46 California cities join Rush in imposing a ‘Netflix tax’

from tax-all-things department

Last year, Chicago proudly declared that the city would extend its 9% entertainment tax (traditionally covering bookstores, music stores, ball games and other physical entertainment) to online streaming services and the cloud. computing. As Chicago eagerly sought the additional $12 million in revenue the expanded tax would provide, it eventually faced a lawsuit challenging the legality of Chicago’s decision. The pending lawsuit by the Liberty Justice Center claims that Chicago violated city rules by not holding a full vote on the changes and violates the Freedom of Internet Tax Act.

Legal or not, Chicago’s push to impose a Netflix tax has opened the floodgates.

Earlier this year, the Pennsylvania legislature expanded the state’s 6% sales tax to cover digital downloads and subscription services like Netflix and Hulu, but also music, e-books, apps, online games and ringtones. And now Pasadena, Calif., has joined the party by slapping its own 9.4% tax on streaming video providers like Netflix, HBO Go, and Hulu. In fact, Pasadena is one of a total of 46 California cities rushing to pass the tax to help address city budget shortfalls. But just like Chicago, there are a number of groups willing to pursue the move, saying these cities lack the power:

“Jon Coupal, president of the Howard Jarvis Taxpayers Association, called the tax “highly suspicious.” The association’s legal team is currently investigating the legality of the new interpretation of the tax.

“We are going to look into this very closely? Coupal said. “If we determine that this is an extension of an existing tax, then under the Constitution they need voter approval. They can put as much lipstick on that pig as they want, but the pig is still a tax increase.

Pasadena, however, says city laws have always given it the power to tax cloud-based services:

“Pasadena Chief Financial Officer Matthew Hawkesworth determined Thursday that the tax applies to video games and similar cable streaming services, regardless of the content of those video programs or the technology used to provide those services.” according to a memo to City Manager Steve Mermell.

“It’s our interpretation because of our code, these types of video services have always been eligible to be taxable,” Hawkesworth said. “The administrative ruling instructs the various businesses that provide video service that the tax also includes their services, and it will be their responsibility to collect the tax and remit it to the city.”

Efforts to tax all cloud services create an absolute legal minefield to determine exactly where a cloud-based transaction takes place, when to apply said tax, and who intends to collect it. Who pays sales tax when an app developer in New York relies on a cloud provider in New Jersey and sells to customers in Illinois? No one seems to know, and the answer may differ from state to state. But one thing is certain: Lawyers certainly won’t go to bed hungry as cities rush to cash in on the rise of the internet’s video revolution.

Filed Under: california, chicago, internet taxes, netflix tax, pennsylvania

Companies: netflix

Bernard P. Love