Massachusetts Pursues a New ‘Netflix Fee’ With a Legal Risk

Over the past few years, local lawmakers have been adapting to the host of new streaming services that have emerged. Because of the growing competition for consumers’ eyeballs and dollars, we’re seeing cities and states search for new ways to recoup the revenues they’ve lost as so many viewers have cut the cord to cable TV.

Recently, lawmakers in Massachusetts drafted a bill that would create a franchise fee for companies like Netflix by recognizing digital infrastructure as public rights-of-way and requiring payments from streaming networks. H.74 would establish “a comprehensive statewide policy concerning streaming entertainment services and the recovery of municipal costs for the management and maintenance of digital infrastructure.”

In other words, state legislators want to create a fee for streamers similar to one cable providers must pay to use public rights-of-way like utility poles. But while proponents of H.74 tout the benefits of increased funding to local governments and community media centers, the legal battles of the past have shown us that this won’t be a straightforward path.

State of Streaming Taxes

According to Nielsen, streaming viewership exceeded cable TV for the first time in July 2022. Fewer cable subscribers means less revenue for state and local tax authorities, but that hasn’t stopped them from coming up with new ways to tax streaming services. We’ve seen authorities use tactics such as expanding the definition of pay TV in lawsuits that claim streaming services should be subject to cable franchise fees because they depend on the use of other companies’ internet infrastructure.

For tax authorities in a state such as Florida, the path forward to taxing streaming services was quite easy. Florida has a communications services tax with a broad definition of pay TV, developed back when authorities considered how they could collect from satellite TV. Netflix Inc. and Hulu LLC have been paying the Sunshine State from the start.

But other state and local governments haven’t had the same fortune. Many California cities have asserted that their utility taxes apply to streaming video services. However, in a setback, a California trial court found that Netflix didn’t qualify as a “video service provider” under the state’s Digital Infrastructure and Video Competition Act.

A Texas judge sided with Netflix and Hulu in a class-action lawsuit brought by several tax jurisdictions which centered on whether the companies must pay a franchise fee for using the state’s broadband wireline facilities. And in Arkansas, a district court ruled that streaming businesses qualify for an exemption under the Internet Tax Freedom Act.

PITFA Enters the Conversation

The Permanent Internet Tax Freedom Act in 2015 made permanent the ban on state and local taxation of internet access and on multiple or discriminatory taxes on electronic commerce. On July 1, 2020, PITFA was fully implemented nationwide, causing the last few states to lose an estimated $1 billion in combined annual revenue. While it’s less well known, PITFA also includes a prohibition against discriminatory taxation of internet-based commerce.

In November 2022, when a Maryland court struck down the state’s first-in-the-nation digital advertising tax, the court ruled that because of PITFA, a state couldn’t impose a tax specifically on digital advertising that doesn’t also apply equally to offline advertising.

With Massachusetts now targeting online streaming services, a question for potential pending lawsuits is whether H.74 would run afoul in the same way—or could the state successfully argue that existing cable public, educational, or governmental fees are actually a level playing field?

If the result is a broad-based fee for streaming companies across the board, it may successfully avoid the legal stain of becoming a discriminatory tax on internet-based commerce. But evidence to the contrary results in a clear legal precedent for invalidating legislation.

There’s a growing imbalance as consumer and business preferences change to data-powered communications such as streaming channels, shifting the way state and local revenue authorities look at taxes and fees. If the future is anything like the past, we may see states go the extra mile to develop completely new tax regimes that address streaming.

Expect legal battles to continue—with an emphasis on a creative use of existing laws and statutes that used to govern cable and satellite services—as governments attempt to extend them to streaming services.

The cases are: City of Lancaster v. Netflix, Cal. Super. Ct., No. 21STCV01881, 4/13/22; City of New Boston v. Netflix, Inc. , E.D. Tex., No. 5:20-CV-00135-RWS, 9/30/21; and City of Ashdown v. Netflix, Inc., W.D. Ark., No. 4:20-CV-04113-SOH, 9/30/21.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Toby Bargar is a senior communications tax strategist at Avalara.

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