News & Events

Pennsylvania enacts ‘Netflix tax’ to boost state revenue and combat effect of ‘cord-cutting’ – The Pennsylvania Record

Abbi White Nov. 30, 2016, 12:20pm

HARRISBURG – In efforts to dodge cable company prices and avoid paying for hundreds of unwanted channels, millions of Americans (now called “cord-cutters”) have opted out of a traditional cable subscription in exchange for a self-selected combination of video-streaming services, including Netflix and others.

State and local governments across the country are implementing their own so-called “Netflix tax” in order to take advantage of the revenue-boosting potential and combat deficits created by mass cord-cutting. Questions have followed regarding the legality and fairness of such measures.

With varying rationales, governments across the country, such as Pennsylvania, are implementing their versions of the “Netflix tax.” However, such taxes do not apply exclusively to Netflix.

“The ‘Netflix tax’ is a pop-culture term for an extension of taxes to cover subscription services, such as Netflix, Hulu, XBOX Live, Sling TV, etc.,” Melonie S. Jordan, Esq., of Butler Snow LLP, told the Pennsylvania Record.

Interestingly, magazines, and newspaper subscriptions are exempt from this tax.

This tax is part of a revenue package passed by Pennsylvania lawmakers and signed by Gov. Tom Wolf to fill a $1.3 billion hole in the state’s new $31.5 billion budget.

Some such measures have been passed by departments of revenue and other non-legislative entities in places like Chicago. Many question the legality of such measures taken by local and city governments, arguing that such taxes should be brought by state legislatures rather than departments of revenue.

However, the implementation of Pennsylvania’s new 6 percent digital product tax was a collective move made by the state Legislature.

“Based on how this new revenue package went through, which was just passed on Aug. 1, it’s through the state Legislature and was a statewide initiative,” Wright said.

However, despite its widely-agreed-upon legality, opposition to Pennsylvania’s tax extension to include video streaming services still exists for other reasons.

Many who have opted out of a traditional cable subscription have done so chiefly to reduce the cost of TV and video services. Much of the opposition to such digital product taxes is due to the combination of subscriptions that many cord-cutters have adopted, and the corresponding tax applied to each individual video service.

While such taxes are most often enacted by state legislatures, the details tend to vary as to the legal classification of the tax and the percentage, which tends to fall between 1 percent and 11 percent.

For example, Pennsylvania’s digital product tax is 6 percent, while Chicago’s is 9 percent and Pasadena, California’s proposed Netflix tax is 11 percent.

Pennsylvania extended an already-existing 6 percent sales and use tax to cover Netflix and other video streaming services. In other places, such measures have so far taken the form of utility taxes, rental taxes (Alabama) and entertainment taxes (Chicago).

Wright said, “Overall we may see other cities attempting to expand already existing tax laws to try and cover this. I would hope that legislators could update their laws to keep up with this new source of revenue, if they want to capture it.”