Op-Eds

My Issue With The Rise of The “Netflix Tax”

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On August 1st, Pennsylvania Gov. Tom Wolfe signed the “Netflix Tax” along with several other new tax initiatives as part of the revenue package passed by the state legislature. The Netflix Tax takes Pennsylvania’s existing 6% sales tax and extends it to digital downloads (e.g. music, ringtones, e-books, apps, online games) and subscription services like Netflix and Spotify.  Thanks to this initiative, this bill is expected to rake in $1.3 billion in revenue for the state’s budget.

Pennsylvania becomes the 12th state to establish a sales tax on digital goods, however, none can seem to come up with a similar definition of what constitutes a digital good. This variation has led to a considerable amount of potential legal disputes over whether streaming services should be exempt from these new tax measures.

Some states, like North Dakota, have decided to exempt digital goods from taxation. The “cloud” tax the city of Chicago enacted last year, on the other hand, puts a 9% tax on streaming services while Connecticut imposes a 1 percent tax on digital “downloads.” I put that in quote because Connecticut defined a digital download as a transmission that contains no “tangible personal property” that, on paper, would include streaming. Washington state made its own extremely detailed definition when it passed its digital sales tax back in 2009. This has been even embraced internationally as the European Union has updated their digital sales tax code in 2015 and Australia prepares to roll out their own in 2017.

To a certain extent, this practice has been accepted and led to real action that is sure to deliver a decent amount of tax revenue. That hasn’t stopped me from growing more concerned about how governments have chosen to respond to intellectual property in the digital era and the far-reaching implications of these taxes.

As the “Netflix Tax” continues to grow more and more popular throughout the US, the excitement from an additional billion in government money has seemingly drowned one of the most devastating rulings in copyright law. In early July, the US Department of Justice was concluding a two year review of the consent decrees that controlled performing-rights organizations like ASCAP and BMI.

These decrees are wildly outdated, many having been instituted during World War II, a time where music fans could have only listened to music on vinyl and mono radio. Ignoring the advice of copyright experts, songwriters, and even members of congress, the DoJ ruled that there would be no further chances made to current degrees. Furthermore, they have decided that all works must be licensed on a 100% basis, which means the established system of fractional licensing (i.e. licensing the share of a song a PRO represents) by ASCAP and BMI will be discarded.

The US Copyright Office commented on the ruling, stating that, “Such an approach would seemingly vitiate important principles of copyright law, interfere with creative collaborations among songwriters, negate private contracts, and impermissibly expand the reach of the consent decrees.”

The Copyright Office’s disapproval proves just how much disconnect there was between the DoJ officials presiding over the consent reviews and what every other expert, musician or politician. More to the point, this makes the growing acceptance of implementing a sales tax on digital goods like the Netflix Tax concerning for songwriters. This may not be intentional, but it certainly gives the impression that politicians are more concerned with devising a means to tax an industry before actually reforming it for the modern era. Not only that, it cuts the money these services pay for royalties.

Despite its reputation as one of the leading streaming services, Spotify hasn’t turned a profit since it first started in 2008. That’s not to say Swedish Streaming Company has drawn significant investment has shown plenty of growth in revenue, subscribed users, and advertising in the last year. There’s still a very real opportunity for streaming to become a real platform for the music business, but, considering how musicians are still struggling to earn a decent living off stream-generated royalties, these taxes could take priority over the artists who are relying on it to make a living. It may not seem like much, but these taxes could create an even larger barrier to the growth of these companies.

Spotify shows their revenue and net losses

Spotify shows their revenue and net losses

The real tragedy with the Netflix Tax – or those like it- is it shows the government has taken more steps to find ways to tax streaming services than support their constituents in the music industry by committing to real copyright reform. The DoJ’s ruling on copyright consent decrees is especially concerning given how much evidence experts have to support making drastic changes. Streaming services are also already fighting to get out of the red just trying to pay the artists who provide their platform’s product. It’s a complicated and precarious situation that doesn’t offer any clear solutions, making it that much more important for artists and other members of the music industry to remain conscious of what’s happening in our tangled legal system. The risks of remaining silent in this battle threaten their very livelihoods as well as the overall future of the business.

Featured image via Michael Righi

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