Navigating communications taxation for streaming and other digital content
Where there’s a will, there’s a way — for consumers to go without pay TV, that is. Or traditional AM/FM radio, or movie theaters, or once-ubiquitous CD players that used to come installed in cars. Even live sporting events and concerts can be enjoyed virtually anywhere, on any device.
If it can be watched or listened to, it can be streamed. And if it can be streamed, there’s a good chance communications tax might be applicable.
As the communications industry continues to innovate and grow into new spaces, the possibility of communications-specific taxation at the local, state, and federal levels becomes increasingly likely to apply to those areas. There are many indications that a highly complex array of liabilities is forming ... one that stands to have massive implications for tax teams at companies that give consumers options for streaming TV, movies, music, and more.
Does communications taxation need to be on your radar?
If you’re tempted to skip this whitepaper because “communications tax doesn’t apply” to your company, or because streaming services aren’t your core offering, you should reconsider.
The industry is changing, and so are the taxes.
Traditional communications taxation is rapidly evolving to encapsulate a much wider range of services. For the company that hasn’t yet had to contend with these regulations and fees, it could very well be a matter of time.
That means a company accustomed to calculating sales and use tax alone may soon find itself facing a far more complex array of taxes and regulatory fees. This is likely to apply in varied ways in many jurisdictions if you offer:
- Digital content including video, audio, games, or software
- Content via delivery mechanisms such as live or on-demand streaming OR digital download
And, if you’re a wireless, cable, or satellite company and you begin offering these services after a merger or acquisition, or through a partnership as part of a bundle, you should be ready for the likelihood of additional tax complexities for those services as well.
Even the slightest indicator that you could be responsible for calculating and remitting communications taxes on these services, either now or in the future, is a sign that you need an action plan now.
Being caught unaware is a costly mistake. This whitepaper will give you guidance to know when you’re entering the realm of communications taxation, and steps you should take to prepare.
The rise of digital content
While the delivery of digital content isn’t all that new — Netflix launched its streaming video service in 2007 — it’s been in recent years that demand has skyrocketed, particularly for streaming content. But what, exactly, is driving this change?
For consumers, broadband is now in more than 80 percent of homes and high-quality audio and video are easier than ever to access. The increased availability of streaming subscriptions and virtual multichannel video programming distributors (vMVPDs) has led many households to view traditional pay-TV bundles as bloated or overpriced. Nearly 60 percent of Americans have adopted some form of streaming service, and 20 percent have made the move to streaming only.
Whether it’s to cut the cord completely or simply expand viewing and listening options, America’s appetite for streaming content is voracious. Consumers spend $2.1 billion a month on streaming video, a number that continues to climb, and want even more content from providers.
As people replace DVDs, downloads, and other digital goods with digital services, it’s not just pay-TV providers that are being impacted. By the first half of 2017, streaming subscriptions accounted for 62 percent of music market revenue and fueled the industry’s first double-digit growth in nearly two decades — moves that led retailers to start pulling the plug on selling CDs.
For businesses, fierce competition has led to a vast array of new offerings, particularly as M&A activity has increased. Content providers continue to launch their own streaming services with unique pricing models, cannibalizing major content platforms and providers as partners become competitors.
Meanwhile, wireless, cable, and streaming subscriptions are constantly coming together in new and innovative ways as companies battle to serve up the “best” or “most popular” options in an incredibly tight market. Cable providers are leveraging “skinny bundles” to combat direct-to-consumer streaming content companies, while unique voice, data, and video bundles with “unlimited” or “inclusive” models sweeten wireless packages.
A particularly defining moment for the industry occurred when Disney, including its ESPN brand, announced it would be pulling content from Netflix to start its own standalone streaming service. The move was quickly duplicated by a spate of other content providers ranging from Discovery to Viacom to AMC.
The intense content competition — both among the streaming services themselves and as alternatives to traditional cable — isn’t likely to let up any time soon. Demand for unbundled TV services, vMVPD, and streaming music continues to rise, and so does the need to get even more creative to keep or gain market share. As more providers compete with the likes of Netflix, Hulu, Amazon Prime, Google Play, and Spotify, and as streaming services become more common than cable subscriptions and album sales, no doubt offerings will continue to change in big ways.
This sea change has opened the floodgates for streaming content that’s structured very similarly to pay-TV cable packages. Which, in turn, makes content providers increasingly more likely to face some critical questions around communications taxation and regulation.
When digital content becomes subject to communications taxation
The potential for digital content providers is undeniable: With so many opportunities for new bundles and innovative offerings, not to mention widespread consumer adoption, it’s easy to understand the growth of this market. Yet for all the provider benefits of digital content, and streaming content in particular, there are risks and possible downsides, too. For state, local, and federal governments, the negative impacts are not insignificant. With streaming content gaining so much steam in such a short span of time, taxing jurisdictions and regulatory agencies have watched a once-large pie of revenue sources shrink slice by slice.
This is due in part to the fact that many consumers aren’t just adopting digital content options as an add-on service. Increasingly, they’re using it to replace traditional telecom services like cable TV, whose revenue jurisdictions have long depended upon. Combined with decreases in revenue from traditional and wireless phone services, many states and localities have been faced with some serious shortfalls.
That means authorities continue to review and refine where their funding comes from to accommodate the growing deficit. This issue is an important one faced by state, county, and local jurisdictions as well as the Federal Universal Service Fund (FUSF) and Public Utilities Commission (PUC). With the rapid growth of so many unregulated services, how do states and the federal government continue to fund critical public services such as 911? How will FUSF continue to ensure telecommunications services are available to all consumers?
Many states are actively pursuing ways to offset declining telecom taxes and other shortfalls by securing new sources of revenue.
- In California, after dozens of cities updated their utility user tax (UUT) ordinances to require collection of tax on video services, a draft ruling interpreted those services to include streaming video and spurred in-depth discussions around potential new requirements for streaming services in general.
- In Chicago, a 9 percent amusement tax originally written to tax concert and sporting event tickets was extended to apply to streaming entertainment including music, video, and gaming.
- In Iowa, taxing authorities determined that video streaming services included in Amazon’s Prime program fit its definition of “pay television” and began to assess taxes accordingly. This opened the door to telecom taxation for other companies selling streaming video services, be it on a subscription basis or as a component of bundling.
The above examples are just a few of the many ways taxation is starting to be reshaped around the new realities of digital content. Some states are redefining what it means to be “communications taxable;” others are likely to follow suit. What many have referred to as “Netflix taxes” are now a reality in states such as Pennsylvania and Florida, and have been under discussion in others.
Even more complicated: Each state interprets the taxability of digital content individually. In some states, streaming video has been deemed to fit the definition of “pay TV” for taxation. In others, it hasn’t. In certain jurisdictions, streaming content providers are liable for communications and utility taxes in lieu of, or in addition to, sales tax. Some states tax downloads of content but not the streaming subscriptions themselves, while others do the opposite.
These complexities can have substantial impacts on tax calculations. Depending on the type of service you provide and the areas you serve, any number of varying communications taxes and fees may apply, with different outcomes based on whether you offer the service via over-the-top (OTT) or as a network provider.
The complexities don’t end there. As if streaming tax determination and calculation weren’t complicated enough, just wait until bundles come into play.
As any traditional telecom provider can tell you, once you begin to bundle different types of services into one package, the taxes can get very complex, very fast. Why? Because some offerings may be communications taxable while others aren’t. And how the bundle is taxed can vary drastically from one state to another.
For example, let’s say consumers pay a flat-fee rate that covers both streaming and downloads. Someone might stream a movie or playlist one day (a digital service), and download it to a device the next (transforming it into a good). In certain states, the digital service will be communications taxable. Others tax the digital good. And in some, as soon as one offering is deemed taxable, the entire bundle becomes liable for filing and remittance. Case in point from the Iowa example above: Once Amazon Prime Video was deemed to be taxable similar to pay television, it made Prime memberships subject to Iowa sales and use tax in their entirety.
Similar complexities may also impact mobile carriers that foot the bill for popular streaming services, such as Hulu and Netflix, as part of bundling strategies. Will communications taxation apply to what’s been referred to as updates of the classic cable TV bundle? The likelihood is high.
Bottom line: If bundling and marketing disparate product types is what gives your company a competitive edge, keep in mind that taxation will continue to present challenges as tax laws are re-examined and rewritten.
Always be prepared, too, for constant change. There’s the possibility that, at any given time, any number of the thousands of taxing jurisdictions may decide to introduce legislative changes that add new layers of communications tax complexity for OTT streaming video, music, and other content.
The end result is a highly complex web of taxation that varies based on what’s being offered, and where.
No matter the size of the company, if you’re accustomed to paying sales tax alone, entering this communications tax territory for the first time can be daunting.
How to prepare for the intricacies of communications taxation
Maybe you’re just starting to realize that your company could be affected by much more than sales and use tax. Or perhaps you’ve wondered if communications taxation may come into play, and this whitepaper has confirmed those suspicions. Or possibly, you’ve known that you’re likely to have a communications tax liability and have been counting on the current ambiguity to help you pass an audit.
Whatever your situation, it’s time to gain an understanding of your current and future tax obligations so that you’re accurately collecting, filing, and remitting to the appropriate jurisdictions.
Always be alert to the possibilities of communications taxation as your company continues to innovate. This might mean slightly longer timelines to launch, but tak-ing time upfront to understand and prepare for potential liabilities can pay back in spades when your company moves forward with the confidence of compliance — rather than with the risk of costly audits, penalties, and possible back taxes.
It’s also important to be aware of the potential for bottom-line impacts as more digital content becomes communications taxable for the first time across jurisdic-tions. Be on the lookout, too, for tax implications as you explore mergers, acquisitions, partnerships, and other relationships that may bring digital content into your mix of services and offerings.
Remember that this tax landscape will only continue to increase in complexity. As it does, companies will need to be continually prepared to meet new rules and require-ments at the local, county, state, and federal levels. Here are four things you can do now to get ready ... and to remain prepared for the future.
- Track taxation across jurisdictions. There’s no easy way around it: Remaining compliant will require continual monitoring of tax rules and regulations across every single taxing jurisdiction where you do business. Because of industry shifts, communications tax law changes are to be expected. The only way to know when your company’s bills may be impacted is to understand how they’re being interpreted by tax authorities. Depending on the breadth and depth of your digital content offerings, this may be a job for multiple people.
- Proceed with caution. At any given time, the fast-growing company could potentially be looking at hundreds or even thousands of different communications taxes and regulatory filings as things change at the federal, state, county, and local levels. However, not all of these will be clear cut. Each governing body takes its own approach to digital content taxation, which means the requirements can vary greatly from one jurisdiction to another. When in doubt, use caution: Talk to other industry leaders in your space when determining which taxes and fees will apply, and thoroughly document your decisions to back them up in the event of an audit. In some instances, you may opt to take a conservative stance and collect or self-assess taxes as a precaution.
- Get your marketers on board. The industry is moving fast, so it’s understandable that your marketing team will want to begin promoting a new service or offering as quickly as possible. Move too fast, however, and the risk for audits, fees, and penalties increases exponentially. For this reason, it’s important to ensure your marketing and tax teams are in lockstep from day one. Evaluate any potential communications taxation implications before you launch. Better yet, ask to be brought in on discussions as soon as the possibility of a new offering is under way. The sooner you can start researching which taxes and fees may apply, the better positioned you’ll be to maximize your profit potential.
- Prepare your billing system. Don’t underestimate the importance of a finely tuned tax engine and billing platform. Billing platforms designed to accommodate typical sales and use taxes aren’t typically capable of handling the complexities of communications taxes, and adding blanket charges to bills in attempts to cover taxes can backfire with an increased risk of litigation. For this reason, it’s important to pay special attention to billing systems and ensure they’re prepared to handle accurate details when describing these taxes, fees, and surcharges according to individual jurisdictional statutes.
In the world of communications taxation, digital content (especially streaming) is one area that’s moving very fast. New technologies, innovative offerings, groundbreaking mergers ... these shifts and others like them stand to have massive taxation implications for years to come. As offerings become more robust and taxation becomes more complex, companies will need to be continually prepared to meet new rules and requirements.
This report was created by the communications tax specialists at Avalara who are dedicated to keeping you up to date on industry changes as they occur. Stay in the know and see their latest insights at resource hub at avalara.com.
learn more about Avalara’s products for the Communications industry, visit: www.avalara.com or call 844.722.5747 today.
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