is for sure, we can expect these taxes to cause more legal and economic problems in 2017.

Tax Revolution Institute