By Alex Samaei
Tax law is often seen as an ever-changing source of complex frustration for consumers, businesses, and attorneys. This is largely because it is an area of law which undergoes continuous modification by legislator in attempts to “fix” various aspects of the federal and state economies. One of the newest attempts to adapt taxation to modern and upcoming industries is the proposed utility tax for online video streaming.
The city of Pasadena, along with approximately forty other towns in California, announced in late 2016 that they have been consulting with experts on how to apply their existing utility use tax for cable to video streaming at a ~9.4% rate. Similarly, Chicago is also currently undergoing litigation for trying to tax cloud computing sales using their amusement tax. Pennsylvania took a different approach of applying sales tax to internet purchases in order to fill their $1.3 billion budget gap. These locations are just the beginning of this shift in U.S. taxation, which countries such as Canada have already begun.
A spokesperson for Pasadena explained that they are considering this new source of tax income because less people today are paying for cable, buying DVDs, and spending money on entertainment. It is natural for tax law to adapt to new industries as the old die. However, expanding utility taxes into video streaming may not be legal under current laws.
Typically, utilities are services which are considered necessary to the public at large. These vary by location but often include water, gas, electricity, telephone, sewage, and (increasingly common) broadband. Pasadena already considers cable television as a utility through their local statutes adopted years ago. It is quite a stretch to say that services such as Netflix are utilities because they are “necessary to the public at large.” Usually with utilities, there are no alternatives available which requires some level of higher government oversight. In fact, Justice Brandeis described utilizes as “unlike merchandise or land, [because they are] not commonly bought and sold in the market.” That is not the case with video streaming. While it is cheaper than traditional cable, you already need access to the internet to use the services. This means you probably have the option of cable or satellite TV, purchasing DVDs, or just not streaming videos to begin with. This service is widely competed in with more big players trying to get involved every year (e.g. Netflix, Hulu, Amazon Prime, HBO GO, Direct TV, etc.).
The “Internet Association,” a group that tries to promote innovation and economic growth through an open internet, stated that Pasadena would be violating federal and state laws if they go through with this proposal. Presumably this is referring to the Internet Tax Freedom Act which prevents state and local taxation of internet access, discriminatory internet-only taxes, and multiple taxation on electronic commerce. While taxing video streaming as a utility would not restrict access, it may be viewed as a discriminatory internet only tax or causing multiple taxation.
Additionally, by treating video streaming as a utility there is strong potential for double taxation of the service because in these cities broadband services are already being taxed. Very often you have financial incentives to package cable television along with internet services. Each month you’ll be paying a utility tax on this package service, but this proposed application of the existing tax law would force some buyers to pay double tax for a service. Buyers who expect to stream videos often are also more likely to pay for a higher bandwidth from the start.
The state of California has proposed a bill which wouldn’t allow these municipalities to tax Netflix like a utility. This shows that many of these proposals and the resistance that follows stem from lobbying and politics behind the dying cable industry. It shouldn’t be shocking that Pennsylvania is one of the few states already taxing video streaming, and happens to be the home of Comcast Corporation. However, social and political agendas aside, utility taxes are not the proper approach for taxation of video streaming.
Student Bio: Alex Samaei is a 2L at Suffolk University Law School. He is currently a staff member of The Journal of High Technology. Alex holds a B.S. in Industrial & Systems Engineering from the University of Florida.
Disclaimer: The views expressed in this blog are the views of the author alone and do not represent the views of JHTL or Suffolk University Law School.
