Research & Commentary: Kansas Governor Considers a ‘Netflix Tax’

Published February 26, 2020

In January of 2020, Kansas Gov. Laura Kelly released a $7.8 billion budget proposal that included significant spending increases for higher education. Under the governor’s proposed budget, certain taxes would be cut, while adding several new sales taxes for digital property and subscription services.

As written, the budget would implement a sales tax on streaming services such as Spotify, Hulu, and Netflix, among many others. Although the proposal does not include a specific tax rate on such services, Kansas currently imposes a 6.5 percent state sales tax on all goods and services. This current rate would likely apply to streaming services if Kelly’s budget is approved by the state legislature.

Kelly claims the Sunflower State’s pension deficit is the main reason for raising taxes despite the state raising nearly $111 million more than estimated during the current budget year. The Kansas Department of Revenue has already calculated that the state would still have approximately $628 million in reserves by the end of the budget’s fiscal year (July 2020 to June 2021) based on Kelly’s proposal.

The pending tax adds Kansas to the growing list of local and state governments that have considered taxing the sale of content consumed through Amazon, Disney, HBO, Hulu, Netflix, Spotify, and other streaming service providers.

In 2017, the Utah state legislature considered expanding the state’s tax revenue base by imposing a new tax on streamed media services, like Netflix. The proposal in the Beehive State failed, however, similar efforts continue to persist throughout the country.

In places where streaming taxes have been implemented, such as Chicago and Philadelphia, taxes on digital goods are very unpopular. In 2015, Chicago imposed a 9 percent tax on digital entertainment, which was widely opposed by the public. Consumers quickly filed a lawsuit on the grounds that the tax violated federal law by taxing digital goods and services. 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.

Iowa and four other states joined the District of Columbia in taxing media streaming services that require a subscription, with rates varying based on the state’s sales tax laws. Digital goods and services have generally been taxable when sold in their non-digital forms. Therefore, the continued rise of consumers using apps, listening to music, watching videos, and reading e-books have made such services an increasingly attractive revenue target for state and local lawmakers.

State legislators should avoid placing new taxes on digital goods and services and abide by the precedent in the 1992 U.S. Supreme Court case Quill Corp. v. North Dakota. In that case, the Court determined a state must prove that a company has a “substantial nexus,” or a substantial physical presence, within a state before taxes can be imposed.

The North Dakota government argued that Quill’s software used in the state constituted a presence using state resources, but the Court ruled that a real-world presence was needed before such taxes could be imposed. Allowing a state to tax digital goods without a brick-and-mortar presence would be a dramatic expansion of a state’s taxing authority.  

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.

When a digital transaction involves multiple states, a consumer can end up paying multiple sales taxes on top of each other. Kansas lawmakers should foster a tax environment that spurs continued economic growth and does not impede the expansion of the increasingly vital technology sector as well as interfere with the private entertainment decisions of Kansans.

The following documents examine digital goods 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’–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. 

Lawmakers Should Get with the Program and Stop Taxing Digital Goods
Jesse Hathaway writes in The Hill about Pennsylvania’s digital goods tax. “Instead of skirting federal law and trying to wring taxpayers dry, lawmakers in Pennsylvania and other states should ‘get with the program’ and stop hiking taxes on things consumers find enjoyable, such as Netflix and Hulu. Cutting spending and eliminating government waste and fraud is a much better way for lawmakers to balance their budgets, and it’s far more popular with voters than tax hikes on services enjoyed by consumers every day,” wrote Hathaway.

10 Principles of Telecom Policy
In this Heartland Institute Legislative Principles booklet, Hance Haney and George Gilder describe what Indiana and other innovation leaders have done and how other states can follow their lead to reap the rewards of new investment in telecommunications services. 

Time to Tax Netflix? Some Cities, and a State, Think So
Elaine S. Povich of Pew Charitable Trusts examines Netflix taxes and discusses how several cities and states are seeking to generate new revenue through taxes on digital goods.

Digital Downloads Should Be Protected from Discriminatory and Duplicate Taxes
Free State Foundation Research Fellow Seth Cooper argues the sourcing rules, nondiscriminatory provision, and requirement for clear statements of tax policy by state legislatures in the proposed Digital Goods and Services Tax Fairness Act would create a framework in which states can equitably collect revenues without burying digital goods and services under multiple state taxes.

The Internet Tax Solution: Tax Competition, Not Tax Collusion
Cato Institute’s Adam D. Thierer and Veronique de Rugy explain why Congress should resist calls to allow states to require online retailers to collect taxes on the sale of goods over the internet.

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.

Research & Commentary: Taxing Cloud Computing–commentary-digital-goods-taxes
Cloud computing has fundamentally changed how consumers purchase and use software and computing services, by moving many of the functions online. Matthew Glans of The Heartland Institute argues state legislators should avoid placing new, burdensome taxes on cloud computing and abide by the physical presence standard. Otherwise, cloud service providers will be discouraged from setting up shop in-state or providing these services there. 


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 subject, visit The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.

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