Kansas Gov. Laura Kelly unveiled her 2021-2022 budget proposal for the Sunflower State, full of new tax proposals following a year of deficits due to the coronavirus-related recession. The budget rings in at $20.9 billion, and most notably includes applying state sales taxes to online streaming services such as Netflix and Hulu. Additionally, state sales taxes would apply to purchases from out of state businesses through online market facilitators such as eBay, Amazon, and Etsy.
This is not the first time that Gov. Kelly has proposed such taxes. In 2020, Kelly released a $7.8 billion budget proposal that contained the same proposals for streaming sales taxes. These proposals died in 2020, but Gov. Kelly has not given up the fight.
Coined the “Netflix Tax,” many states have proposed, passed, or defeated similar tax proposals on streaming services and platforms in recent years. Historically, most states have only imposed sales taxes on transactions in which tangible property is involved. Although with newer innovations in technology with streaming platforms and cloud systems, some lawmakers have begun to see dollar signs. Gov. Kelly is no different. The debate is highly contested with experts in sales tax policy still disagreeing over whether streaming your favorite show involves tangible property or intangible information.
However, there is no contest that additional taxes will have harmful effects on the consumers in Kansas. It would behoove Kansas lawmakers to continue to vote down and avoid this trend. Overall, this trickles down to higher prices for Kanas residents. It is paramount to note that as written, this tax does not simply apply to Netflix and the binge-watchers of the Sunflower State. This applies to Kansas consumers who buy books online, play games online, stream music, movies, television, or maintain magazine subscriptions. Overall, this will end up affecting virtually every single one of Kelly’s constituents.
In places where streaming taxes have been levied, such as Chicago and Philadelphia, taxes on digital goods are detested. In 2015, Chicago imposed a 9 percent tax on digital entertainment, which was vehemently opposed by the public. In a surprising turn of events, the Entertainment Software Association quickly filed suit against the tax and the city claiming that it violated the Internet Freedom Act. The lawsuit was rejected by Illinois Circuit Court Judge Carl Anthony Walker in 2018, who upheld the legality of the tax. The ruling opened the door for other cities and states to attempt similar tactics. Overall, the actions of the Chicago City Council resulted in taxpayers footing the bill for an unnecessary legal challenge. A legal challenge that can be avoided in Kansas.
Taxes on streaming video and music services are unnecessary and interfere with the private market by protecting cable companies from competition. This lack of competition can lead to many cable providers having government-sanctioned monopolies and can produce artificially high prices for consumers without any alternatives to consider.
Furthermore, the proposal to levy internet sales taxes to purchases from out of state businesses may seem appealing to Kelly and lawmakers, but out-of-state internet sales taxes inherently reduce states’ accountability to taxpayers and will ultimately lead to higher costs for consumers.
Historically, states have avoided the legal complexities of implementing internet sales taxes on persons or businesses without a physical presence in the state. However, when the U.S. Supreme Court upheld South Dakota’s internet sales tax law in South Dakota v. Wayfair, things changed swiftly.
The ruling overturned the 25-year-old “physical presence nexus” standard set in Quill Corp. v. North Dakota. Under this new standard, a business may be required to pay sales taxes to a state or local government even if it has no physical location, or nexus, in the taxing jurisdiction.
The Wayfair decision reversed decades of sales tax law and has encouraged many states to impose new sales taxes on online businesses and consumers as seen in Gov. Kelly’s latest budget proposal. Between burdensome licensing laws, heavy fees, and onerous regulations, small businesses already face substantial barriers. Adding a new internet sales tax would only increase the strain on small businesses.
Moreover, small businesses already face a maze of taxing bodies. According to the Tax Foundation, there are more than 10,800 sales tax jurisdictions in the United States. New sales taxes on internet transactions will make it more difficult for small businesses to remain in operation. This is especially worrisome for small business owners who are struggling to remain open amid a worldwide pandemic that has caused much economic hardship.
While many states are still reeling from lost revenue due to the pandemic and mandated lockdowns, a Netflix tax and out-of-state internet sales taxes are not the solution. Like all taxes, these will ultimately raise costs for residents of the Sunflower State. Members of the Kansas legislature should consider all of these factors as they prepare to vote of ratification of this budget.
The following documents examine state internet sales taxes in greater detail.
Five Reasons Why the ‘iTunes’ Tax Is a Bad Idea
James Lakely of The Heartland Institute gives five reasons why imposition of a sales tax on Internet purchases will cause more harm than good, in an op-ed published in The New York Post.
Research & Commentary: Utah Considers ‘Netflix Tax’
Matthew Glans of the Heartland Institute examines a Netflix tax proposal in Utah from 2017 and discusses the ongoing debate on imposing sales taxes on digital goods and services.
More States Taxing Streaming Services Like Netflix and Hulu
Gail Cole from CPA Practice Advisor discusses the latest developments on state and city governments imposing a tax on media streaming services.
Netflix Tax: A Dangerous New Trend
William Paul with Americans for Tax Reform breaks down the positives and the negatives of implementing a “Netflix tax”, or a tax on online streaming services. Paul discusses how such a proposal can lead to further encroachments by the government.
What Does the Wayfair Decision Really Mean for States, Businesses, and Consumers?
In this “Q&A,” Joseph Bishop-Henchman of the Tax Foundation discusses the Wayfair decision and the potential effects it could have on states.
Understanding an Internet Sales Tax
Jessica Melugin of the Competitive Enterprise Institute examines the effort by states to expand their internet sales taxes to draw more revenue from taxpayers. Melugin argues in favor of the origin approach of taxation, a sales tax system where the sales tax is determined based on where the product was sold.
Taxes on Remote Sales
This election brief from the Kem C. Gardner Policy Institute at the University of Utah examines the complexity of online sales, including the legal context and the growth of online sales, and provides some policy options for consideration.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics visit The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.
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