Time to tax Netflix? Some cities think so

WASHINGTON — A bland, one-paragraph item that appeared this fall in a lightly read weekly newsletter from the city manager in Pasadena has set off a firestorm in the online entertainment industry and in cities and states around the country. The issue: a plan to impose taxes on video streaming services like Hulu and Netflix.

Backers of the internet streaming levy say it’s just another step in governments’ attempts to adapt the tax code to the modern world. Consumers no longer get DVDs at the local Blockbuster video store, where they paid sales tax. Now, they download movies and shows directly to their devices. Streamers should pay taxes too, the tax advocates argue.

But opponents object to the way some jurisdictions are going about the tax. Officials in Pasadena and other cities that have adopted similar rules, such as Benicia and Indio, Calif., argue that regulatory rules adopted nearly a decade ago give them the right to extend taxes to streaming services. Foes, led by the streaming industry, say the issue needs to go before the voters, or at the very least, city councils or state legislatures, before taxpayers start handing over more cash.

The move to impose taxes on internet streaming is another step in an effort by cities and states to tax services that are downloaded from far-flung companies that likely don’t have an office or other facility in that state. The so-called “Amazon tax” that some states are seeking to apply to out-of-state internet sales is one example. Taxing “cloud” services with a business-use levy is another. The taxes are akin to taxing electricity that a utility generates out-of-state, but is consumed in-state, or like cellphone taxes on wireless service.

Pennsylvania and the city of Chicago took the lead on what’s known as the Netflix tax, but not without controversy. As part of Chicago’s 2015 “cloud tax,” the city was ready to begin applying a 9 percent tax to digital entertainment. But news reports prompted an uproar and consumers have filed a lawsuit seeking to stop the tax, which has been temporarily suspended.

And in August, as part of Pennsylvania’s effort to address a $1.3 billion budget gap, the state extended its 6 percent sales tax to cover digital downloads, including music, videos, e-books, mobile apps and games.

At least 45 other cities were initially advised that they also could apply utility taxes like those charged for electricity and cable TV to video downloads, including San Bernardino, Glendale, Santa Monica, Culver City and Pico Rivera. The financial firm MuniServices, which helps cities with structuring and collecting utility taxes, worked with the cities on the tax. Their taxes range from 4.5 to 11 percent. Beyond that, streaming video services worry the utility tax extension or a form of entertainment or use tax could spread to other states and municipalities.

Now, according to MuniServices attorney Donald Maynor, the cities are reassessing and talking to the video industry about their products and how to fairly apply the tax.

“The whole idea was to treat everybody the same,” he said. “That way, we can keep our rates down and nobody gets a free ride.”