Tax Analysts Blog

Taxing Streaming Video

Posted on Mar 26, 2014

State governments are often slow to adapt their tax codes to technology. Most states are just now getting a handle on the taxation of digital products, but technology doesn’t stand still. States are now struggling with how streaming video services fit into the sales and use tax structure.

Streaming video is exceedingly common, yet challenging to tax. As a result, few states have specifically addressed its tax treatment. Historically, the problem with the taxation of digital goods (and now cloud computing) is that the sales tax was designed to be imposed on the sale of tangible personal property. The tax base has been expanded over time to include specifically enumerated services. But many digital products are a mix of an intangible product and a service. Most transactions don’t neatly fit into existing state tax laws.

With streaming video, states have taken a variety of positions. For example, Arizona taxes charges paid to stream video as if it were the rental of tangible personal property. In Texas, the definition of cable television service is broad enough to include all forms of video programming, including streaming video. Still others, like California, impose no sales tax on digital goods.

Some states have also imposed communications taxes on streaming video. To do so, they use existing laws regarding information services or data processing to tax streamed content. For example, Florida’s communication services tax is expansive enough to encompass telecommunication and audiovisual services transmitted via any medium, which includes streaming video.

Given the varying positions and general uncertainty in this area, it isn’t surprising that litigation has ensued. Netflix is involved in litigation in Louisiana and Kentucky. The Louisiana suit was brought in November 2013 by St. Charles Parish for unpaid sales tax on “streaming and/or internet television subscriptions.” Because there is no mention of digital products in the parish’s ordinances, it appears from some rescinded guidance that the parish is treating the sale of streaming video as the sale of tangible personal property.

Kentucky, a member of the Streamlined Sales and Use Tax Agreement, has a definition of digital products in its tax code. However, that definition does not include streaming video, and the state did not adopt the SSUTA’s definition for digital audiovisual work, which would have included streaming digital content.

All in all, it’s a mess out there. States will continue to use a variety of methods to attempt to subject streaming video to tax. Streaming any media content is unlikely to fit neatly within existing definitions and laws, which will likely result in states taking creative positions to ensure its taxability. This puts taxpayers like Netflix in a difficult situation.

Read Comments (1)

Rick MInorApr 2, 2014

Great article, Cara. A lot of useful information and analysis in a relatively
small space. I for one prefer the state legislature decide specifically what
digital products to tax or not and look for consistency in the approach. Texas
legislature appears to be a good example of this. Since 2003, the EU has
endeavoured to define both digital products and downloads as "services" for VAT
purposes, which had more to do with where to tax (and at what rate) rather than
whether to tax. The fragmented compliance effect of the state sales tax rules
for suppliers of digital products and services will be a significant burden on
businesses for a long time to come. Time for a uniform state sales tax code?

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