How does sales tax apply to streaming services like Netflix, Spotify, and other similar services?

The rise and expansion of the internet has vastly changed the way many sectors of the economy work. From facilitating ecommerce to allowing for the download of digital media, this technology has greatly expanded the reach of all types and sizes of businesses. It has also fundamentally changed the way many people access things like music and movies, and just like in other areas, this has created problems for states concerning sales tax collection.

Moving Away from Physical Goods

It used to be that, if you wanted to hear the newest song by your favorite artist or check out the latest hot movie, you would go out and buy a physical product like a CD or DVD. As technology advanced, however, it became possible to purchase these products in digital form online and download them directly to your computer or mobile device.

Over time, states have adapted to this change, with some expanding the definitions of tangible personal property in their sales tax laws to include software and media delivered digitally. With these types of goods, however, the purchaser receives full and permanent rights to the personal use of the product, just as they would have had they bought physical media that contained the product. The streaming services like Netflix and Spotify that have arisen more recently present issues that are not so clear-cut.

What Makes Streaming Services Different?

In order to understand the difference between digital downloads and streaming subscription services, it’s helpful to take a look at how both kinds of purchases work. With a digitally-downloaded purchase, whether it’s an ebook, album or movie, you take final possession of the product. Signing up for a streaming subscription, however, allows you to access a wide range of movies or music, but only for as long as you keep the subscription active.

Another difference between digitally downloaded purchases and those accessed through streaming services is that with the latter, you don’t have ultimate control over what is available for you to watch or listen to. Netflix, for example, adds and removes TV shows and movies all the time, and so your subscription only provides access to whatever the service decides to make available.

There are some parallels to this type of consumption of media before the rise of the internet. Video rental stores like Blockbuster, for instance, allowed you to come in and pick out a movie you would pay to rent. This didn’t generally involve a monthly membership charge, but it was a way to pay for something you only had temporary access to, and it was usually covered under state sales tax statutes.

How Tax Can Be Applied to Streaming Services

When state sales tax laws were first written, the economy was dominated by sales of physical goods. Services have now assumed the leading role, however, and many states have adjusted to this by adding them to sales tax statutes. With streaming services now on the rise, states are beginning to look at how they can apply taxes to these types of purchases as well.

Several states including Florida, North Carolina, Pennsylvania and Washington currently tax streaming services under existing sales tax laws. This approach has not received pushback from Netflix in particular, although different approaches in other states, particularly those that try to expand taxes on utilities or communications services to streaming services, have not fared as well.

Setting up an entirely separate tax that only applies to streaming services creates problems as well, as the 1998 Internet Tax Freedom Act prevents state and local governments from imposing taxes that unfairly target internet-based businesses. Trying to conflate streaming with pay TV services has not held up to legal scrutiny either, as a Kentucky law oriented in this way was struck down by the courts.

Trends Moving Forward

Just as with most businesses related to the internet, it’s expected that states will keep trying to find a way to tax streaming services, especially as they proliferate and continue to cut into sales of movies and music albums that are already subject to state sales tax. The best and most legally-sound approaches seem to be those taken by Washington and Pennsylvania, which modified their existing sales tax laws to cover streaming.

These two states did this in somewhat different ways, with Washington stipulating that the tax applied to the actual item that was paid for rather than the way it was accessed. So, if you access any given movie or album through a service that you pay for, whatever you pay is subject to sales tax. In Pennsylvania, the state simply modified existing sales tax law to include streaming services.

Because these subscriptions are not terribly expensive, the good news for consumers is that, even if your state adopts a tax on streaming services, it likely will only raise your bill about a dollar per month. However, because of its great potential in terms of a revenue stream for states, it is likely that many more states will find a way to tax streaming services in the near future.

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