In a sign that state legislation might be changing to reflect technology's growing economic importance, more U.S. states are taxing streaming services, new research shows.

Of the 45 states with a general sales tax, 33 states — along with the District of Columbia — include video streaming services in their sales tax base, according to research from The Urban-Brookings Tax Policy Center, a Washington, D.C.-based think tank.

In addition, other states are taxing online video platforms with a different strategy. Delaware now requires streaming platforms to pay its gross receipts tax, while Connecticut is collecting a 1% sales tax specifically targeting streaming services. Florida stands out among the states by targeting streaming services in two ways: charging platforms both a 7% communications service tax and a general sales tax.

This marks a significant change from just a couple of years ago, when most states did not include streaming services in sales taxes, according to the Urban-Brookings Tax Policy Center's research, which analyzed information from the Federation of Tax Administrators and state tax reports. Research by the latter in January 2018 identified only 17 states that were taxing streaming video services in some form.

Tax policy experts note that the growing number of taxes being levied against these services reflect the multiple ways consumers now watch content. But while some states may simply be reshuffling old sales taxes to the new platforms, others are rolling out more localized taxes to benefit from a growing industry: Over-the-top video revenue in the U.S. totaled $14.5 billion in 2018 and is set to grow to $16.4 billion in 2019, according to PwC data.

Old taxes on new media

"[I]f you used to buy a DVD or go to Blockbuster and rent movies, you would pay a sales tax on that. And now, if you order a streaming service like Netflix Inc. or Hulu LLC, you pay $10 to $15 a month and you pay a sales tax on that just like you'd gone and bought a handful of movies," Richard Auxier, a research associate at the Urban-Brookings Tax Policy Center, said in an interview.

Auxier said many states are "still trying to figure a lot of this out because the economy changed pretty quickly on them in the past 10 to 20 years, and they've had to change some of their tax systems to catch up."

Carl Davis, research director at nonprofit Institute on Taxation and Economic Policy, said the increase in the number of states introducing sales taxes on streaming services reflects a shifting economy dynamic that brings tech-services to the fore.

"You can't just watch your sales tax base be eroded forever," he said, in reference to sales tax laws that have primarily taxed physical goods. "At some point, you have to plug the holes and make sure that the tax base is reflective of the modern economy."

States that generally exempt tax on digital goods and services include Maryland and Virginia, while states that do not have a general sales tax include Delaware and Alaska.

Call for change

Members of the cable industry have long called for more parity when it comes to taxes and other regulatory fees for traditional video providers.

"Almost none of today's video rules apply to streaming services like Netflix and Amazon.com Inc. Prime, despite their large number of subscribers and leading market positions," Michael Powell, president of NCTA – The Internet and Television Association, said during congressional testimony on June 5.

NCTA – The Internet and Television Association is a trade association that represents major pay TV companies such as Comcast Corp. and Charter Communications Inc.

According to federal law, franchising authorities can charge cable companies up to 5% of gross revenues for a 12-month period as a franchising fee. In addition, traditional pay TV providers like cable operators and telcos are frequently subject to a federal excise tax that applies to certain types of voice services; state and local sales taxes; state and local gross receipts and utility taxes; state and local communications services taxes; and a Federal Communications Commission fee, whereby cable operators must reimburse the FCC for administering its regulatory responsibilities.

Charter, a major video and broadband service provider, explains on its website that government agencies have found traditional communications offerings like phone service "to be an effective way to assess and collect taxes" because most people subscribe to such a service and receive a regular bill.

Customized for streaming

Streaming services could soon have their own specialized taxes. Chicago, for example, made streaming services part of its amusement tax, which typically is applied to in-person concerts as well as sporting and other events taking place in Chicago.

The city has expanded the tax to include streaming video, audio and gaming services — such as Netflix, Spotify Technology SA, and Microsoft Corp.'s Xbox Live — by taxing customers who provide a Chicago billing address.

Auxier wrote in a recent blog post that by applying an amusement tax on streaming services rather than levying the general sales tax, Chicago stands to collect much more revenue. While the city's sales tax is only 1.25%, its amusement tax is 9%.

The Liberty Justice Center, a Chicago-based public-interest litigation nonprofit, has challenged Chicago's streaming tax. Among other arguments, the center said the amusement tax violates the federal Internet Tax Freedom Act by discriminating against online entertainment and violates the state constitution's uniformity clause because it does not apply to "automatic amusement devices" that deliver video, music and gaming entertainment in person, such as jukeboxes and pinball machines.

While the city won the case in a lower court ruling, the Liberty Justice Center filed an appeal in December 2018 that has yet to be heard.

At the state level, taxing digital services, including streaming, is part of several governors' tax reform programs. For example, Rhode Island Governor Gina Raimondo proposed broadening sales tax to "digital downloads," including online video, in fiscal 2020.

Of the handful of states that continue to exempt tax on digital goods and services, there have been regulatory and legislative attempts in Maryland and Virginia to start taxing streaming services.