Many states and localities are concerned that the proliferation of streaming services is shrinking tax revenues previously received from sales of traditional forms of entertainment. Those concerns are not unfounded. The rapid development of streaming services has drastically changed how people watch "television." It is now estimated that over 56 million U.S. adults either have cancelled or never subscribed to traditional cable or satellite television service, while the number of Americans who subscribe to Netflix now equals the number of Americans who have a traditional television service subscription. Meanwhile, streaming music services now generate the majority of the industry's revenue.
Thus, it is not surprising that many jurisdictions have taken a variety of approaches to subject sales of streaming services to sales taxes and excise taxes. And now that the U.S. Supreme Court has ruled that there is no physical presence requirement for a state to impose a sales tax collection obligation on sellers, all companies offering streaming services should pay even closer attention to the state and local tax landscape—even if the streaming service is only a small part of a larger business. Notably, in a state or locality that imposes sales taxes or excise taxes on streaming services, a company's otherwise non-taxable services may become taxable if the company decides to include a streaming service as part of a bundled offering for a single price, even if the streaming service is not used or desired by a particular purchaser.
Some jurisdictions, including Pennsylvania, have passed legislation amending their sales tax laws to specifically tax streaming services. However, similar legislative efforts have proven less successful in other jurisdictions. For example, a proposal in Virginia to expand the state's communications sales tax to streaming entertainment services was overwhelmingly rejected by a Virginia House of Delegates committee earlier this year. Meanwhile, the general unpopularity of taxes on streaming television services has inspired legislative proposals to explicitly exclude such services from tax.
Taxing authorities in other jurisdictions have attempted to apply existing sales tax and excise tax laws to reach streaming services by issuing guidance such as letter rulings and publications. For example, in a 2018 Private Letter Ruling, the Texas Comptroller found that a streaming video service was subject to sales tax as a "cable television service." The Florida Department of Revenue has issued guidance stating that, while sales and rentals of streaming videos are not subject to sales tax, rentals of streaming videos are subject to the State's communications services tax as a "video service." Even more confusing, the Florida guidance states that sales (as opposed to rentals) of streaming videos are not subject to Florida's communications services tax because the sales would qualify as a nontaxable "information service."
Localities are also attempting to tax streaming services, even when the state is not. For example, although Illinois does not currently impose tax on streaming services, the City of Chicago's Comptroller released guidance stating that the City's excise tax on admission fees or other charges paid for the privilege to enter, witness, view, or participate in "amusements" applies to certain streaming services.
Any company that offers streaming services should be aware of the taxing authority's position in each jurisdiction where the company has customers, even if the company has no other "presence" in that jurisdiction. Importantly, however, companies should also be aware that a taxing authority's position is subject to challenge. Judicial challenges of taxes on streaming services are ongoing in Chicago and Pennsylvania. Notably, at least one state's attempt to impose existing taxes on streaming services was rejected. In Kentucky, a state circuit court overturned the Department of Revenue's audit assessment that subjected a streaming service company's revenues from Kentucky customers to the same excise taxes applicable to traditional pay television providers.
If your company offers a streaming service, now is the time to closely examine your tax compliance efforts. In the wake of the U.S. Supreme Court's recent decision in South Dakota v. Wayfair, Inc., which overruled over 50 years of precedent and found that the U.S. Constitution does not require a physical presence in a taxing state in order for the state to impose a sales and use tax collection obligation on an out-of-state seller, jurisdictions will likely be more aggressive in seeking sales tax from companies offering purportedly taxable services over the Internet. And don't forget that continued vigilance will be necessary, as jurisdictions continue to investigate whether or how to subject streaming services to sales taxes and excise taxes.
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Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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