Alabama Proposes Taxes on Streaming Services Like Netflix, Spotify

As on-demand streaming services have replaced video rental brick-and-mortar stores, the state’s tax code hasn't yet caught up.

by Kelly Poe, Alabama Media Group, Birmingham / March 23, 2017
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(TNS) — Netflix users, your binge-watching habit could soon get a little more expensive.

The Alabama Department of Revenue has proposed an amendment that would apply the state's rental tax to streaming services like Netflix, Hulu, Spotify and others. The rental tax is 4 percent on all sales.

There's a hearing for the amendment April 11 at 1:30 p.m. in Montgomery.

But taxing these services through regulation could create problems for the state, said Bruce Ely, a tax attorney at Bradley in Birmingham and a professor in the University of Alabama's graduate accounting program. The concept of taxing these services isn't a problem, Ely said — it's taxing it through regulation instead of through statute.

At least a dozen states have taxed such services. But Alabama's rental statute is meant to apply to physical goods like cars or tapes, and Ely said trying to apply it to a use could create problems.

"The things we're talking about now, they're so different," Ely said. "The new technology just doesn't fit."

For example, under the proposed amendment, the tax is based on a user's billing address. Ely said this doesn't account for the many children using their parent's Netflix account in another state, or folks using Netflix who haven't updated their billing address.

Then, there's the issue of who gets the tax. The rental tax is complicated — each city and county has the option of levying its own rental tax, though fewer than half of counties in Alabama have them.

"If you live in something called Birmingham, that could be four or five different cities and two different counties," Ely said. "I think what the industry would like is uniformity."

All of these issues, Ely said, could easily be solved if the state legislature passed a new law aimed at taxing digital streaming services instead of trying to apply an old law.

The state has lost revenue from the days where Blockbusters and other video rental brick-and-mortar stores paid taxes. As on-demand streaming services replaced that revenue stream, Alabama's tax code hasn't yet caught up.

This isn't the first time the department has tried to amend this tax - in 2015, the Department of Revenue proposed a similar amendment, but several legislators sent the department a letter that said new taxes should be approved by the legislature.

A representative for Commissioner of Revenue Julie Magee did not respond to a request for comment.

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