A senior Netflix official objected to a rule written by Idaho tax enforcers that requires the company to charge sales tax for its service, records show.
Diane Holman, a senior sales tax manager for Netflix, told the Idaho State Tax Commission in a letter written last summer the state is unfairly taxing the streaming service and impeding the company’s ability to compete.
“But Netflix objects, and believes that it would be unfair, and adverse to Netflix’s ability to compete and develop new and innovative technologies,” Holman wrote in the letter submitted as public comment last summer.
The Idaho State Tax Commission, to clear ambiguities created by a 2014-passed law that sought to define how the Gem State would tax cloud services and other digital products, decided to impose taxes on Netflix customers starting July 1, 2014.
Rep. Ron Nate, R-Rexburg, estimated the Netflix take hike to be more than $1.2 million based on his own projections. Nate is an economist and professor at Brigham Young University-Idaho.
The law, sponsored by House Majority Leader Mike Moyle, R-Star, required the state to tax digital movies, music, television and other similar subscriptions, but left open to interpretation if that meant taxing downloaded content along with streamed entertainment.
That’s an important distinction because it could decide the entire issue. Idaho typically doesn’t tax services, and Netflix believes it falls under that exemption.
“As a policy matter, because Netflix’s content is streamed in real time, such that the subscriber neither obtains possession of or control over either the streaming technology or the content itself, and the content is not actually transferred or downloaded to the subscriber,” Holman added.
Some Idaho lawmakers didn’t walk into this blind. During testimony on the 2014 bill, officially House Bill 598, that created the ambiguity, members of the Senate Local Government and Taxation Committee questioned state tax officials about the possibility of taxing Netflix.
“We don’t know what to do with it now, and I don’t think we’ll know what to do with it under H 598,” Mclean Russell, a state tax analyst, told the Senate committee.
Russell said taxing downloaded digital movies, music and books is obvious, but streamed content less so.
The law and accompanying rule unfairly target Netflix in two ways: First, the law clearly exempts cable and satellite customers, even if their services are nearly identical to Netflix’s.
Next, though all streaming subscription services fall under the commission’s ruling, only Netflix has to add the sales tax to customers’ bills. A 1993 U.S. Supreme Court decision blocks states from taxing businesses unless they have a physical footprint in a given state.
Because Netflix operates a 12-person DVD shipping facility in the state, it must add the tax to bills. Hulu Plus, Amazon Prime and others don’t have a physical footprint, so they don’t have to add the charge.
Idahoans are still supposed to report the taxes for Hulu Plus and Amazon Prime subscriptions, but few do.
Jay Larsen, president and founder of the Idaho Technology Council, told senators Netflix should be taxed because of the company’s method of delivery.
“It doesn't need to be that way,” Larsen told senators in an attempt to clear up confusion. Larsen blamed the tax commission for creating uncertainty on the issue.
"Do not be deceived on this issue; it is much clearer than this,” Larsen testified, according to committee records.
One senator, though, said the committee didn’t want to tax Netflix.
“None of us intended to tax something we haven’t taxed before,” Rice told IdahoReporter.com last week. “We’ve never taxed that before.”
The bill’s fiscal note estimated a total tax reduction of up to $5 million annually, though that burden could grow as more Idahoans use digital products and services. The fiscal note, typically used to gauge how proposals will affect residents and businesses, did not mention the $1.2 million tax hike on Netflix.
Key lawmakers told IdahoReporter.com there are ongoing talks about the issue, but didn’t give hints about how they might address it. Senate Local Government and Taxation Committee Chair Jeff Siddoway, R-Terreton, said he believes his committee is inclined to tax entertainment.
Boise Sens. Grant Burgoyne, a Democrat, and Cliff Bayer, a Republican, were cool to the idea, explaining they’re likely to object to keeping the commission-mandated tax.
“Regular folks pay enough,” Burgoyne said.
Either way, Rice said lawmakers, not unelected tax commission officials, need to decide.
“We need to have a vote,” Rice said. “We haven’t done that in this case.”
Netflix’s public relations team has not responded to IdahoReporter.com’s request for a comment on the latest developments.