About 40 municipalities in the state of California are considering imposing a tax on internet-based content services such as Netflix, Hulu, Amazon Video and HBO, according to news reports. In doing so, they would be following the lead of the city of Pasadena, which has already announced that effective 1 January 2017 there will be a 9.4 percent tax on each of these services. The stated purpose of the tax is to replace revenue lost to “cord cutting.” Currently cable TV services are taxed on the municipal level in California, whereas internet video content streaming is not, so when people terminate their cable subscriptions in favor of OTT providers, the given city loses a tax stream. The so-called “Netflix tax” is provoking opposition from at least one industry group, the Internet Association, whose spokesman, Noah Theran, said, “Websites and apps are not utilities and it defies logic to tax them like electricity, water or gas.”
We agree with Mr. Theran that streaming content services are not utilities. In fact, it has been precisely the fear of being demoted to utility status that has been motivating mobile operators to partner with streaming content services and even to create their own. While the Pasadena tax initiative appears to target only broadband access to these services, it could conceivably open the door to taxation of mobile streaming, as well. Such taxes, by increasing the total cost of services, could end up driving away some subscribers and therefore are a potential threat not only to the entertainment content providers but also to MNOs. And if MNOs (or, for that matter, fixed line operators) were to mount a legal challenge against a “Netflix tax,” we believe it would not be difficult to argue that such a tax, by discriminating with regard to certain kinds internet traffic, violates U.S. federal net neutrality rules.