Streaming entertainment has been a particularly tough nut to crack, leading to “creative” tax strategies, Beebe said. Joyce Beebe, a fellow in public finance and tax policy at Rice University’s Baker Institute for Public Policy, said the three lawsuits reflect a broader theme of states and municipalities stretching antiquated tax structures to new technologies in a bid to recapture lost revenue. But our local revenues are being shipped out of state.” “The streaming companies are providing services in our cities, just like cable. “There’s real harm to our municipal revenue sources,” Sheets said. The company predicted continued growth in subscriptions to 190.3 million during the second quarter of the year.Īcross Missouri, local collections from franchise fees paid by the cable companies have declined at least 25% over the last five years, said Richard Sheets, deputy director of the Missouri Municipal League. In April the company reported global paid memberships jumped 22.8% to 182.8 million at the end of first quarter of 2020. Netflix is picking up a lot of those viewers, particularly during the Covid-19 pandemic. Meanwhile, the number of “cord-cutter and cord-never households” will jump from 48.9 million this year to 61.5 million in 2023. households using cable and satellite television services would drop from 80.5 million in 2020 to 69.6 million by 2023. The market research company eMarketer issued a report in March predicting the number of U.S. The dollars at stake could be substantial in many communities, particularly as consumers continue to cut the cord on their cable television contracts and migrate to streaming services to watch movies, sports, and subscription-based television. ![]() A state court judge is currently considering a motion to dismiss filed by the entertainment companies. on behalf of hundreds of Missouri municipalities against Netflix, Hulu, DIRECTV, and DISH Network. The class actions mirror a legal theory that first surfaced in 2018 in a suit brought by the City of Creve Coeur, Mo. “Defendants failed to apply for and obtain a SICFA, and are, therefore, providing video service throughout Texas without authorization, and in contravention of the Texas Utility Code,” the lawsuit states. In the case of Texas, businesses using this infrastructure are required to obtain a state-issued certificate of franchise authority (SICFA) from the Public Utility Commission and then pay a franchise fee of 5% of gross revenues in each municipality where services are offered. The suits specify Netflix and Hulu rely on broadband Internet connections located in part in the public rights-of-way to deliver streaming entertainment services to subscribers. That’s presumably going to be part of the defense these companies will raise.” They don’t have any control over any activities that would trigger the regulatory concern. “They aren’t in the public rights of way in a literal sense. “When you think of a Netflix or a Hulu, they obviously aren’t actually in control of any sort of physical infrastructure,” said Toby Bargar, senior tax consultant for communications at the tax software company Avalara. ![]() Netflix and Hulu couldn’t immediately be reached for comment, but at least one telecommunications tax expert expressed doubts about the municipalities’ legal theory. “The larger issue is a group of large corporations using public assets, and using them for free.” “There is a good amount of money lost,” said Scott Houston, general counsel of the Texas Municipal League. Texas and Indiana argue the streaming entertainment providers should be treated like cable television companies, which have been paying franchise taxes and fees for decades. The Indiana lawsuit, filed in state court by Indianapolis and three smaller cities, also included Disney Direct To Consumer LLC, DIRECTV LLC and DISH Network LLC as defendants. and Hulu LLC asserting the companies should be paying franchise fees for their use of existing public infrastructure for the delivery of entertainment services. Over the last two weeks, municipalities across Texas and Indiana filed suits against Netflix Inc. Netflix, Hulu, and other streaming entertainment providers could be on the hook for millions of dollars in unpaid local utility franchise fees, offering cities and counties a revenue lifeline as consumers cut the cord on cable services and the fees they generate.
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