State Streaming Tax Efforts Buffering as Facebook, MLB Connect

From Daily Tax Report: State

March 15, 2018

By Ryan Prete

A Facebook-Major League Baseball deal to stream upcoming games comes at a time states are struggling to recover revenue as consumers flock to streaming-based services that mostly go untaxed.

Under the agreement with MLB, Facebook will stream 25 MLB games via its Facebook Watch service. Even though Facebook’s MLB streams will be free to its users, paid streaming video services—like Netflix Inc., Amazon.com Inc.'s Prime Video, Hulu LLC, and YouTube Red—are expanding at a record pace while traditional cable services—such as DirecTV and Comcast Corp.—are seeing a historic decline in subscribers.

A record number of users will watch this month’s NCAA basketball tournaments via streaming on March Madness Live, though that arrangement straddles the two worlds: users need a cable login to watch the games.

Despite the rise of streaming services, states’ abilities to tax the products have been largely untested, and this trend could continue through 2018, according to Max Behlke, director of budget and tax for the National Conference of State Legislatures.

“For states, 2018 has been and will continue to be dominated by conforming to federal tax reform and upcoming November elections,” Behlke told Bloomberg Tax. “Still, streaming taxes are a huge issue, and it’s not a question of if states will move into the direction of taxing the services, but when.”

As consumers continue to cut the cord, states could be staring at an increasingly large revenue hole. State sales and use tax rates vary greatly when it comes to cable television, but at least 21 states administer sales and use tax on cable television, according to Bloomberg Tax data. Additional taxes like telecommunication taxes could also apply.

And streaming services appear to be taking over. In January, Netflix announced its membership was 117.6 million subscribers strong. Meanwhile, cable subscriptions are declining—reports estimate a total of 22.2 million cord cutters by the end of 2017.

Still, streaming taxes are relatively rare throughout the country. Florida, North Carolina, Pennsylvania, and Washington are among jurisdictions that impose a tax on streaming entertainment. A recently proposed Kansas bill aimed at taxing remote sellers and marketplace facilitators includes a push to tax “digital property and subscription services.”

In Chicago, an amusement tax was placed on streaming services, but the proposal is on hold because of a 2017 lawsuit against the tax. Recent legislative attempts have failed in Louisiana and Virginia.

Sourcing Complications

It’s incredibly difficult to break down what a streaming service receives in revenue by state—meaning that it’s tough for a state to grasp potential revenue gains through a streaming tax, according to Mark Nebergall, president of the Software Finance and Tax Executives Council, a Washington-based trade association.

Nebergall, who is also counsel at McDermott Will & Emery, told Bloomberg Tax that it is “administratively burdensome” to identify where someone is using a streaming service, which limits the auditing power of a state’s revenue department.

He said taxing streaming services is difficult because the benefit of a service could be received in a different location than where the service was initially purchased.

Bad for Politics

In the meantime, Behlke said he’s confident that most television services will cater to the streaming market by 2020, but noted that public disapproval of streaming taxes is a major obstacle.

“You tell someone you want to tax their Netflix, consumers don’t want to hear that,” Behlke said. “And, of course, these consumers are voters, too, so it’s a very tough topic for politicians to maneuver.”

Behlke expects to see a sharp incline in state efforts to tax streaming in 2019, after November’s midterm elections.

John Buhl, media relations manager for the Washington-based Tax Foundation, told Bloomberg Tax that because of the immense popularity behind streaming services, any effort to tax the products will be met with staunch public opposition.

“Consumers aren’t sympathetic to the tax,” Buhl said. “We’ve already seen unpopularity shut down efforts to tax streaming services in Virginia and elsewhere around the country.”

However unpopular the tax might be, Behlke and Buhl both agreed that an upcoming U.S. Supreme Court case could potentially normalize a streaming tariff.

‘Wayfair’ Implications

The high court will hear oral arguments in South Dakota v. Wayfair on April 17. The case is a direct challenge to the 1992 ruling in Quill Corp. v. North Dakota that prohibits states from imposing sales tax collection obligations on vendors lacking an in-state physical presence.

If the Quill physical-presence standard is rolled back or repealed, both Behlke and Buhl said it could ease the public into accepting a streaming tax.

“If Quill is repealed, the influx in sales and use tax revenues could allow states to lower rates, but broaden the taxable bases to include streaming and other digital services,” Behlke said.

Buhl said the death of Quill could “jump start” the conversation on streaming taxes.

“People could be open to lower tax rates but expanded bases,” Buhl said. “If Quill is undone, taxing streaming services might not seem crazy or unrealistic to the public.”

On the other hand, if Quill is upheld, Behlke said states would still go after streaming services as a way to make up for lost sales and use tax revenue.

Untapped Sports-Related Revenue

Facebook’s deal with MLB isn’t the first time a streaming service will offer professional sports content.

In 2017, Amazon paid $50 million for the rights to stream 10 of the National Football League’s Thursday night football games. In 2016, Twitter Inc. paid $10 million for the rights.

Facebook and Twitter are free websites and don’t charge additional money for streamed content. If they did, membership fees would be subject to sales and use tax—as paid-for streaming memberships such as Netflix—in all states that impose a sales tax, according to Behlke.

To contact the reporter on this story: Ryan Prete in Washington at rprete@bloombergtax.com

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

Copyright © 2018 Tax Management Inc. All Rights Reserved.


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