The popularity of various forms of online digital entertainment—such as music, movies and games—has had one unintended consequence that is hitting cities where it hurt: in their budgets. Their response has been dubbed the “Netflix Tax” which we wrote about last December.
The crux of the issue is this: as consumers increasingly “cut the cord” and shift their entertainment online, many of the services they’re choosing are both non-local and non-taxed. So, while cable companies deal with the loss of revenue when consumers decide that streaming services such as Netflix and Hulu are their preferred way to consume entertainment, cities similarly lose tax revenue—an average of $50 per subscriber per year. Compounding the problem is the fact that broadband is exempt from state and local taxation, due to the Internet Tax Freedom Act. And so, local municipalities are left with a shortfall.
This new streaming tax is meant to replace this lost revenue, and Chicago was merely the first city to impose it. Minnesota, Pennsylvania, and a handful of cities in California have all followed suit, with more likely as they realize the extent and increasing permanence of this lost revenue. The tax can be applied to the purchase of digital products that are delivered to consumers electronically, digitally or via streaming—for example, e-books, digital audio such as songs and audio books, downloaded apps and games, photographs, greeting cards, and of course digital video which is streamed or downloaded including the subscription service, such as Netflix or Hulu, that provides this access.
As reported in Slate, “Telecom revenue is dwindling away because it’s going to broadband…. All that leaves cities and states scrambling to tax those goods and services that have vanished into the web.” This, from Tim Lay, a partner at Spiegel & McDiarmid in Washington, D.C., who represents local governments. “Even if broadband is the telecom of tomorrow, you can’t tax that.”
Despite the new tax being implemented by more and more cities and states, there’s no reason to believe that it will affect the popularity of digitally streamed entertainment. It’s simply been too compelling, too convenient, too established and too disruptive of a business model to think that it’s going to do anything but gain market share. As we discussed in a blog post in October, the shift toward digital is accelerating, most markedly among Millennials. This blog notes that “Studies show that people aged 18 to 24 are spending 30% less time per week watching TV compared to 2012. For the 24- to 35-year-old segment, the decline is 18%. The only demographic watching more TV are those aged 50 to 64.” And cable TV’s loss is of course digital’s gain.
Of course, any new tax does add to the complexity in the compliance requirement to collect it. Recurly is a certified partner for Avalara AvaTax, allowing Recurly merchants to directly integrate their Avalara AvaTax account with their Recurly site. Read our Documentation page for more detail and this page, on Avalara’s website. If you don't already have an AvaTax account, you can sign up here.
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