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Netflix Streaming and Sales Tax: Go with the Flow

  • Apr 9, 2014 | Gail Cole

 One good reason to switch to streaming.

Netflix streaming services are subject to sales tax in some states, but not all.

Netflix launched in 1997, with movie rentals ordered online and mailed to customer. Movie fans, particularly those not living near video stores (remember them?), suddenly had access to a decent selection of DVDs. From there, Netflix expanded to offer monthly subscription services and in 2007, the company introduced streaming services. Today, Netflix can stream through an ever-growing number of devices, including the Xbox 360, Blu-ray disc players, TV set-top boxes, and many internet connected devices: Apple computers, iPad, iPhone, the iPod Touch, and more.

Many people enjoy Netflix streaming video services, but states struggle to fit them into their existing sales and use tax structures. That’s not surprising. Often “digital products are a mix of an intangible product and a service” (Forbes). While some states tax many services, many states tax few. And intangible products? They're hard to grasp.

Each state approaches the issue differently. California, where Netflix is headquartered, does not tax digital goods, a category that includes video streaming services. Florida, on the other hand, subjects those services to the telecommunications services tax. Texas is able to impose tax on the latest season of House of Cards because it broadly defines cable television service, and Arizona pretends streamed content is the same as rented tangible personal property, like a DVD. To each his proverbial own.

Netflix needs to deal with customers in every state according to that state’s tax laws. Yet many of those laws are changing as states seek to acquire tax revenue from digital goods and services. Minnesota, for example, began subjecting certain digital goods and services to sales tax in July 2013.

Uncertainty breeds contention. Kentucky and Louisiana are already embroiled in litigation with Netflix over tax. More will assuredly follow -- sure as Francis Underwood is up to his own good in House of Cards.

Netflix ahoy!

Although Netflix now boasts that it has “over 44 million members in 41 countries,” initially it made modest international leaps, expanding to Canada in 2010 and Latin America and the Caribbean the following year. In 2012, the company began offering its services in the United Kingdom, Ireland, and Nordic countries. Last year, it launched in the Netherlands. The company is currently looking to set up shop in France, very likely via Luxembourg.

As with Google and Amazon, the international expansion of Netflix has been calculated. Wherever possible, the company has minimized its tax liability, and the imminent French connection is no different. Luxembourg has a much lower rate of value added tax (VAT) than does France--7% to a whopping 19.6%. Furthermore, France has requirements for French video streaming services that Netflix could avoid by setting up shop in neighboring Luxembourg. It would not, for example, have to donate 20% of its annual revenue to subsidize French movies and European films, a policy known as “l’exception culturelle” that is essentially a way for France to protect its Frenchness (The Washington Post).

According to Variety.com (quoting the French Les Echos), if Netflix sets up shop in Luxembourg it will not be motivated by minimizing taxes. And indeed, avoiding taxes looks set to become more difficult in the not-too-distant future. Britain has decided to close the loophole that allows digital downloads to be taxed at a reduced rate, and other European Union countries are following suit. Beginning January 1, 2015, in Britain and in France, tax will be based on the point of consumption instead of the point of distribution. In other words, a Netflix based in Luxembourg will not prevent streamed content viewed in France from being taxed at the French rate of 19.6%.

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photo credit: _tar0_ via photopin cc

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.