‘Netflix Tax’ Plan in Georgia Part of Bigger Digital Revenue Push

Dec. 19, 2018, 6:19 PM

A Netflix tax proposal will be on the agenda for the Georgia legislature in 2019—part of a larger movement of states to broaden their sales tax bases to tap into the increasingly digital economy.

The Georgia proposal’s chances of passing could be helped by the state’s recent income tax cuts and a focus on rural development.

The state would overhaul its communications service tax — lowering the rate on cell phone and cable TV services to 4 percent and imposing the same 4 percent sales tax on “digital goods and services” — under a proposal offered by the state House’s Rural Development Council. The council’s wide-ranging recommendations have the backing of House leadership. Revenue from the expanded communications tax would help fund expansion of rural broadband internet services.

The digital goods and services tax would likely apply to video and music content accessed via the internet through companies including Amazon.com Inc., Apple Inc., Netflix Inc., Pandora Media Inc., and Spotify Ltd. If the proposal succeeds, Georgia would join states such as Florida, North Carolina, Pennsylvania, and Washington in imposing a sales tax on streaming media services. Chicago remains in litigation over its 9 percent amusement tax, which it extended to cover Netflix and similar media services in 2015.

The Georgia proposal isn’t a sure win in the GOP-led legislature. But the heads of the House and Senate tax-writing committees say there’s growing acknowledgment that consumers’ shift to digital goods and services is causing the sales tax base to erode.

Music purchases and video rentals that once took place in a store—where they were subject to sales tax—now take place over the internet.

“It is controversial, but the world is changing,” Senate Finance Committee Chair Chuck Hufstetler (R) told Bloomberg Tax Dec. 18. “I don’t want that loss of sales tax that we’re seeing to mean a greater income tax.”

“We’ll have to look at the details” of the proposal if it passes the House, he said.

Push for Broader Sales, Lower Income Taxes

A broadened sales tax base could help the state afford further income tax cuts, Hufstetler said, although he predicted the legislature wouldn’t pursue those cuts in 2019 as it waits to see how recent cuts affect state revenue.

The legislature in 2018 approved cutting the individual and corporate income tax rates to 5.75 percent for 2019, down from 6 percent. The tax cut legislation also called for a further cut to 5.5 percent in 2020, if the legislature and governor approve during the 2020 session.

The Georgia legislature rejected previous proposals for digital media taxes, including a similar overhaul of the communications service tax in 2018. But House Ways and Means Committee Chair Jay Powell (R) said GOP lawmakers are getting more comfortable with the idea that it isn’t a tax increase.

“I think there’s an increasing awareness that we’re really not talking about new taxes,” he told Bloomberg Tax Dec. 10. Powell also co-chaired the House Rural Development Council that recommended the proposal. “We’re talking about a market that has converted tangible personal property” that historically has been subject to sales tax “into a digital format.”

Unlike 2018, 2019 also isn’t a re-election year for state legislators whose constituents might not be thrilled about a vote to add sales tax to their Netflix bills.

Gov.-elect Brian Kemp (R) is reviewing the rural development proposals, spokesman Cody Hall told Bloomberg Tax Dec. 19, without commenting specifically on the digital media tax. Kemp has spoken publicly about his support for efforts to bolster rural Georgia.

To contact the reporter on this story: Chris Marr in Atlanta at cmarr@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Megan Pannone at mpannone@bloombergtax.com

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