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Netflix — and tax?
Your monthly bill for Netflix, Amazon, Hulu and other streaming entertainment services could go up soon as states such as Illinois try to find ways to offset declining sales taxes and other revenue shortfalls. Chicago, Pennsylvania and Florida have already passed a so-called Netflix tax, and cities such as Pasadena, Calif. have broached the issue.
These taxes can translate to additional fees of less than $1 each month to consumers. But over the months — and tacked onto multiple streaming subscriptions — they might add up to $50 or more each year.
Netflix, consumer tax groups and tech trade organizations have voiced their opposition to such taxes, warning they can be unfair and deter innovation. Some opponents have initiated legal challenges, and at least one state has shelved plans after a court decision. But state and local governments aren't likely to halt fresh efforts as falling pay-TV subscriptions and video rentals mean there's less opportunity to tax cable bills or charge sales tax at the cash register.
"The way, particularly, municipalities rationalize this is, 'Well, we don't have Blockbuster Video anymore. We were charging them tax, that's got replaced by streaming services like Netflix, so for us it's really just replacing one tax with another for the exact same service'," said Larry Downes, project director of Georgetown University's Center for Business and Public Policy.
Sales tax revenue last year grew less than 1%, after accounting for inflation, and states are facing slow growth into 2018, according to the Rockefeller Institute of Government at the State University of New York.
"When you see the sales tax base dwindling like this, it is understandable for lawmakers to get together and say, 'Is there a way that we can expand this?'" said John Buhl of the Tax Foundation, a non-partisan think tank.
Netflix, which boasts more than 50 million U.S. subscribers, hasn't publicly protested the growth in streaming sales taxes but it warns of attempts to assign utility-type taxes.
"Our view is that it is a dangerous precedent to start taxing Internet apps and websites using laws intended for utilities like water and electricity," said spokesman Jonathan Friedland. "
Amazon and Apple declined to comment; Hulu did not return request for comment.
Where your Netflix is already taxed
States including Alabama, Illinois, Louisiana, Maine and West Virginia have considered taxes on streaming and digital entertainment. Those that have already passed so-called Netflix taxes give a sense of the fees facing consumers.
Chicago amended its 9% amusement tax, originally written to tax concert and sporting event tickets, in 2015 to apply to Netflix and other streaming entertainment, including online game networks. For a typical Netflix or Spotify subscriber with a $9.99 monthly plan, that translates to an additional 90 cents per month or $10.79 for the year.
Pennsylvania in August 2016 expanded its 6% sales tax to include streaming services, as well as downloads of apps, movies, music, games and e-books. So, when Apple or Amazon sells a $13.99 ebook to a Pennsylvania resident, the seller must include an 84 cent tax. The state has collected about $46.9 million in the first 10 months of the tax.
Washington, Florida and North Carolina also tax digital goods.
'A tax on millennials'
Sometimes efforts don't stick.
Kentucky began taxing Netflix in 2015, comparing it to a multichannel video programming service such as traditional pay TV. But the state's tax appeals board nullified the attempt, saying the service was not equivalent to a traditional pay-TV service. That decision was subsequently reaffirmed by the state court.
"States are increasingly looking to raise revenue, but these efforts must be both lawful and not discriminate against any one sector," said Dustin Brighton, vice president of state government affairs for the Internet Association.
The Internet Association has yet to publicly oppose streaming taxes, but would do so if the group disagrees with how a tax is levied, Brighton says.
Some new tax efforts would seek voter approval, but many result from adapting current laws to cover streaming services and digital goods. Lawmakers that have fought them say while revenues may be bolstered, they can backfire on local governments.
While in the Pennsylvania House, Republican Mike Regan, now a state senator, voted against the law, despite the state's $1.3 billion deficit. He considered it "a tax on millennials" and "short-sighted" because it could dissuade companies that might locate in the state.
Taxpayers and legislators voiced opposition last year when the city of Pasadena discussed applying its city utility user taxes on Net-delivered services such as Netflix. In Pasadena, that would have meant a 9% tax.
Legal challengers to streaming taxes say federal law that prohibits a tax on e-commerce that discriminates against onlineproviders means some of these municipal efforts should be halted. Earlier this year, the Entertainment Software Association, an industry trade group representing video game hardware makers and software publishers, filed a suit challenging the Chicago law, citing the Internet Tax Freedom Act.
Internet taxation became an issue two months ago when President Trump tweeted about Amazon, founded by Jeff Bezos, and The Washington Post, which Bezos paid $250 million for four years ago, accusing "The #AmazonWashingtonPost" of not paying "internet taxes."
There is no "internet tax" but Amazon does collect sales taxes on goods it sells online to buyers in 46 states.
Yet state and local governments, wrestling with slipping tax revenues, recognize many digital sales go un-taxed. As retail tax bases shrink and with more consumers buying online and purchasing digital goods, more states are likely to debate a streaming tax.
"We are at the very beginning of a trend where local governments begin evaluating their policy vis á vis digital taxation," said Stephen Kranz, an attorney with McDermott Will & Emery, a Washington-based law firm handling the Electronic Software Association's case.