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Streaming, Cloud Computing Are State, City Revenue Targets

Oct. 15, 2021, 7:12 PM

This week in state tax news: Municipalities in 13 states are suing streaming services over unpaid utility franchise fees, inequities in New York City’s property tax system are exposed, and a business decision by Amazon results in a tax windfall for some California localities but a loss for many more.

What lessons have cities and counties learned by suing the manufacturers of OxyContin and other painkillers responsible for the opioid epidemic?

As revealed in a spate of lawsuits from California to New Jersey, municipalities have learned they too can go after powerful business interests, in this case for taxes or fees the cities believe are owed. The powerful businesses are the streaming entertainment companies Netflix Inc. and Hulu LLC, which have surged in popularity as consumers “cut the cord” on their cable TV subscriptions.

An analysis of court records found class actions brought by communities in Arkansas, California, Georgia, Illinois, Indiana, Kansas, Louisiana, Missouri, Nevada, New Jersey, Ohio, Tennessee, and Texas alleging Netflix and Hulu declined to pay local utility franchise fees. The purported past liabilities could surpass $1 billion if other states join and capture support from sympathetic judges.

The municipalities argue streaming video services rely on locally regulated broadband internet connections to deliver services to subscribers and should be required to pay the same operational levies cable TV companies have paid for decades. Netflix and Hulu say they don’t function within the infrastructure used by cable companies and shouldn’t be forced to pay the associated fees.

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The litigation is just the latest example of “affirmative litigation” seeking monetary recoveries for harms traced to corporate misconduct. It’s a theme highlighted in “Dopesick,” the popular miniseries documenting the opioid epidemic that began streaming on Hulu Wednesday. Similar municipal actions have been filed against the makers of e-cigarettes and polyfluoroalkyl substances, or PFAS, said Erich Eiselt, assistant general counsel for the International Municipal Lawyers Association.

“My message to little communities is don’t be hesitant, and try to stand up to these folks,” he said. Read More: Netflix, Hulu in Growing Fight With Cities Over Streaming Money

Tax Havens, Windfalls, and Taxing the Cloud

Mississippi: A plan to extend Mississippi’s sales tax to cloud computing services will receive a public hearing after business taxpayers complained the state was imposing a wholesale shift in policy without legislation or public input. The Mississippi Department of Revenue will hold a public hearing Nov. 3 to accept comments on a proposed amendment to its sales tax regulation on computer equipment, software, and services. Read More: Businesses Set to Object as Mississippi Taxes Cloud Computing

New York: A Bloomberg News analysis of millions of New York City property tax records Thursday described striking inequities that cause low- and middle-income residents to pay a heavier portion of the property tax burden than wealthy residents. The analysis revealed flawed valuations contribute to inaccurate and unfair property taxes for condos, shifting hundreds of millions of dollars in tax burden away from the most expensive properties to rentals and low- to moderate-value properties. Read More: Five Key Takeaways From Bloomberg’s Study of NYC Property Taxes

South Dakota: The fury over domestic tax havens following the release of the Pandora Papers continued this week. Much of the attention was focused on South Dakota, which hosts half a trillion dollars of wealth in trusts. South Dakota’s position has been cemented over 40 years through a network of laws permitting “dynasty trusts,” highly secretive trust accounts that can theoretically endure in perpetuity. Read More: Favorite U.S. Tax Haven of Rich and Powerful Holds $500 Billion

California: A small group of cities in California is reaping a treasure chest of local sales tax revenue due to a quirk in transaction sourcing rules and a recent structural change by the online retail giant Amazon. When Amazon dissolved a California limited liability company that ran its fulfillment centers in 2019, it also changed the point of origin for sales—and the flow of local sales tax—creating windfalls for local governments that host the company’s fulfillment centers. Read More: Amazon Tax Change Leads To Windfall for Some California Cities

Maryland: Tech companies challenging Maryland’s tax on digital advertising accused the state of imposing a penalty for perceived “social ills” rather than a legitimate tax. The arguments came in a brief filed Wednesday by the U.S. Chamber of Commerce and three trade associations asking a federal judge to void Maryland’s first-in-the-nation Digital Advertising Gross Revenues Tax. Read More: Big Tech Calls Maryland’s Tax a ‘Penalty’ to Cure ‘Social Ills’

Michigan: The Great Lakes State is headed toward a workaround of the $10,000 SALT cap. The Michigan House on Thursday passed a bill that would allow pass-through entities to pay their state and local taxes at the business-entity level instead of individually. Read More: SALT Cap Workaround Bill Passed by Michigan House

Texas: Citgo was denied a $2 million tax refund after a Texas appeals court Thursday ruled that net proceeds, not gross proceeds, from selling commodity futures should be included in franchise tax calculations. Read More: Citgo Loses $2 Million Futures Trading Tax Appeal in Texas Court

Indiana: The U.S. Supreme Court declined to review a tax discrimination case brought by long-haul truckers. The Owner-Operator Independent Drivers Association alleged that increased fees for the 156-mile Indiana Toll Road discriminate against out-of-state taxpayers in violation of the Constitution. The high court’s posture affirm earlier district and appeals court rulings upholding Indiana’s fee structure. Read More: High Court Skips ‘Discriminatory Tax’ Indiana Toll Road Case

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To contact the reporter on this story: Michael J. Bologna in Chicago at mbologna@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergindustry.com; Kathy Larsen at klarsen@bloombergtax.com

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