Pasadena and other California cities weigh a ‘Netflix tax’ for video subscribers

The intrigue of the Netflix drama “House of Cards” soon might pale next to the turmoil brewing over whether consumers should pay a tax to watch Netflix and other video streaming services.

Pasadena city officials are mulling whether to tax subscribers of Netflix, Hulu and other video streaming using an existing municipal utility tax code that initially was designed for taxing cable-television users. Sacramento and dozens of other California cities have similar codes that might enable them to consider the tax.

That follows similar so-called “Netflix taxes” that already have gone into effect in Pennsylvania and Chicago. More levies elsewhere could be coming as state and local agencies try to generate more revenue, especially to replace revenue lost from consumers who became “cord cutters” by dropping cable TV and switching to video streaming.

“The trend seems to be more toward taxation than non-taxation,” said Paul Verna, senior analyst at the research firm eMarketer.

But the move is fraught with doubts and confusion. For starters, the Internet Assn. — the trade group whose members include Netflix — is not happy about the tax effort and is campaigning to curb it. The group also hinted that it might pursue legal action in some cases.

“We’re not leaving anything off the table,” said Robert Callahan, the Internet Assn.’s California executive director. “There are a number of questions we have about the legality of this.”

There’s also confusion about whether city officials can unilaterally impose a tax on streaming services or whether a specific Netflix tax should be subject to voter approval.

In Pasadena, for instance, City Finance Director Matthew Hawkesworth said he can decide whether to levy the city’s 9.4% video tax on streaming services based on a revised utility tax code that was approved by voters in 2008. That code says video-programming suppliers can face a tax “whatever their technology.”

But the California Taxpayers Assn. consumer group says not so fast.

“Our stance is you can’t do this without a public vote” on a tax on video streaming, said David Kline, the group’s spokesman.

“The law is very clear in California that if the local government wants to expand or increase a tax, it requires a vote of the public,” Kline said.

Then there’s the question about how and when such a tax would be collected by Netflix or the other providers and then relayed to a city’s coffers.

For example, Netflix could look for account holders with addresses in Pasadena. But what if the account holder simply switches to a relative’s address outside the city to avoid the tax? Or, as Kline theorized, “What if someone goes on vacation out of town and uses Netflix at their hotel? Are you still going to tax them?”

Even Pasadena is struggling with that question, Hawkesworth said. “That is the part we’re trying to understand. It could be based on the address designated on the account, but I don’t know that for sure.”

In addition, Netflix would have to keep track of different city tax rates for different subscribers in California.

There are roughly 45 California cities with utility tax codes that might allow for a Netflix tax, including Sacramento, Culver City, Glendale and Santa Monica. The cities’ video tax rates range from 1% of the bill to 11%.

Netflix has 47 million U.S. subscribers, and its standard plan costs $9.99 a month. So a 10% tax would add another dollar to the bill. Hulu, with 12 million subscribers, charges $5.99 to $11.99 a month depending on the service.

Netflix spokeswoman Anne Marie Squeo said the Los Gatos, Calif., company has serious reservations about the tax issue.

“It’s a dangerous precedent to start taxing Internet apps and websites using laws intended for utilities like water and electricity,” Squeo said. “It is especially concerning when these taxes are applied to consumers without consent and in a manner that likely violates federal and state law.”

Pasadena and some of the other California cities that are weighing such a tax have hired MuniServices, a unit of PRA Group Inc., to help them navigate the issue.

MuniServices spokeswoman Nancy Porter declined to discuss the effort in Pasadena or any city specifically, but said in general, the cities are asking such questions as: “If a consumer unplugs from cable television and gets the same service from Netflix or HBO Go, should that service be taxable?”

Asked why he was considering the tax for Pasadena, Hawkesworth said, “My job is to put all the options on the table for the city manager and elected officials to make good, informed decisions about how the city can collect revenue.”

Netflix and the rest of the streaming industry “has proven itself fairly sustainable, and it’s incumbent on us to say, ‘Does this apply [to a tax] or doesn’t it apply?’ ” Hawkesworth said.

Pasadena, with a population of 142,000, expects to collect $2.3 million from its video utility tax — mainly for cable TV — this year. That’s up from $1.9 million in 2013 because of additional subscribers.

But the city is projecting overall budget shortfalls in coming years, starting with a $7.6 million deficit in 2018, so it’s looking for additional revenue sources.

Regardless, one big reason the Internet Assn. objects to a Netflix tax “is the precedent of having what you do online being taxed as a utility,” Callahan said.

“That is a slippery slope we think is dangerous,” he said. “Today, it’s because I’m paying for Netflix, and the next day, it’s for the music I download online and the next day, it’s for social media I use. If you’re treating Internet websites and apps as utilities, there’s no limit as to how far they can take it.”

That’s already partly the case in Pennsylvania. On Aug. 1, the state’s 6% sales tax was extended to streaming services such as Netflix and to digital downloads of music, e-books and ringtones. The tax is levied on users with accounts having a Pennsylvania billing address.

Chicago last year imposed a 9% tax on streaming media services under an existing “amusement tax” typically applied to concerts and sporting events.

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But that tax is being challenged in court by the Liberty Justice Center legal group on grounds the tax is unconstitutional under state and federal laws. In the meantime, Chicago residents are forking over the tax money.

Critics also contend that taxing Netflix and other streaming services amounts to double taxation because the user typically already is paying local taxes for Internet access for their computer and for phone-carrier access for their smartphone.

Of course, the same double taxation already applies to goods bought on Amazon.com and some other e-commerce sites. Amazon initially was free of state sales tax but now Amazon purchases are subject to sales tax in 28 states, including California.

Regardless, the factors at play in taxing Netflix and other streaming services “make for a situation where everything is up in the air,” eMarketer’s Verna said. “The cities are taking matters into their own hands, and then there’s going to be a lot of fallout.

“As these battles play out and get more media attention, and lobbying attention on both sides escalates, it’s anybody’s guess who wins,” Verna said.

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