Towns take heat from proposed taxes targeting streaming video

Tempting fate — and mobilized outrage from consumers and their Silicon Valley allies — municipalities around California have zeroed in on a new source of revenue: Online film and television streaming services, and the people who use them.

“If the cities are successful in adjusting their existing utility users taxes — and there are questions surrounding the legality of such a move — viewers could be forced to pay as much as 10 percent more to stream Netflix’s ‘Orange is the New Black’ or Amazon Prime’s ‘The Man In the High Castle,'” the San Jose Mercury News reported. 

“Cities from Richmond to Redwood City to Watsonville are looking at adopting a streaming video tax. Alameda, Albany, Emeryville, Gilroy, Hayward, Hercules, Menlo Park, Los Altos, Newark and San Leandro have ordinances that could be tweaked to allow them to tax video streaming without a fresh round of voter approvals.”

The temptation has quickly spread from the city of Pasadena, where local officials have already succeeded in slapping the levy on residents. “Pasadena was among the first to say publicly this fall that it wanted to tax video streaming services like Netflix, a step that could make up for lost tax revenue from growing numbers of cord-cutters,” the New York Times recalled. “The move in Pasadena, with a population of about 140,000, has drawn consternation from technology companies and consumers who worry that it could be copied across the state.”

In fact, some tax defenders have construed its legality around a rule passed years ago under different auspices. “Pasadena voters modernized a law in 2008 to tax cell phones like landlines, never anticipating it could be applied to video streaming,” according to CBS. “Forty California cities now have similar laws.”

National nerves

And though the federal government doesn’t permit internet taxation, big cities outside California have muscled in onto the potentially lucrative source of cash too. Results, however, have been mixed. “Pennsylvania’s charging a 6 percent sales tax on everything, from apps to downloads, to help close a $1.3 billion budget gap,” the network added. Chicago, meanwhile, “is currently being sued for charging a 9 percent tax on video streaming.”

Critics have warned bites like that add up. The taxes “may show no signs of stopping, considering streaming music, podcasts, video games and other technology is constantly being developed,” The Drum observed. “Paul Verna, an eMarketer analyst, said that a larger debate could erupt when people start seeing their bills if those smaller channels are continuously added.”

For its part, Netflix threw up a red flag. Spokesperson Anne Marie Squeo told the Los Angeles Times it was “a dangerous precedent to start taxing Internet apps and websites using laws intended for utilities like water and electricity. It is especially concerning when these taxes are applied to consumers without consent and in a manner that likely violates federal and state law.”

Shifting business

And now, in the midst of the controversy, Netflix has moved aggressively to court customers with a significant new feature adopted by its rivals: offline streaming. “Netflix signaled in recent months it would add an offline viewing option to better compete as the streaming video market becomes more and more crowded,” Reuters reported. “Amazon.com Inc’s rival streaming video service, Prime Video, has had this option for about a year.”

The company’s domestic customer base has stalled, but foreign audiences have swelled, a trend that could be exacerbated if American cities flock toward taxation. “Growth among U.S. subscribers has slowed in 2016,” the wire continued. “Netflix added just 370,000 subscribers during the third quarter and only 4.3 million since the third quarter of last year, suggesting they are reaching a saturation point.”

“In that same time frame, Netflix has added 13.2 million international subscribers, including 3.2 million in the third quarter. Much of that has to do with Netflix’s expansion by more than 130 countries earlier this year to over 190 nations currently.”