The City of Creve Coeur, Missouri recently filed a suit against Netflix and Hulu claiming that the companies should be paying the same local franchise fees as Charter Communication, which is the incumbent video provider in the community. The City claims that it is losing franchise tax revenues as people cut the cord and they want to tax the companies that are taking that business away from Charter. They argue that Netflix and Charter ride the same wires and rights-of-way to deliver content and both should be taxed the same.

My quick reaction is that the lawsuit will get little traction due to the numerous differences between Charter and Netflix. However, I’ve learned over the years that it’s hard to predict tax disputes and it’s certainly possible that a judge might agree that Netflix can be taxed. If the courts see this as a regulatory battle the case will likely get referred to the FCC, but there’s no telling what happens if it’s instead considered as a tax dispute.

Most cable franchise taxes around the country are levied against the amount of cable TV revenues sold in a community. The nature of franchise agreements varies across the country and there are some jurisdictions that also tax telephone and broadband services.

There some interesting differences between a cable provider like Charter and Netflix.

• I’ve read a lot of franchise agreements and one of the most common characteristics of these agreements is that, while the assess the tax levy on cable revenues, the basis of the agreement is to grant access to public rights-of-way to allow a cable provider to hang wires or bury cable in the community. Charter owns a wired network in the City while a company like Netflix does not.
• Franchise agreements almost always create an obligation for a cable provider to serve everywhere in the community, or at least to the parts of the community that have a certain level of home density. For instance, cable companies are often required to build wires to any parts of town that have at least 15 or 20 homes per linear mile. The same obligation can’t really be applied to Netflix – they can only sell to homes that have sufficient broadband to use their service.
• There are often other requirements that come with a franchise. For instance, the franchise holder might be required to dedicate a channel for local government programming. Franchise holders are often required to provide fiber or bandwidth to the City. Netflix wouldn’t be able to meet any of these obligations.

I don’t know if the City ultimately wants Netflix and Hulu to sign a franchise agreement, but if they do the City might not like the result. Current regulations require that a City can’t demand concessions from one franchise holder that doesn’t apply to all franchise holders. I can picture a stripped-down franchise agreement for Netflix for which Charter would immediately demand to use if Netflix was excused from any obligations required of Charter.

The FCC does not want this issue handed to them because it opens the door to defining who is a cable company. The agency opened an investigation into this issue a few years ago and quietly let it drop, because it’s not a decision they want to make. The FCC is constrained on many issues related to cable by laws passed by Congress. I think the FCC decided early in the investigation that they did not want to tackle the sticky issues of declaring online programmers to be cable companies. Had the FCC done so then this suit might have good traction.

Even a few years ago at the early start of online content the FCC could see that the online content world would become messy. There are now companies like Sling TV and DirecTV Now which look a lot like a cable company in terms of programming. But there are far more online providers that don’t fit the mold. Is a company that only streams British comedy, or soccer, or mystery movies really a cable company? Is a web service that streams blogs a content provider? I think the FCC was right to let this issue quietly die. I’m sure the day will come when the FCC finally acts on the issue, but when they do it’s more likely that traditional cable companies will be freed from regulation instead of dragging OTT providers into regulation.

It’s hard to think any city can justify the legal expense of pursuing this to the end – even winning might not give them the results they want. Without congressional action the City would have to tackle each of the hundreds of online video content providers to somehow get them to also pay a tax. This feels a lot like tilting at windmills. However, many taxes we pay today started when one jurisdiction tackled the issue and others climbed aboard – so this is worth keeping an eye on.