Virginia Lawmakers Hit Pause on ‘Netflix’ Tax

By Andrew M. Ballard

Virginia lawmakers are putting off efforts to tax audio and visual streaming on communication services like Netflix and Hulu.

The state House Committee on Finance unanimously agreed to “indefinitely” shelve a bill ( H.B. 1051) that would have levied sales and use taxes on Netflix Inc., YouTube TV, Hulu LLC, Spotify, and other online streaming services. Fiscal notes accompanying the legislation, which also would have added prepaid calling services to the expansion of such taxes, estimated it would have brought in about $7.9 million in annual revenue.

The Jan. 29 vote “shows there is no appetite in the Commonwealth for expanding the tax base to digital content streaming and similar services,” Mark Nebergall, president of the Software Finance and Tax Executives Council, an industry-focused advocacy group based in Washington, told Bloomberg Tax Jan. 31. State legislatures are moving away from such taxes, he said.

‘This is the Future’

However, Max Behlke, director of budget and tax for the National Conference of State Legislatures, told Bloomberg Tax in early December that he expected the taxation of such services to be a focus of state tax efforts during 2018.

“More and more people will cut the cable cord and start streaming channels and video. This is the future,” Behlke said. “Currently, telecommunication taxes are a big revenue source for states, so when it comes to streaming services, states will begin to identify specific services, then decide whether or not to apply a tax to it.”

Behlke also said he expects significant pushback from a potential tax levied on streaming services and that states must make it a priority to revisit and modernize their tax codes.

The District of Columbia, Florida, North Carolina, Pennsylvania, and Washington are among jurisdictions that impose a tax on streaming entertainment. Efforts to capture such revenue through legislation or rulemaking have also recently been tried or considered in Alabama, Kentucky, and Maine, as well as certain local jurisdictions.

Pushback a ‘Reaction’

Stephen Kranz, partner and tax attorney at McDermott Will & Emery in Washington, agreed with Nebergall that “there appears to be a trend away from imposing such taxes on streaming services, at least at the legislative level.”

One example is Arizona, where lawmakers are considering a bill that would expressly exclude streaming content from taxation, Kranz said. Similar bills were introduced in the Florida Legislature in 2017 but weren’t finalized.

Such pushback “is a reaction to business and consumer concerns,” Kranz told Bloomberg Tax.

“There may be some rogue revenue departments that have attempted to administratively expand the tax base, but they are subject to attack as outside the legislative tax imposition which, generally, only applies to sales of tangible personal property and certain enumerated services,” Nebergall said.

With assistance from Chris Marr in Atlanta, Ryan Prete in Washington, and Paul Shukovsky in Seattle.

To contact the reporter on this story: Andrew M. Ballard in Raleigh, N.C., at aballard@bloomberglaw.com

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

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