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Going With the Current: State and Local Taxation of Streaming Services

Posted on Aug. 17, 2020

Jeff Cook is a manager, Harley Duncan is the managing director, and Allen Storm is an associate in the state and local tax group of KPMG LLP’s Washington national tax practice.

In this article, the authors outline how states and localities have taxed streaming services, concluding that streaming service providers should carefully monitor developments with state legislatures and administrative guidance.

The following information is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This article represents the views of the authors only, and does not necessarily represent the views or professional advice of KPMG LLP.

Over the last few months, many people spending more time at home because of COVID-19 have shifted their leisure activities to in-home entertainment — including movies, television, music, board games, reading, and puzzles. Many no longer rely on traditional cable and satellite subscriptions for their news and entertainment, but instead acquire their content through streaming services. This shift was already well underway before COVID-19 struck: Last year, cable and satellite providers were estimated to have 5 million fewer subscribers than the previous year.1 All signs point to another rise in popularity and proliferation of streaming this year.

At its essence, streaming is a delivery method of content for multiple forms of entertainment, recreation, and information. Streaming services are used to listen to music, podcasts, and books; watch movies; receive news; take classes in a virtual environment; participate in personal fitness training; and for many other uses. As streaming has become part of our daily lives, it has also supplanted to a growing degree more traditional forms of delivering content.

In many ways, streaming is simply the next step in the evolution of technology for consumption of content. Remember that cable and satellite replaced broadcast as the dominant form of television content delivery a number of years ago. For live entertainment and sports, pay-per-view became a popular method for viewing an event. For music, people bought records, cassettes, and compact discs before digital music, MP3 players, and the Apple iPod came along. Movies were watched primarily in theaters before you could purchase and rent movies at home, and then download them to your computer or cable box. Streaming is just the next step in the evolutionary timeline — a move that has accelerated with increased availability of high-speed connectivity, a proliferation of content producers of all types, and COVID-19 generating increased demand.

From a state and local tax perspective, this evolution in technology has had an impact. State tax codes traditionally impose sales and use tax on all forms of tangible personal property, but typically tax only a smaller list of enumerated services. Movies and music delivered in a tangible format are generally subject to sales tax, much like films viewed in theaters — which are also subject to sales tax in many states as a taxable amusement. When movies and music became digital products, whether they were subject to tax became unclear, and many states created new definitions in their codes to tax specified digital products or goods. Now with streaming, states are once again being forced to reexamine and update their tax codes to respond to new technology.

Fewer states tax streaming services than tax downloaded digital products, but taxing the former is gaining momentum — with approximately half of states now doing so under their sales tax codes. The states that do not tax streaming services have seen their tax bases diminish, which will continue as the format’s popularity increases. Further, states may see a reduction in other levies that have historically been imposed on some cable or satellite subscriptions, such as telecommunications taxes, occupation taxes, franchise fees, and others.

The states that do tax streaming services have not taken a uniform or consistent approach, which leads to uncertainty or complexity for service providers. The taxing states have largely proceeded under two methods: one, to specifically enumerate streaming as a taxable service; and two, to impose tax on digital products in a manner that captures streaming services. In a third and potentially more problematic approach, some have interpreted existing laws in such a manner as to include streaming services as either an enumerated service (for example, an amusement service) or a form of tangible personal property. Finally, several states broadly tax all business activities, services, or gross receipts sourced to consumers within their jurisdictions.2 To illustrate the lack of conformity among the states, we will discuss several examples of the first three approaches.

Regardless of how a state taxes streaming, any business that delivers content in this format needs to be aware of potential sales tax exposure. With the Wayfair case removing the requirement that a business have a physical presence in a state before being subject to tax registration and compliance requirements, a company can now be subject to sales tax collection in a state based on sales volume alone.3 Exposure might also arise at the local level, as some localities have sought to tax streaming services accessed by customers within their jurisdictions. Businesses ignoring the potential taxation of their streaming services do so at their own peril.

Streaming as an Enumerated Service

States that tax streaming as an enumerated service have typically tried to fit it within an existing regime originally designed to tax cable or other pay television services. For example, Kentucky imposes a gross receipts tax on revenue derived from sales of “multichannel video programming services.”4 Previously, the definition of that term included only cable service, satellite broadcasts, and internet protocol television, but in 2019, the legislature amended the definition to specifically include video streaming services.5

Similarly, Iowa enumerates pay television services as taxable, which the state had traditionally defined by regulation to mean “distributing the signals of one or more television broadcasting stations or other television programming to subscribers.”6 In 2018 the legislature amended the law to read “pay television, including but not limited to streaming video, video on-demand, and pay-per-view.”7

If a state taxes video streaming under a pay television statute, it leaves open the question whether streaming audio services are taxable — an issue providers should examine. Kentucky, for example, considers video streaming to be a taxable enumerated service (pay television), but it considers audio streaming to be a taxable digital product.8

Streaming as a Digital Product

As noted, many states over the past decade have recognized the increased conversion of tangible products to digital ones (such as digital books, movies, and music) and have expanded their sales tax codes to specifically tax those digital products. Over half of states now tax digital products to some degree, with digital products being defined (depending on the state) to include digital audiovisual works, digital audio works, digital books, digital games, digital codes, and similar products.9 Some have declared digital products to be a form of tangible personal property, while others tax digital products under a separate imposition in their sales tax codes.

States generally tax a consumer’s download of a digital product, in which the consumer thereafter has permanent ownership or right to use the downloaded product — making it akin to a sale and transfer of possession of a tangible book, for example. Some states also tax digital products when sold with “less than the permanent right to use” the product (or similar phrasing). These definitions are usually intended to capture transactions in which there is some form of time limitation on the consumer’s right to use the digital product or that continued use beyond the time period is dependent on additional payment (that is, monthly subscription fees). A state seeking to tax streaming as a digital product may specify that its definition of digital products includes streaming, or its position may be that digital products sold with less than the permanent right to use the product naturally subsumes streaming services without further elaboration. This position, however, is not always clear to the provider, and arguably further elaboration in the law would alleviate any ambiguities.

Pennsylvania is an example of a state that specifically defines streaming as a form of tangible personal property. In 2016 the General Assembly expanded the definition of tangible personal property to include video, music, photographs, books, and other digital products “whether electronically or digitally delivered, streamed or accessed.”10 With this approach, the legislature’s intent to tax streaming is clear.

The challenge for businesses faced with states asserting to tax streaming as a digital product with less than the permanent right to use is illustrated by comparing Arkansas with Utah. In Arkansas tax is imposed on the sale of specified digital products to an end user, including products sold with less than permanent use granted by the seller.11 Specified digital products include digital audio works, digital audiovisual works, and digital books.12 Also, the tax imposition statute specifies that tax applies to sales of subscriptions to digital audio works and digital audiovisual works without the right of permanent use.13 The Arkansas Department of Finance and Administration has said that streaming services are taxable under these provisions.14

In contrast, Utah imposes sales tax on amounts paid or charged for the sale of a product transferred electronically, regardless of whether the sale provides a right to use the product that is less than a permanent use.15 The term “product transferred electronically” is defined as a product that would be subject to tax if that product was transferred in a manner other than electronically.16 The Utah State Tax Commission has released guidance, however, indicating that the sales of streaming videos or music, by themselves, would not be taxable. In a letter ruling request, a company sold memberships to customers that provided the ability to download or stream videos and music, and to also download e-books.17 The commission determined that downloads of videos, music, and e-books are taxable as products transferred electronically. On the other hand, the streaming of videos and music, without downloading, would not be subject to tax. Because the company had sold the memberships for one nonitemized price, the commission concluded that sales of the memberships would be taxable unless the company could reasonably identify from its books and records the value of the nontaxable items.

Interestingly, both Arkansas and Utah have incorporated the Streamlined Sales and Use Tax Agreement into their tax codes, and both adopt language in the agreement regarding the “right of less than permanent use.” Yet Utah does not appear to tax streaming services if there is no ability to download videos, music, books, etc. Nonetheless, it seems clear that the “right of less than permanent use” language was intended to allow states that adopt it to tax streaming services if they so choose. In 2020 Rhode Island amended its statutes taxing specified digital products to include the “right of less than permanent use” concept so as to be able to tax streaming services, after being found to not be in compliance with the agreement when it tried to tax streaming services without that language.18

In another noteworthy example, Connecticut previously taxed streaming because the state considered it to be a type of enumerated service, but the state has since changed its definitions to include streaming as tangible personal property. Before 2019, Connecticut taxed streaming services as a computer and data processing service, which is subject to tax at a reduced rate.19 In 2019 the legislature amended the definition of tangible personal property to capture digital goods, including audio and audiovisual works that are electronically accessed or transferred — resulting in streaming services being taxed at the full sales tax rate.20

States Broadly Interpreting Existing Laws to Tax Streaming

Some state tax authorities’ position is that streaming is taxable under existing law, even if it was not yet a thing when the law was enacted, and the state legislature has not addressed it. For example, Texas enumerates cable television service as taxable — defining it to mean the “distribution of video programming with or without use of wires to subscribing or paying customers.”21 By regulation, the Comptroller goes further and defines cable television service to include “streaming video programming provided via the Internet or other technology, regardless of the type of device used by the purchaser to receive the service.”22 The definition excludes content that has been downloaded by the purchaser and addresses only video streaming.23

South Carolina’s definition of tangible personal property includes the sale of “services and intangibles, including communications.”24 The Department of Revenue has broadly interpreted communications to include streaming video and music. The DOR has also interpreted cable and satellite television subscriptions to be taxable communications.25

Florida imposes a communications services tax (CST) rather than a sales tax on communications services.26 Communications services are defined, in part, as the transmission, conveyance, or routing of voice, data, audio, video, or any other information or signals, including video services, regardless of the medium or methods used.27 DOR guidance stated that video streaming is not the delivery of tangible personal property and not a taxable service for sales tax purposes. However, streaming services were deemed to fall within the definition of communications and were therefore subject to CST. 28 A customer’s purchase of digital video content — regardless of whether stored in an online library or downloaded to her device — is the purchase of an information service that is not subject to CST.29

Local Taxation of Streaming

Businesses should also be aware of local jurisdictions potentially taxing streaming services. For example, two Illinois cities impose tax on streaming as an amusement service under their independent home rule authority. Effective July 1, 2015, the City of Chicago issued Amusement Tax Ruling 5, which states that charges paid for the privilege of watching electronically delivered television shows, movies, or videos are subject to the amusement tax if delivered to a customer in the city.30 Further, charges paid for the privilege of listening to electronically delivered music and for the privilege of participating in online games are subject to the amusement tax if delivered to a customer in the city.31 To determine whether an amusement is delivered to a customer in the city, Ruling 5 states that the city will use the rules set forth in the Illinois Mobile Telecommunications Sourcing Conformity Act, meaning the amusement tax will apply if the customer’s address is in Chicago as reflected by her billing address or other reliable information.32

This year, the City of Evanston also adopted an ordinance, effective October 1, imposing its amusement tax on video streaming, audio streaming, or online games delivered electronically to mobile devices.33 Similar to Chicago’s, Evanston’s ordinance uses the sourcing act to determine whether amusements are delivered electronically to customers in the city.

Chicago’s amusement tax is imposed on admission fees or other charges paid for the privilege to enter, witness, view, or participate in amusements.34 The term “amusement” is defined to include any exhibition, performance, presentation, or show for entertainment purposes; any entertainment or recreational activity offered for public participation or on a membership or other basis; and any paid television programming — whether transmitted by wire, cable, fiber optics, laser, microwave, radio, satellite, or similar means.35 Some amusements are exempted from the tax, including the use of automatic amusement devices (for example, jukeboxes, pinball machines, video booths, etc.), and in-person live theatrical, musical, or other live cultural performances that take place in a space where maximum capacity is not more than 1,500 persons.36

In 2018 two lawsuits were filed challenging the Chicago ordinance, arguing that the policy change imposing tax on electronically delivered amusements violated, among other things, the Internet Tax Freedom Act (ITFA), a federal law prohibiting “multiple or discriminatory taxes on electronic commerce.”37 The first lawsuit was brought by a group of consumers who were residents of Chicago and subscribed to various streaming services.38 The plaintiffs argued that the amusement tax violated ITFA because streaming services are taxed at a different rate than transactions involving similar services provided through other means. The plaintiffs specifically cited two instances of discrimination: First, consumers of streaming services were subject to the amusement tax, but consumers of automatic amusement devices were exempt. Instead, the owners of these devices are subject to an $150 annual tax. Second, the plaintiffs argued that the tax violated ITFA because the ordinance exempts live theatrical, musical, and cultural performances at venues where the maximum capacity is not more than 1,500, but taxes streaming services that provide access to similar or identical performances over the internet.39

The Illinois circuit court granted summary judgment in favor of the city, and the appellate court affirmed. In its analysis, the appellate court determined that streaming services were not the “same” as automatic amusement devices and live performances, and therefore the tax did not discriminate against electronic commerce. At least one commentator has criticized the court’s decision, however, because ITFA defines a discriminatory tax as one that is “not generally imposed . . . on transactions involving similar property, goods, services, or information accomplished through other means.”40 Regardless, the Illinois Supreme Court denied the plaintiffs’ petition for leave to appeal the decision.

The second lawsuit challenging Chicago’s amusement tax was brought by a streaming service provider, Apple, and had been stayed at the circuit court level until the first case was decided, but is now proceeding. It remains to be seen whether this lawsuit, also arguing that the amusement tax as expanded to include streaming violates the ITFA, will have a different outcome.

Outside Illinois, other localities have also explored taxing streaming services. For example, in California, the position of Pasadena and other cities is that streaming is taxable under their local utility user taxes, which are typically imposed on consumers of traditional utilities such as electricity, gas, water, and telecommunications. A number of these cities recently updated their ordinances to impose the utility user tax on consumers of video services, which is broadly defined to include “any and all services related to the providing of video programming.”41

Evaluating the Tax Implications of Streaming

Considering that states and localities have taken different approaches to imposing tax on streaming, how should businesses that sell these services plan to stay in compliance with the laws?

  • First, businesses should review a state’s laws, regulations, and other guidance in detail to determine whether and how streaming is subject to tax. If possible, they should determine how broadly a state has interpreted its statutory definitions.

  • Businesses should also consider whether any exemptions are available for the sale of streaming services. In some states, exemptions might apply depending on the nature of the purchaser or the type of streaming service (educational purposes, for example).

  • Businesses should further have in place a method for monitoring changes to state and local laws, as a number of states and localities (for example, Chicago and Evanston) have altered their approaches to taxing streaming in recent years.

  • Finally, as more companies (including telecommunications providers) offer promotions in which a trial period of a streaming service is included with the purchase of a service or a device, a potential use tax obligation may arise. States could seek to impose use tax on either the streaming service provider or the retailer on the value of the streaming service being provided without charge to customers.

Conclusion

Taxation of streaming services is a rapidly developing area, and more states are likely to examine a tax on these services as the offerings’ popularity grows. As outlined, states could tax streaming as an enumerated service; define streaming as a taxable digital product; interpret existing authority to tax streaming; or broadly tax all business activities and services delivered to consumers in the state, including streaming. Streaming service providers should carefully monitor developments with legislatures and administrative guidance to stay compliant and aware of their tax obligations.

FOOTNOTES

1 Leichtman Research Group, “Major Pay-TV Providers Lost About 4,915,000 Subscribers in 2019” (Mar. 3, 2020).

2 These states include Hawaii, New Mexico, and South Dakota.

3 South Dakota v. Wayfair Inc., 585 U.S. ___ (2018).

4 Ky. Rev. Stat. section 136.616.

5 Ky. H.B. 354 (enacted Mar. 26, 2019).

6 Iowa Admin. Code r. 701-26.56(422).

7 Iowa S.F. 2417 (enacted May 30, 2018).

8 Ky. Rev. Stat. section 139.010(10).

9 The Streamlined Sales Tax Governing Board updated SSUTA in 2007 to add definitions for specified digital products, which include digital audiovisual works, digital audio works, and digital books. Under the agreement, member states that tax specified digital products and other products transferred electronically must do so by a separate imposition; member states cannot include those products within the state’s definition of tangible personal property. See SSUTA section 332. Also note that nonmember states that define digital products in their tax codes have largely followed SSUTA’s definitions.

10 72 Pa. Cons. Stat. section 7201(m)(2).

11 Ark. Code section 26-52-301(1)(B).

12 Ark. Code section 26-52-103(29).

13 Ark. Code section 26-52-301(3)(C)(iii).

14 Arkansas Department of Finance and Administration, Revenue Legal Counsel Opinion 20190418 (Apr. 23, 2019).

15 Utah Code Ann. section 59-12-103(1)(m).

16 Utah Code Ann. section 59-12-102(100)(a).

17 Utah State Tax Commission, Final Priv. Ltr. Rul. 16-005 (Aug. 9, 2017).

18 R.I. H.B. 7532 Sub. A (enacted June 24, 2020).

19 Conn. Gen. Stat. section 12-407(a)(37)(A); Conn. Agencies Regs. section 12-426-27(b)(1).

20 Conn. H.B. 7424 (enacted June 26, 2019); see also Connecticut Department of Revenue Services, Special Notice 2019(8) (Sept. 4, 2019).

21 Tex. Tax Code sections 151.0101(2); 151.0033.

22 34 Tex. Admin Code section 3.313(a)(4).

23 Id.

24 S.C. Code section 12-36-60.

25 South Carolina DOR, Rev. Rul. 16-5 (July 6, 2016). See also Priv. Ltr. Rul. 18-1 (Apr. 10, 2018).

26 Fla. Stat. section 202.12.

27 Fla. Stat. section 202.11(1).

28 Florida DOR, Technical Assistance Advisement 14A19-005 (Dec. 18, 2014).

29 Id.

30 City of Chicago Department of Finance, Amusement Tax Ruling 5 (June 9, 2015).

31 Id.

32 35 Ill. Comp. Stat. 638.

33 Evanston Ordinance No. 55-O-20 (enacted June 15, 2020).

34 Mun. Code of Chicago section 4-156-020.

35 Mun. Code of Chicago section 4-156-010.

36 Mun. Code of Chicago sections 4-156-020(B)(1); 4-156-020(D)(1).

37 Internet Tax Freedom Act, section 1101(a)(2) (codified at 47 U.S.C. section 151).

38 Labellet al. v. City of Chicago, No. 1-18-1379 (Ill. App. Ct. Sept. 30, 2019).

39 For an in-depth discussion of the case, see Samantha K. Breslow, “Internet Tax Freedom Act: Protector From the Tax Man?Tax Notes State, May 11, 2020, p. 785.

40 ITFA section 1105(2)(A) (emphasis added); see also Breslow, supra note 39, at 788.

41 Pasadena Mun. Code sections 4.56.020 and 4.56.070.

END FOOTNOTES

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