Cities, Local Governments Up Quest for ‘Netflix Tax’ Dollars

As over-the-top video supplants traditional pay-TV nationwide, local governments and cities are looking to cash in (via taxation) on the burgeoning streaming video ecosystem.

In Indiana, the cities 0f Fishers, Evansville, Valparaiso and Indianapolis recently filed a lawsuit seeking 5% franchise fees from Netflix, Disney+, Hulu, DirecTV and Dish Network as part of the state’s Video Service Franchise Act of 2012.

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“Defendants transmit video programming to Indiana subscribers using Internet protocol and other technologies,” read the suit filed in Marion Superior Court first reported by Ars Technica. “When doing so, Defendants transmit their programming through facilities located at least in part in public rights of way within the geographic boundaries of Indiana Units, including public rights of way located within Plaintiffs’ geographic boundaries. Therefore, Defendants are required by the VSF Act to pay the Plaintiffs — and all other Indiana Units in which Defendants transmit video programming through facilities located at least in part in a public right-of-way — franchise fees.”

Following the landmark 2018 U.S. Supreme Court ruling enabling states to charge e-commerce operators such as Amazon for online transactions across state lines, cities and states have ramped up efforts to include taxing streaming video services such as Netflix, Disney+, Hulu and Amazon Prime Video for delivering content via taxable cable, satellite connections.

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Rhode Island and Pennsylvania have imposed taxes on e-commerce while continuing to explore options for streaming video.

In 2015, Chicago became the first city in the country to impose a tax on streaming video platform as part of its entertainment tax code that characterized SVOD as a utility similar to water and power. While the action made headlines in regards to the city’s pursuit of Netflix, actual taxes collected thus far include about $2 million from companies engaging in transactional VOD — not SVOD.

Three years ago, Pasadena, Calif., proposed a 9.4% tax on streaming video services to make up for the shortfall in pay-TV fees as consumer drop the traditional cable bundle. More than 40 California cities have similar laws.

“Cities and states are beginning to experiment with this,” Mark Mazur, director of the Urban-Brookings Tax Policy Center, told CBS News. “People are buying more and more services and less goods, so the sales tax pace is getting reduced, and you end up trying to find ways to raise revenue from services.”

Observers contend municipalities and states will have a difficult time levying taxes on streaming video services that charge a monthly subscription fee and already pay fees for delivering content via third-party ISPs such as Comcast, Charter, AT&T and Verizon.

Harold Feld with consumer-advocacy group Public Knowledge says companies delivering video content through high-speed Internet or broadband networks are not charging consumers per movie or TV show consumed, nor are they necessarily streaming content via cable connections.

“I find it extremely unlikely this lawsuit will prevail,” Feld told the publication.

Robert Callahan, SVP of state government affairs for Internet Association, a consumer advocacy group, in 2016 criticized the move, arguing the proposed taxes were nothing more than a money grab by local and state governments.

“Folks are going to wake up and see line items on their Netflix and Hulu bills, and they’re not going to be happy,” Callahan told CBS News.

Italy Investigating Netflix on Alleged Tax Evasion

Italian officials have reportedly opened an investigation into Netflix regarding possible tax evasion operating its subscription streaming video service in the country.

Reuters, citing a source familiar with the situation, said prosecutors in Milan opened the inquiry despite the fact Netflix does not have a physical presence in the country.

Netflix Italy has about 1.4 million subscribers who access content through servers, desktop computers, TVs and mobile devices, which officials say amounts to a physical presence in the country.

Netflix bases European operations out of Amsterdam, Holland.

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Italy has pursued similar investigations of Apple, Facebook and Amazon, reportedly resulting in substantial fines and tax payments.

With the proliferation of e-commerce and streaming video, local and national governments have recognized a potential fiscal windfall targeting companies operating for-profit operations within their borders without physical presence.

Dubbed the “Netflix tax,” Chicago earlier this year became the first U.S. city to collect taxes ($2 million) from media/tech companies operating services within its city limits.

Netflix, Amazon Prime Video and Spotify, among others, have filed litigation against the 9% tax Chicago officials imposed on streaming entertainment services four years ago.

States of Iowa, Maine, Wisconsin and Colorado, among others, have imposed taxes on Internet-based companies operating within their borders.

Lawmakers in Georgia had considered taxing Netflix and other streaming services to help pay for broadband infrastructure deployment in rural parts of the state.

Netflix and other streaming platforms were removed from verbiage associated with House Bill 887, after a local poll showed 65% of consumers were opposed to taxing Internet services.

Notably, Netflix in 2018 received a €57,000 ($70,385) tax rebate in the U.K. — despite generating a reported £700 million ($864 million) in revenue from 10 million subscribers in the region.