The latest attempt to create a new tax comes from Dallas, Texas. The City Council there authorized a lawsuit against online video providers like Netflix and Hulu to collect franchise fees. The city not only wants to collect a 5% franchise tax moving forward but wants to also collect back taxes from these entities as far back as 2007.
The rationale behind the tax is that these providers deliver services through wires that are located at least partially in the public right-of-way. Dallas joins a few other cities like Kenner, Louisiana, and four cities in Indiana that have filed similar lawsuits.
It’s clear that the city is trying to replace lost tax revenues that come from traditional franchise taxes. These taxes were first started in the early days of the cable TV industry as a way to charge cable companies a fee to hang wires in city rights-of-ways. The taxes were pretty small in the 1970s because cable revenues were low. But communities benefitted tremendously when the cable industry exploded and began offering hundreds of channels of programming. Franchise taxes grew even faster when cable companies started raising cable rates an average of 9% annually for more than a decade as the companies passed on increases in programming fees.
Cities obviously have gotten used to this steady and growing revenue stream, but suddenly see franchise fees dropping like a rock as households cut the cord or downsize cable packages. The big cable providers have collectively shed 11.8 million customers over the last two years. Most communities have seen at least a 30% decrease in franchise fees and they know the tax revenue is going to continue to sink.
The argument that online video providers owe franchise fees is flimsy because online providers do not own any facilities in the community and do not directly use any right-of-way. But that doesn’t mean that courts won’t decide that fees paid to online providers can’t be taxed.
I’m writing about this tax because the cities winning the right to tax online video would open a huge can of worms because every Internet service that derives revenues rides through wires in public rights-of-way in exactly the same manner as online video. The city is counting on the quacks-like-a-duck argument that online video looks enough like cable service that it ought to be taxed the same – but at the end of the day, online video is delivered as a big stream of 1s and 0s like every other bit of data delivered over the Internet. If this concept passes legal muster, then everything ISPs deliver to customers could face similar taxes.
A similar taxation scheme has been hatched in Maryland to tax all Internet advertising. In February, a wide coalition of parties ranging from Amazon and Google but also including the U.S. Chamber of Commerce has sued the state to kill this new tax.
The Maryland tax only applies to online advertising and doesn’t try to tax ads in newspapers, TV, or the radio. Opponents say this is an open attempt to tax out-of-state companies. They also argue that the tax violates the ban on taxing the Internet that has been passed and renewed by Congress.
It seems likely that states will continue to pursue more esoteric taxes over the next few years. The pandemic has hit states erratically and some states are flush with revenues this year while others are hurting badly. Expect the states with diminished tax revenues to overturn every rock and try every idea that will bring in new tax revenues.