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Senators question Netflix tax hike

Senators question Netflix tax hike

Dustin Hurst
January 22, 2015
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January 22, 2015

Idaho senators expressed deep reservations about a tax on digital streaming service Netflix, worry serious enough for the lawmakers to ask for more time to examine the issue.

On Wednesday afternoon in the Senate Local Government and Taxation Committee, the senators, led by Sen. Cliff Bayer, R-Meridian, delayed approving the tax hike, and instead set it up for future review at a later -- and unknown -- date.

At issue is a tax charge for Netflix and other purveyors of streaming for digital books, movies, games and music. The levy could eventually affect some of Idahoans’ favorite companies, like Hulu, Amazon Prime, Spotify and Pandora.

Last year’s House Bill 598, a bill to straighten out Idaho tax rules and regulations for digital products in the ever-evolving tech economy, kicked off this process. During testimony for that bill, co-sponsor Jay Larsen, leader of the Idaho Technology Council, predicted Netflix would face the tax under the House bill.

Still, Idaho State Tax Commission felt the law was ambiguous on the issue. After holding several hearings and taking public comments, the commission ruled for charging the tax on streaming services.

Netflix started collecting the tax on July 1, 2014, House Bill 598’s enactment date. The company fought the charge in public meetings with the commission, arguing the law’s language was insufficiently clear to justify the tax.

The rule, approved by the House Revenue and Tax Commission earlier this week, doesn’t yet apply to all streaming across the board. In accordance with the Quill decision, only companies with a physical nexus in Idaho must force their customers to pay the tax.

For now, that includes Netflix, which operates a small disc shipping hub within the Gem State’s borders.

Of course, the other companies don’t get off scot-free. Mclean Russell, a senior analyst for the commission, confirmed Idahoans should pay the use tax on Hulu, Spotify and Amazon Prime subscriptions. The use tax applies to online purchases not subject to sales tax, as well as out-of-state transactions for goods to be used in the state.

The use tax, though, is more or less an option, as Idahoans must voluntarily report it on yearly income tax return forms. Gov. Butch Otter, who came out in favor of taxing all Internet sales this year, said at a recent press conference he pays $600 a year in use tax charges.

The senators also raised a fairness issue surrounding the levy. The law taxes Netflix streaming services, but leaves alone cable and satellite providers, who provide essentially the same service.

The reason for that? House Bill 598 wasn’t clear on the issue and the commission couldn’t take a position on taxing those companies.

“The rule is silent on cable and satellite broadcasts entirely,” Russell told the senators. He added that cable and satellite companies lobbied for the tax on Netflix during the rulemaking process because they believe Netflix’s service to be “fundamentally different” from their own.

Sen. Steve Vick, R-Dalton Gardens, suggested the cable and satellite companies are using government to beat back Netflix, which is eating up market share as more Americans cut the cord and move to streaming only.

“Any competitor would want their competitor taxed,” Vick said. “That’s not a reflection on the commission, just an observation.”

The tax remains in place while senators investigate further.

Some states tax Netflix and similar services, but others don’t. Texas’ tax code broadly defines video services, so that state applies the tax to streaming. California, on the other hand, does not.

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