Analysis: Netflix, Hulu Streaming Battle Localities Over Revenue

Local jurisdictions are continuing their push to tax the video streaming services offered by Netflix, Inc., Hulu, Inc., and Walt Disney, Co. (Disney+). Although the courts have decided against most of the local governments seeking to collect franchise fees from these companies, the localities are not likely to give up attempts to secure revenue to shore up their budgets.

Local governments have used local excise taxes and franchise fees to generate revenue from cable and satellite television. Consumers shifting away from traditional television programming to online digital video consumption has cities across the country feeling the effects of decreasing franchise fee revenue from cable and satellite companies.

The percentage of adults using cable and satellite TV dropped from 76% in 2015 to just 56% in 2021. Streaming viewership in the US surpassed both cable and broadcast TV viewership for the first time ever in July 2022 and financial forecasts expect the global market to reach $932 billion by 2028.

With customers increasingly moving towards streaming services for their entertainment, localities are trying to make up for lost revenue. Towns and cities across the US have been suing for the power to collect local taxes and public utility franchise fees traditionally applied to cable and satellite from streaming services. Their efforts have largely been unsuccessful but past failures have not deterred them from pressing forward.

Local Procedural Wins

The localities’ attempts to tax streaming services have been challenged on both procedural and substantive grounds with primarily unfavorable results.

In a few recent examples, class action lawsuits filed in federal court on behalf of cities in Arkansas, Illinois, and Nevada have been tossed out on procedural grounds, including that the cities have no private right of action to enforce collection of franchise fees and that they failed to state a claim to proceed with the lawsuit.

In procedural wins for localities, cities in Indiana and Texas prevailed against streaming services’ attempts to move cases to federal court.

The cities in Indiana have survived Netflix and Hulu’s motions to dismiss the complaint on grounds including violation of the Internet Tax Freedom Act and the First Amendment. The outcome in Texas could mean a major windfall for the more than two-dozen cities seeking to recover franchise fees—plus interest and penalties— potentially back to when Netflix started offering video streaming in 2007.

Franchise Expansion Rejected

State courts rejected attempts to gain revenue from streaming services by expanding their franchise fee base.

Lancaster, Calif., lost its bid to force Netflix and Hulu to pay a 5% video service provider fee to every city and county in the state on grounds that the local entity had no private right of action against the companies because the companies were not franchise holders. The state court went on to find that Hulu and Netflix are not required to obtain a franchise and pay a fee to the localities and are not comparable to traditional cable and satellite television services even if they compete with those traditional providers.

In Tennessee and Ohio, local governments’ efforts to classify Netflix and Hulu as video service providers subject to franchise fees resulted in court decisions that the companies are not video service providers.

The Ohio high court decision in City of Maple Heights is one of the most recent losses for the localities. Shortly after the court’s judgement, the state legislature enacted a law to “clarify” that streaming services are not video service providers, solidifying the streaming services’ contention that they are not subject to the local franchise fees.

However, because Ohio excludes video service providers from sales tax, these streaming services are now more clearly subject to sales tax (which the Ohio Department of Taxation had previously asserted). Local sales tax has the same tax base as the state tax, meaning that Ohio localities will still see some tax revenue from these streaming services.

Amusement Tax Challenges

Unlike efforts to subject streaming services to franchise fees, some local governments have successfully extended existing taxes.

In 2015, Chicago’s Department of Finance issued a ruling that concluded that streaming services are subject to their Amusement Tax. After initially challenging this ruling, streaming services ultimately settled and have agreed to collect the tax.

Evanston, Ill., citing decreased tax revenue as a result of the pandemic and the example set by its neighbor Chicago, amended its Amusement Tax to explicitly impose a tax on “amusements that are delivered electronically” beginning Oct. 1, 2020. The result was a significant increase in revenue in 2021, credited to the expansion of the tax to streaming services.

Unintended Consequences

Though streaming services will likely have no refuge from these efforts, changes in statutes and regulations often end up applying more broadly than initially thought.

Evanston’s regulation applies to paid television programs “that can be viewed on a television or other screen.” This broad definition could also apply to online learning services or professional conferences that use live streaming as part of a a hybrid model.

Taxpayers who do not think of themselves as offering the same services as Netflix might find themselves caught up in local governments’ efforts to secure revenue from streaming platforms.

As revenue from franchise fees falls, localities will only face greater pressure to fill the gap.

This pressure means that streaming services, and possibly a broader set of providers, should not assume that recent failures to extend franchise fees will put an end to local government efforts to adapt to the changing media landscape.

René Blocker is practice lead for indirect taxes at Bloomberg Industry Group. She is responsible for content creation and content maintenance for Bloomberg Tax’s online research and reference tools covering sales and use and excise taxation

David Epstein is tax law analyst at Bloomberg Industry Group. He researches and reviews developments in state tax with a focus on indirect taxes and marketplace facilitator issues.