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Cities and states find new ways to tax streaming services

More than half the states and dozens of cities now levy taxes or fees on digital streaming services such as Netflix and Hulu, aiming to recoup the revenue they lose when people cut the cable cord.

Cable customers pay sales taxes and a variety of other taxes and fees imposed by state and local governments. For example, states and localities require cable companies to pay franchise fees—up to 5% of gross receipts, under federal law—for the easements allowing them to run cable in public rights-of-way. Cable companies recover these costs by adding charges to customers’ bills.

But as more consumers drop their cable and satellite television subscriptions, the amount of money that governments can collect from these companies and their customers is shrinking. States and cities argue that they shouldn’t be deprived of taxes on video services just because people have changed how they watch video. But some of their new taxing strategies have landed them in court.

“We are starting to see states look at this and say, ‘Our law no longer matches what the industry is doing,’” said Scott Peterson, vice president of U.S. tax policy and government relations at Avalara, Inc., a tax compliance firm. The governments, he said, are thinking that everybody who is doing “roughly the same thing” should be subject to “roughly the same tax.”

The number of Americans who say they watch cable or satellite television plunged from 76% in 2015 to 56% in 2021, according to a Pew Research Center survey of U.S. adults. (The Pew Charitable Trusts funds the center and Stateline.) Of those cord-cutters, 71% say they dropped their cable or satellite service because they can get the content they want via streaming services.

That shift has taken a huge bite out of pay TV revenues, which declined from $116.9 billion in 2016 to $91.1 billion in 2021. Kagan, a research unit of S&P Global Market Intelligence, recently forecast that sales will drop to $64.7 billion by 2025.

'The logic of taxation'

To replace the lost revenue, at least 33 of the 45 states with a general sales tax (plus the District of Columbia) have folded streaming services into their existing sales tax structures, according to the Urban-Brookings Tax Policy Center, a joint venture of two, nonpartisan Washington, D.C., think tanks. These states tax subscriptions to digital streaming services the same way they slap a sales tax on tickets to movies or concerts.

Bringing streaming into the sales tax fold “totally follows the logic of taxation,” said Richard Auxier, senior policy associate at the Tax Policy Center. Since people pay sales taxes for cable television and for DVDs they buy or rent, taxing streaming services in this way makes sense, Auxier said.

“Trying to make up for the money states lost from people not going to Best Buy and buying DVDs is good tax practice,” he said.

Ulrik Boesen, senior policy analyst at the Tax Foundation, a think tank that touts broad-based taxes over specific levies, agreed that extending sales taxes to streaming services is not a bad way for governments to recoup tax losses if they are “interested in grabbing revenue.” But he cautioned that it’s better to do so with a new law as opposed to doing it administratively.

“At least if you are a lawmaker, voters have a say next time you’re up for election,” Boesen said in an interview.

A few states have pursued a slightly different approach. Delaware, which doesn’t have a state sales tax, imposes its gross receipts tax on streaming services. And Florida, which levies a communications services tax on cable and satellite television as well as cellphone service, now extends it to video and music streaming. That is in addition to its state sales tax, which also applies to streaming services.

Meanwhile, Chicago and a few other cities have categorized streaming services as electronically delivered amusements subject to the amusement tax they levy on other forms of entertainment.

Chicago pulled in $9.4 million from streaming services under its amusement tax in 2017, the first full year of implementation, according to the city’s Office of Budget and Management. By 2021, the revenue from the tax had more than tripled to $31.3 million, the city said in an email.

The Chicago suburb of Evanston, Illinois, followed suit last fall, according to Kelley Gandurski, interim city manager for Evanston.

In an email, Gandurski said Evanston’s total take from the amusement tax was $222,870 in 2020. In 2021, after the tax was expanded to include streaming services, the total was $765,585—and streaming services only were included in roughly the last quarter of the year.

Gandurski said in a phone interview that when the discussion began in June 2020 about expanding the amusement tax, “the thinking was at the time that the city was predicted to lose a substantial amount of entertainment tax due to COVID. We could align with Chicago and recoup some of the revenue lost due to COVID.

“We believe streaming is the way of the future,” she said.

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Different from cable?

Customers who cut the cord to consume their video through streaming services still rely on fiber-optic cable that lies beneath city streets to connect them to the internet. Because streaming services use that broadband infrastructure, many cities argue, they should pay the franchise fees that cable companies pay. 

Cities and towns in at least 13 states have sued streaming video giants Netflix and Hulu seeking compensation. Georgia, Indiana and Missouri cities have won preliminary legal victories, but judges dismissed similar lawsuits in Arkansas, California, Nevada and Texas.

Despite a judge’s dismissal in September of a suit by New Boston, Texas, other Texas cities aren’t giving up. Last month, the city council in Austin approved a resolution to file a lawsuit against Netflix, Hulu, Disney and other streaming services to force the companies to pay the city’s 5% franchise fee.

Other Texas cities—including Abilene, Amarillo, Arlington, Dallas and Houston—are pursuing a similar strategy, Austin spokesperson Yasmeen Hassan said in an email.

“Under state law, private use of the City’s right of way requires compensation for the use,” Hassan said. And since 2007, she said, “video streaming companies such as Netflix, Hulu, and Disney have provided their video services to subscribing customers via broadband internet through wireline facilities located at least partially in the public right of way.”

But streaming services reject that argument.

Commenting on similar lawsuits filed by three Georgia municipalities, a Netflix spokesperson told The Verge that the lawsuits “falsely seek to treat streaming services as if they were cable and internet access providers, which they aren’t. They also threaten to place a tax on consumers that the legislature never intended, and we are confident that the courts will conclude that these cases are meritless."

Colin Dixon, founder and chief analyst at nScreenMedia, which follows digital media trends, said in a phone interview that internet streaming is a “very different model” from cable.

Cities, he said, gave franchisees the ability to dig up roads, and the cities charge them fees for that privilege. “This is very, very different,” he said. “Now [streaming] companies are using the cables that have already been installed that really have nothing to do with them. They are running on the open internet.”

But, he said, “I can understand why cities would want to recoup that revenue.”

Stateline is a nonpartisan, nonprofit news service of the Pew Charitable Trusts that provides daily reporting and analysis on trends in state policy.

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As streaming services proliferate, and people cut the cable cord, states and cities are moving to charge taxes and fees on the services.