The ‘Netflix Tax’ Is A Simplistic Solution To A Complicated Problem

Senior Contributor
08.02.16 5 Comments
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Chicagoans are familiar with the “Netflix Tax” and it’s about to arrive in Pennsylvania. The Pennsylvania law will impose a sales tax on any goods bought on a credit card with a Pennsylvania address, but this law opens up a lot of criticism about taxes, the law, and shifting technologies.

By itself, the Netflix tax Pennsylvania is passing is fairly simple. If you own a credit card with a Pennsylvania billing address, the state’s sales tax will be tagged onto any digital goods you happen to buy, whether they’re Kindle ebooks, Netflix subscriptions, comic books from Comixology or a host of others. Due to First Amendment law, the only purchases that won’t be taxed will be religious materials, newspapers, and school textbooks.

And by itself, it’s relatively harmless, at least on the surface. There’s no particular reason, legal or otherwise, states can’t impose sales taxes on digital goods, a long legal fight that has more or less ended with tech companies capitulating to the inevitable. But there’s a problem nestling in there that politicians have failed to address.

The Netflix Tax Is Coming To Every State

Say someone from out of town goes to a bookstore in Philadelphia and buys a book. They pay sales tax on it, of course, because that’s the law. But if they’re from another state, take out their phone, and buy the exact same book in the exact same place, they won’t be charged the sales tax. Why is the law penalizing one buyer and not the other? Conversely, if a Pennsylvanian buys a book on their phone in Atlanta, why are they paying sales tax on a purchase technically made in another state? Especially when both are being purchased from a “store” in another state entirely? Where, precisely, are the state and city borders in cyberspace? That’s not the only problem.

The Netflix Tax Is A Stopgap

Tying sales tax to credit cards is a simple solution, but also one that offers a host of problems the law simply hasn’t dealt with yet. If somebody steals your credit card and buys $10,000 worth of Bieber singles, are you going to get the sales tax back? There’s also the question of state commitment. If somebody steals your collection of digital goods, as of right now, the police can mostly offer you a cup of coffee and a hug. But now that digital goods are being taxed in Pennsylvania, the theft of those goods means lost revenue for the state and, arguably, a commitment to follow up on those thefts. And that’s a commitment your local police department likely isn’t equipped to follow up on.

These may seem like minor, fiddly issues now, but they can explode into major problems with shocking speed. Part of the reason Amazon sold goods across the country without collecting a dime in sales tax for more than two decades was because, quite simply, it had never occurred to any politician buying things off the Internet could ever be an industry.

It would be easy to play off politicians as completely ignorant of these problems, and to be sure, some are. But every politician is aware of budget gaps, and Pennsylvania is facing a $1.3 billion gap it desperately needs to fill, and it’s far from alone. Most politicians are either looking for ways to extend current tax law, or ways to pretend it’s not a problem in the first place, and both are, legislatively, not great strategies. But roads need to get paved and schools need to open, and the money has to come from somewhere. And your Netflix subscription is as good a place as any; another target of legislators is the vaping industry, which got a few taxes of its own.

Not that it’ll help much in Pennsylvania. At six percent, and $10 a subscription, even if Pennsylvania had every one of Netflix’s 47 million subscribers in its borders, it’d still only be making $338 million a year off the tax. They’d still have another billion dollars to find.

Netflix Can’t Fix Tax Problems

The reality is, the free ride had to end sooner rather than later for Netflix fans. But the Netflix Tax betrays both a stopgap attitude towards understanding technology and a desperation for tax revenue over sensible policy that Pennsylvanians, and Chicagoans, should be worried about. A Netflix tax might be highly visible and offer us something to gripe about, but there’s a far more serious problem underneath. States need to figure out just what the tax obligations of citizens are when they buy things online, and when state borders matter or when they don’t.

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