California Chills Bill to Block Taxes on Netflix, Hulu

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By Laura Mahoney

A bill to halt plans in dozens of California cities to tax streaming video services for five years is stalled for the year.

Assemblyman Sebastian Ridley-Thomas (D) agreed to shift his A.B. 252 into an idea that lawmakers will study this year and take up again in 2018. The unanimous vote April 24 in the Assembly Revenue and Taxation Committee was a win for the powerful California Cable and Telecommunications Association, as well as cities, counties and the consulting firm MuniServices LLC, which has been helping cities figure out if their existing ordinances would allow such a tax.

Pasadena, Calif., recently introduced a plan to tax streaming services, and Ridley-Thomas said at least 80 other cities are considering such a move.

The local governments want the application of existing utility user taxes (UUT) on video streaming to replace revenue they are losing as more residents drop cable television service in favor of streaming services such as those from Amazon.com Inc., Netflix Inc. and Hulu LLC.

Mark Nebergall, an attorney with McDermott Will & Emery in Washington, D.C., and founder of the Software Finance and Tax Executives Council (SofTEC), told Bloomberg BNA April 25 the delay could make local ordinances to tax streaming services more likely this year.

“We’re disappointed the bill has taken a slower boat,” he said.

Discrimination Arguments

Carolyn McIntyre, president of the cable association, argued the state bill would have given streaming services an unfair and discriminatory advantage over cable companies, which must collect the UUT from customers.

Ridley-Thomas said he isn’t convinced the UUT applies to streaming video because that tax is meant to be levied based on the address where the infrastructure for the service is used. Streaming video is mobile and can be used anywhere.

“That is a missing aspect of UUT’s,” he said. “I don’t know that it was intended to catch mobile.”

Ridley-Thomas said he expects litigation to crop up as more governments weigh application of their existing taxes on the service. He proposed a five-year moratorium on local taxation to give lawmakers time to consider alternative, uniform taxation schemes for new technologies.

“It’s not a solution unto itself but an attempt to foster dialogue,” he said of the bill.

More Study Needed

However, Ridley-Thomas said he would delay his bill so lawmakers can study the potential impact of a moratorium on local revenue, the issue of fairness between types of service providers and whether providers are complying in places where the tax may already apply.

Representatives of the streaming services industry made their own arguments about fairness, saying non-uniform taxes among multiple cities would create a significant compliance burden on an industry that has never dealt with such a tax before.

Local taxes on video streaming would also violate the due process and commerce clauses of the U.S. Constitution because many of the providers have no physical presence in California, they argued.

“This would result in a fundamental unfairness and competitive disadvantage to similarly situated local providers that are required to collect the tax since their competitors with no physical presence would not have to,” Kara Bush, director of western region government affairs for the Computing Technology Industry Association (CompTIA), told the committee.

Internet Tax Freedom Act

Local taxation would also violate the federal Internet Tax Freedom Act, which blocks states or local governments from imposing “discriminatory taxes on electronic commerce,” said Bush, also speaking on behalf of the Digital Goods and Services Coalition, a national group of companies and trade associations focused on preventing the expansion of state and local taxes to digital goods and services in an unfair or unconstitutional manner.

Bush asked the committee to broaden the moratorium to also apply to audio streaming and video gaming.

Both proponents and opponents of the bill said they anticipate litigation about the issue. But Dan Carrigg, deputy executive director for the League of California Cities, told the committee there is nothing wrong with cities updating their tax ordinances, which voters have approved.

“The doors of the courthouse are open for interpretation of our existing ordinances,” he said.

Assemblyman Bill Brough (R), vice chair of the committee, said he disagreed with the position the cities are taking. He said he worked for former U.S. Rep. Christoper Cox (R-Calif.) when he was drafting the IFTA.

“I don’t think cities have the ability to tax it per that legislation,” he said.

To contact the reporter on this story: Laura Mahoney in Sacramento, Calif. at LMahoney@bna.com

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

For More Information

Text of A.B. 252 is at http://src.bna.com/ofD.

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