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The Netflix tax: A tax hike for the digital age

The Netflix tax: A tax hike for the digital age

Wayne Hoffman
January 23, 2015
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January 23, 2015

State lawmakers like to talk about how they’re opposed to higher taxes; now they have an opportunity to put their money where their mouths are. All they have to do is reject a questionable regulation that has Idahoans unnecessarily paying sales tax for streaming video services like Netflix. If lawmakers don’t act, they’re potentially exposing Idaho residents to even more taxes on video and audio subscription services that are a product of the digital age.

Here’s how this works: Everyone in Idaho is supposed to pay sales tax on tangible personal property, which is defined under state law as items which “may be seen, weighed, measured, felt or touched, or which is in any other manner perceptible to the senses.”

A couple of years ago, the state Tax Commission began treating remotely-accessed computer software as tangible property subject to the sales tax. Last year, the Legislature passed House Bill 598, exempting remotely-accessed computer software from the state sales tax. The idea behind the exemption was that this is software the user never actually possesses; he merely accesses it remotely.

The legislation, however, also said computer software that is taxed includes “digital music, digital books, digital videos and digital games, regardless of the method by which the title, possession or right to use such software is transferred to the user.” That definition was intended to prevent people from avoiding taxes on downloadable software while paying taxes for something they get in a box at the store.

Still, from that, the Tax Commission wrote a regulation that says Netflix, which has a mail hub in Idaho, should collect a sales tax on its digital subscription service. The House Revenue and Taxation approved the regulation, but the Senate Local Government and Taxation Committee is skeptical.

Nowhere in 2014’s House Bill 598 did the Legislature authorize a tax on digital subscription services like Netflix. And while digital music, games and videos that you download for your use are taxed, the streaming of content that the user never actually possesses or owns shouldn’t be.

Additionally, while Netflix is charging you sales tax, Tax Commission analyst Mclean Russell recommended Idahoans voluntarily report their 6 percent use tax for digital subscription services that don’t have locations in Idaho; Russell intimates that House Bill 598 authorized the application of Idaho’s 6 percent tax rate on services like Rhapsody, Spotify, Amazon Prime and Hulu, among others.

Because the Senate’s tax committee is balking at the streaming subscription service tax, members of the House committee are under scrutiny. They’re upset at being labeled tax hikers for approving the regulation. Some legislators who want the tax to stay in place have tried to convince committee members that rejecting the Netflix regulation would either have no effect on taxes owed by Idahoans for streaming subscription service or would result in sales taxes being imposed on remotely-accessed computer software. Neither of those things is true. Another story contends that the tax on digital services has been authorized since the early 1990s, which would be really interesting if true.

This much is true, however. If lawmakers do nothing, they’ll be allowing a tax they’ve never authorized, and they’ll be further increasing the tax burden on Idahoans in the process.

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