Local Government

Cities Looking for New Revenue Sources Target Netflix, Disney+

U.S. cities are trying to tax streaming services, but if they want revenues to keep up with technology, they are looking in the wrong place.

Back when we first started hearing about how the economic fallout over the COVID-19 pandemic was affecting city revenues, an interesting tidbit rose to light. While at the beginning of the year, Dallas did not anticipate a huge decline in sales tax revenue related a historically unprecedented global pandemic, the city’s budget office did expect that another important source of municiple revenues would decline: franchise fees.

For decades, cities have scooped up revenue by charging cable companies for using the city’s right of way to deliver television to their constituents. But as streaming revolutionizes the way we consume entertainment, those franchise frees are drying up. City of Dallas franchise fee revenues are expected to decrease by around $13 million between 2020 and 2025.

Some cities are now trying to shore up those loses by going after a new potential revenue source: streaming services. According to the Hollywood Reporter, cities around the country are suing streaming giants Netflix, Hulu, and Disney+ claiming that they should pay for delivering content to their residents homes:

In the past month alone, lawsuits against streamers, including Disney+, have come from Reno, Nevada; New Boston, Texas; and Fishers, Indiana. Each of these suits is guided by Chicago plaintiff lawyers and stylized as a class action over the issue of whether streamers must pay utility fees. If the lawsuits are successful, thousands of other municipalities will benefit too. But what are the prospects for victory? “It’s going to be an uphill battle [for cities],” says Covington & Burling partner Mitch Kamin. “The law just wasn’t structured with streaming in mind.”

This is not the first time cities have tried to hit up entertainment companies for new revenue. In 2015, Chicago passed an “amusement tax” which levied a fee on Netflix and Spotify usage. That tax has held up in court so far, but there are still pending legal challenges against it.

Streaming service providers have defended themselves in court with two arguments. The first is that their services don’t quite fit the archaic definitions of video programming or television service providers as defined in the current laws that allow for the leveraging of franchise fees. The second is a legal argument that has been used in a case in Creve Coeur, Missouri by streaming service providers who say that the taxes violate the Internet Tax Freedom Act as a discriminatory tax on electronic commerce.

As Hulu puts it, “Creve Coeur seeks to collect a fee from Hulu because Hulu allegedly provides services ‘comparable’ to television broadcast stations — but Creve Coeur does not collect a fee from those same television broadcast stations.”

Creve Coeur argues that the streamers have it wrong: They are the privileged ones.

“In the end, Netflix and Hulu allow subscribers to watch TV with a push of a button just like other TV-content providers, and they have been siphoning subscribers from other TV-content providers without paying any VSP fees—putting them at an unfair competitive advantage,” states Creve Coeur in a bid to stave off dismissal.

The city asserts there’s no discriminatory tax because what the lawsuit seeks to collect isn’t a “tax.” It’s a “fee” for pushing content through the public right-of-way.

According to the Hollywood Reporter, sorting out the Creve Coeur case could take the Supreme Court. But Scott Houston, general counsel at the Texas Municipal League, told the entertainment news outlet that if cities are successful in establishing these new taxes, the big losers will be consumers who will likely pay the passed on new fees in their subscription bills. That means that this whole push to tax streaming services really equates to a new taxes on city residents. And since many of these new streaming service taxes are being attempted in cities that are already struggling with declining revenues because of the long-term erosion of their tax bases, this whole streaming tax deal feels like robbing Peter to pay Paul.

However, there is something right about the inclination on the part of cities to find news ways of rethinking tax revenues in order to keep up with the ways technology is changing the way we live, but I don’t think this streaming service tax scheme is it. For a more stable and sustainable long-range plan, I’d like to see more cities around the country pursue municipally owned broadband. As Chattanooga has shown, when cities provide their residents their own publicly owned broadband service, that service is often cheaper and faster for users, and it builds a reliable new revenue source for cities that can also stir on new business investment. Too bad Texas is one of 22 states that currently outlaw municipal broadband thanks to this state’s brand of rights protection that ultimately values corporations more than consumers.

 

 

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