Over-the-top Complexity: Examining the Potential Tax Implications of Streaming Video Distribution

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Tax Policy

Over-the-top is video streaming of film and television content over the internet. This new and disruptive media industry is growing quickly, with players eager to be first to market. In this article, Deloitte Tax LLP's Janet Moran, Stephanie Csan, and Jon Tilson discuss the state tax exposure and significant risks involved in this complex environment when players fail to consider upfront tax planning.

Janet Moran Stephanie Csan Jon Tilson

By Janet Moran, Stephanie Csan, and Jon Tilson

Janet Moran is a principal for Deloitte Tax LLP and leads the US Media and Entertainment Tax practice, and has more than 20 years experience serving clients on a wide range of tax issues. Stephanie Csan is a director with Deloitte Tax LLP's Multistate Tax Services Group in the New York tri-state area. Jon Tilson is a senior manager with Deloitte Tax LLP.

In the beginning, there were movies and television. Fast forward to today and the video landscape has changed dramatically. With the growing popularity of streaming services, the market has expanded exponentially and a new generation of media industry players are looking to insert themselves into the value chain, not just as distributors, but also as content producers.

The entrance of these new players challenges the very nature of what constitutes a transaction, and the tax implications are incredibly complex. When assessing the implications of film and TV content delivered via the internet, also referred to as over-the-top (OTT), there are certain significant factors that new and existing players may wish to consider for upfront tax planning, including what constitutes “broadcasting,” the location of a transaction, the current state of tax policy, and the implications of nontraditional partnerships in the market.


When considering how U.S. jurisdictions impose sales taxes on OTT offerings, it is important to accurately categorize what those offerings are and whether they constitute “broadcasting” or another exempt service because certain tax exemptions are tied to specific definitions.

In the past, most programming was approved and regulated by the Federal Communications Commission (FCC). While many states provide U.S. indirect tax exemptions for FCC regulated broadcasters, other states determine taxability based on the method of transmission. For U.S. indirect taxes, the definition and imposition of tax on sales of digital goods and/or services varies from state to state and requires a thoughtful reading of each state's definition of broadcasting, digital goods and services.

Things do not become simpler on the global level, where the critical term is “electronic services,” as nearly every country seeking to tax non-resident providers has defined this term slightly differently. In general, OTT offerings tend to fall within this definition and thus within the scope of local tax regimes.

Location, Location, Location?

Much of sales and use tax law has developed around the notion of a product or transaction being delivered to, or used in, a specific location. In the U.S., when a company has achieved sufficient physical presence or “nexus” in a state, it is typically required to collect indirect tax on retail sales of a product or transaction that physically occur in that state. However, if a customer based in New York subscribes to a certain cable service and then watches a program from a hotel room in Georgia, the physical situs of the transaction is unclear.

For U.S. indirect tax purposes, depending on whether OTT distribution is considered a service, the taxable situs may be where the service is performed or where the benefit of the service occurs. If a state considers an OTT offering to be content or a digital good, however, the taxable situs may mean where the OTT content is delivered or used by a customer. There is also the question of whether that content is “delivered” or “accessed,” which could result in different tax consequences. Regardless of where the content is viewed, some U.S. jurisdictions are moving toward application of a rule based on either the principal place of use or the residential street address of a customer.

Outside of the U.S., a significant issue is the location where value-added tax (VAT) should be levied on electronic services. For example, if a U.S. OTT provider has customers in France, the VAT generally should be paid. But if its customers are in Singapore, the provider may not need to register for VAT. While policy varies from country to country, globally a shift is underway from collecting indirect taxes at the location of the supplier to taxing electronic services at the location of the customer. This could result in significant compliance obligations in the countries where customers are located.

Tax Policy is a Work in Progress

Getting a handle on how countries, states and localities treat taxation of OTT distribution can be extremely challenging. As technology changes, the statutes and regulations have not always kept pace. In the U.S., some jurisdictions have responded to the explosive growth of OTT and streaming services by enacting new indirect tax legislation or expanding existing statutes, while others are still struggling to catch up. As a result, taxation of OTT distribution is inconsistent across states. For example, if a company streams content to a customer in California, it may not be required to collect sales tax. But if it streams that same content to a customer in Ohio, it may be required to do so.

On the global front, the laws regarding taxation of electronic services, specifically what (and who) may be taxable, differ from country to country and this is not expected to change. For example, if a customer purchases an app which streams another company's content, it is not clear what service should be taxed and who should be responsible for collecting the tax - the app or the content provider. This is becoming an increasingly prevalent issue given the shift toward platform business models, where several parties may participate in providing infrastructure, hardware and content.

Nontraditional Partnerships Have Nontraditional Tax Consequences

As the OTT ecosystem evolves, we are beginning to see increasing competition from nontraditional players, including producers of user-generated content, as well as more partnerships, collaborations between competitors, and co-production and co-distribution arrangements. These arrangements can have complex tax implications. If a company is based in New York and decides to enter a partnership with another company based in California, this could result in a broadened indirect tax footprint and a filing responsibility in California.

Furthermore, the question of who in a partnership is responsible for indirect tax collection is not always clear and may differ based on the interactions between the companies. Ideally, these details should be addressed in the contractual relationship between the two parties though many smaller or new market entrants may be unaware that these issues are important to negotiate upfront.

Competition and technological disruption have prompted companies to sprint toward the next innovation. Yet in their eagerness to be the first to market, some companies may be failing to adequately address pertinent tax considerations, exposing them to potentially significant risk.

We've seen this movie before, and we know how it ends. If your company's business model is changing, it should consider the factors noted above as part of a comprehensive tax plan.

As used in this document, “Deloitte” means Deloitte Tax LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of our legal structure. Certain services may not be available to attest clients under the rules and regulations of public accounting.

This article does not constitute tax, legal, or other advice from Deloitte LLP, which assumes no responsibility regarding assessing or advising the reader about tax, legal, or other consequences arising from the reader's particular situation.

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