Kentucky Commissioners Pull the Plug on Proposed Netflix Tax

Published December 9, 2015

Kentucky commissioners have ruled popular streaming video services such as Netflix are different from cable television companies or over-the-air broadcast television stations and should therefore be exempt from the state’s gross revenue and excise taxes on satellite broadcast and wireless cable services.

The Kentucky Board of Tax Appeals ruled Netflix and other similar services are not “generally considered comparable to programming provided by a television broadcast station,” denying the state Department of Revenue’s demand to be allowed to use existing state telecommunications tax laws to collect revenue from Netflix.

Virtual Headaches

Steven Titch, a telecommunications policy analyst for The Heartland Institute, says “Netflix taxes” hurt consumers and create legal headaches for lawmakers.

“Beyond the general principle that taxation places an additional cost burden on both the consumer and service provider, … taxing cloud-based services also creates jurisdictional problems,” Titch said. “A Netflix subscription is portable. A subscriber can use it anywhere there is an Internet connection. So if I watch a good portion of Netflix videos while I’m traveling outside my city or state, what claim does the city have on that transaction?”

Consumer ‘Backlash’

Netflix taxes may be popular with lawmakers, but they’re understandably unpopular with voters, Titch says.

“Legislators may try, but they could face backlash for the reasons [already mentioned],” Titch said. “Because cloud services are virtual, there’s no telling where or when they might be used by the consumer. Like online retailing, it’s arguable that state and local legislators have no legitimate claim on the transaction.”

Pam Villarreal, a senior fellow with the National Center of Policy Analysis, says discriminatory taxes such as the Netflix tax proposed by the Kentucky Department of Revenue spread their harm unevenly.

“Excise and discriminatory taxes such as these are regressive and tend to hurt lower-income households the most,” Villarreal said. “When you look at the taxes imposed on other technologies, such as voiceover and cable TV, the taxes and fees have become numerous and excessive.”

Making entertainment more expensive has a disparate impact on those who can least afford to pay up, Villarreal says.

“For instance, in my state, Texas, which has some of the highest effective tax rates in the country on phone and cable services, the typical landline phone bill is about 25 percent taxes and a cable TV bill is about 14 percent taxes,” Villarreal said. “The ability to tax Internet services would make a fairly affordable technology for all more and more expensive and open the door to numerous taxes and fees. These hit lower-income households the hardest.”

Matt Hurley ([email protected]) writes from Cincinnati, Ohio.