The Netflix and Spotify tax: States are making streaming services more expensive

Your monthly bill for Netflix and Spotify may be going up.

States are trying to capitalize on Americans’ growing fervor for digital consumption of movies, TV, music and other media content by taxing monthly subscriptions for streaming entertainment services. That means that $12.99 bill you just paid for a February full of on-demand shows could rise by dollar or so in the near future.

Around half of states in the U.S. have started taxing residents’ subscriptions to Hulu, HBO Now, Amazon Prime and the like within the past few years, primarily by extending sales taxes to these services — and some experts believe most other states aren’t far behind.

Lawmakers in Maine, Illinois, Kansas, Massachusetts and Utah, for example, are considering similar measures, and officials in Alabama and Louisiana have also broached the subject in recent years.

“It’s a fast-moving policy development,” said Michael Mazerov, a senior fellow at the Center on Budget and Policy Priorities. “Bills are constantly being introduced on this.”

States have had to adapt their tax policies to reflect a shift in consumer behavior.

More American households subscribed to a streaming video service than to traditional pay TV in 2018 — the first time that video streaming eclipsed the traditional model, according to a Deloitte report published in March.

And while households subscribing to pay TV still outnumbered those with music-streaming subscriptions, the share of households signing up for digital music services grew 58% from the year prior, the Deloitte report found.

This migration toward digital entertainment has clipped states’ budgets.

State sales taxes — most of which were introduced around the 1930s, decades before the internet’s ascension — have historically only covered tangible goods, according to Richard Auxier, a research associate at the Urban-Brookings Tax Policy Center.

As fewer consumers buy physical goods like compact discs and DVDs in favor of intangible streamed content, states have had to update their tax laws accordingly or risk eroding their tax revenue, Auxier said.

Only about a third of consumers’ expenses today relate to tangible personal property — about half the share back in 1930, according to Jackson Brainerd, a senior policy specialist at the National Conference of State Legislatures.

It’s not just streaming that state tax authorities are eyeing. Some states have also begun taxing other services, such as tanning, landscaping, dry cleaning, interior design work, dating referral services, and pet grooming and boarding.

Connecticut has added 20 such services, the most in the country, over the past decade, Brainerd said.

“Our current sales tax is designed for a Sears Roebuck economy driven by over-the-counter sales,” Ned Lamont, the governor of Connecticut, said in a budget address last year in support of a streaming tax. “Today we live in an Amazon economy, which is driven by e-commerce, digital downloads and consumer services.

“Movie theaters charge a tax, and Netflix should be treated the same,” Lamont added.

State sales taxes have gradually increased over the past few decades, to an average of 6% today, according to Brainerd.

For some consumers, a 6% sales tax might not seem like much. For example, a subscriber to Netflix’s premium service would pay an extra $0.96 a month, for a grand total of $16.95.

However, the costs mount for those subscribing to multiple services. A subscriber who signs up for Netflix, Hulu, Disney Plus, Amazon Prime Video and HBO Now would pay almost $4 extra in tax each month, in addition to roughly $63 in subscription fees.

Spokespeople for those streaming services firms did not respond to requests for comment.

Twenty-two states plus the District of Columbia currently tax streamed video or audio media, Michael J. Allen, associate commissioner for tax policy in Maine’s Department of Administrative and Financial Services, testified earlier this month in the state legislature. Chicago has also levied a similar city tax since 2015.

This tax play on the state level comes as more providers are starting to offer streamed content. NBCUniversal, parent company of CNBC, is launching a streaming service, Peacock, in April.

Maine lawmakers proposed a bill to begin taxing digital goods beginning Oct. 1. Services that aren’t permanently owned — like a Netflix subscription — would be taxed at a 6% rate, while digital purchases, such as an e-book downloaded to an Amazon Kindle e-reader, would see a 5.5% tax.

The digital streaming tax would raise an estimated $3.73 million in 2021 and $6 million in 2023 for the state, Allen said.

Kansas’ governor, who recommended that a sales tax on digital property be applied beginning July 1, projects the levy would raise $26.7 million in 2021.

Connecticut’s tax law changed on Oct. 1 relative to “digital goods,” which includes streamed music and video, as well as items like audio books, podcasts, stock photos and e-books. The state used to tax these goods at a 1% rate as a “computer and data processing service,” but now applies the state sales tax of 6.35%.

However, not all consumers will necessarily be exposed to taxes on their streaming and other digital services.

Voters in Arizona and Missouri, for example, passed constitutional measures that effectively ban such a tax, according to Brainerd.

And five states — Alaska, Montana, Delaware, New Hampshire and Oregon — don’t have sales taxes.

“If you do not have a sales tax in your state, you’re probably OK,” Auxier said. “Because you also didn’t pay tax on the CD or DVD.”