‘Netflix Tax’in Queue for Review in Pasadena, Calif.

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By David McAfee

Oct. 5 — Pasadena, Calif., is considering applying its “video tax,” used for cable television, to streaming services like Netflix and Hulu, the city attorney’s office confirmed.

The city’s finance department is looking into using a utility users tax (UUT), approved by voters in 2008, to collect taxes on over-the-top television (OTT) services. That option is currently under review, according to Javan Rad, chief assistant city attorney for Pasadena.

“One of the things that we are looking at is whether to tax OTT services under the video tax of the existing utility user tax ordinance,” Rad told Bloomberg BNA Oct. 4. “It’s not an expansion, but rather just an application of the existing tax.”

Pasadena city officials are considering following in the footsteps of two other California cities—Indio and Benicia—that have already adopted administrative rulings applying utility taxes to Netflix and other streaming services. Similar taxes are in use in Pennsylvania and Chicago, but these kinds of taxes often face hurdles. Chicago’s amusement tax is now the subject of pending litigation for alleged constitutional and Internet Tax Freedom Act violations (144 DTR H-1, 7/27/16).

“It’s a dangerous precedent to start taxing Internet apps and websites using laws intended for utilities like water and electricity,” a Netflix Inc. spokesperson told Bloomberg BNA in an Oct. 4 e-mail. “It is especially concerning when these taxes are applied to consumers without consent and in a manner that likely violates federal and state law.”

Administrative Ruling?

Pasadena Assistant City Manager Julie A. Gutierrez announced Sept. 22 that the city had been working with its UUT consultant, MuniServices, to determine if the city’s UUT ordinance applies to streaming video services.

“An administrative ruling will now allow the city to apply UUT to video program services referred to as Over the Top Television such as Hulu and Netflix,” Gutierrez wrote in a weekly newsletter, adding that the ruling will “assure that all ‘video programming’ is treated the same, regardless of technology or service supplier.”

The Internet Association, a trade association representing global internet companies, and others pushed back against Pasadena’s tentative decision, which would have applied the UUT to OTT effective Jan. 1.

“Websites and apps are not utilities, and efforts to designate them utilities for tax purposes sets a dangerous precedent that is in potential violation of federal law and Prop 218 in California,” Robert Callahan, California executive director for the Internet Association, told Bloomberg BNA in an Oct. 4 e-mail.

‘Under Review.’

On Sept. 29, a week after the previous notice on the Netflix tax, Pasadena City Manager Steve Mermell clarified that the city is “not presently adopting nor applying an administrative ruling that would tax OTT services.”

“The recent direction being taken by other local governments with similar UUT ordinances is to tax these OTT services,” Mermell wrote in a weekly newsletter. “Whether an administrative ruling is ultimately adopted in Pasadena will come only after a full and complete review of the matter, including a review of the City’s underlying ordinance and ballot measure; monitoring other cities’ activities in seeking to apply a video tax on OTT services, including litigation, if any.”

Mermell said city officials will also consider updates from MuniServices, as well as advice from other experts and counsel.

To contact the reporter on this story: David McAfee in Los Angeles at dMcAfee@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

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