Is the taxman coming for Netflix and Hulu?

Netflix, Hulu and Sling TV and online video services are
being eyed as the next golden goose for tax revenues.

Dozens of California cities are deciding whether to follow the
lead of Chicago, which began taxing Internet-based streaming downloads last

These efforts are meeting resistance. Chicago’s expansion of
its amusement tax is being challenged in court. News of Pasadena’s finance
director ruling that its 9.4 percent utility user tax could be applied to Internet
services beginning Jan. 1 sparked so much backlash that city officials have
since backed off that pronouncement.

City spokesman William Boyer told AMI Newswire that no
decision has been made to expand or change the existing utility tax and that
Pasadena is not taxing the Internet. He acknowledged that the release of the
city finance director’s memo was premature, though.

“I think they got political blowback on that,” Jon Coupal, president of the
Howard Jarvis Taxpayers Association, told AMI. “I think the city tried to sneak
in a low fastball.”

As Americans have increasingly turned to the Internet for goods and services,some revenue streams flowing to states and municipalities have declined. That has led lawmakers nationwide to find ways to tax the Internet economy in order to firm up their budgets.

“In most states, taxation of digital goods would only raise in the tens of millions of dollars at present, not enough to have a significant impact on state budgets that are in the billions of dollars annually,” Michael Mazerov, a senior fellow at the Center for Budget and Policy Priorities in Washington, D.C., told AMI Newswire. “Still, broadening the sales tax base to include these goods (and related services, like Netflix streaming), could forestall some significant and harmful cuts in things like college financial aid and after-school programs. This would benefit state economies in the long run.”

Netflix alone boasts 48 million U.S. subscribers to its streaming services, according to company statistics, suggesting a revenue source ripe for harvesting.     

Indeed, Pennsylvania this year moved to balance its state budget, in part, by expanding the sales tax to cover online movie streaming services, e-books and digital music downloads.

That said, some critics point to surveys showing that the number of Americans who “cut the cord” by cancelling their subscriptions to cable television or similar pay TV services are few. A Consumer Reports survey published this year found that 68 percent of U.S. consumers continue to subscribe to such services.

And critics have argued that electronic products such as e-books and physical products such as bound paper books are simply not equivalent, The New York City Independent Budget Office reports that opponents of extending the reach of local taxes to digital products have argued that electronic downloads have little or no resale value because they are less easily resold.

Coupal said his association looks at the situation through the lens of California’s Proposition 218, a measure passed two decades ago that amended the state constitution and requires local governments to get approval from property owners before levying any general tax increase on them.

“There are several dozen cities looking at this, and I hope they tread carefully,” he said, stressing that the association would pursue litigation if it finds any city commits a clear violation of Proposition 218.

Last week in Pasadena, City Manager Steve Mermell issued a statement affirming that the city is not applying the utility tax to services such as over-the-top television (OTT), an Internet-driven entertainment service that bypasses traditional distribution.

The initial appearance that an unelected city administrator in Pasadena had applied the utility tax to online streaming video services mirrored the situation in Chicago. That city’s Finance Department expanded the scope of the 9 percent amusement tax — which previously applied to concerts, professional sporting events and other recreational activities — to streaming services, according to the Chicago-based Liberty Justice Center.

The nonprofit litigation center’s lawsuit against Chicago continues to move forward and is now in the discovery stage, meaning the parties involved are collecting evidence and documents in the Cook County case, the center’s spokeswoman, Kayla Weems, told AMI.

The center’s lawsuit contends that Chicago’s expansion of the amusement tax is unconstitutional and illegal under both federal and state statues. The move violates the state constitution’s Uniformity Clause, the U.S. Constitution’s Commerce Clause and the federal Internet Tax Freedom Act, according to the center.

“The city of Chicago cannot tax services such as Netflix and Spotify in a discriminatory manner or outside of its constitutional bounds,” attorney Jeffrey Schwab of the Liberty Justice Center said in a prepared statement.

The lawsuit contends that the city does not have the authority to tax Internet-based streaming services and that the Internet Tax Freedom Act prohibits cities from taxing electronic commerce at a greater rate than other types of commerce. The amusement tax levies tickets to some live concerts and theater productions at a rate that’s lower than 9 percent, the lawsuit says, creating an unlawful playing field.

City officials contend that the events taxed differently than digital products are not similar to electronic downloads and so can be treated differently under the federal statute, according to court documents.

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