If you live in Massachusetts and use streaming services like Netflix or Amazon Prime Video, you could face a covert tax increase.
Earlier this year, state lawmakers introduced a bill (H. 74) that would impose a 5 percent tax on the gross receipts collected by streaming companies to fund local media channels. Unfortunately, the bill would tax the wrong entity, for the wrong thing, at the wrong rate, while violating the policy principles of neutrality and transparency in the process.
To begin with, the logic behind the new tax is seriously flawed.
Here’s the thinking: according to federal law, localities can impose a franchise fee on cable companies of up to 5 percent of gross receipts to compensate for their private access to public rights-of-way (e.g., installing their fiberoptic or coaxial cables on or under public roads, lands, or utilities). Because streaming services use some of these same rights-of-way to deliver their content, proponents say, they should be subject to the same tax.
But that would be like requiring a grocery store owner to pay an additional transportation tax because it benefited from a delivery truck using public roads to transport produce—even after that delivery truck paid fuel taxes and tolls to use those roads. Streaming services may be piggybacking on cable companies’ infrastructure, but the cable companies are already paying for the privilege of using those public rights-of-way.
Nor do all streaming services use public rights-of-way; some streaming content is delivered via cellular networks, among other methods. And to the extent streaming services rely on public utility infrastructure, they don’t depend on it any more than non-streaming sites. Yet internet-based companies that make sales or deliver non-streaming content—news, social media, or just about anything else—through the same transmission lines as streaming companies are exempt from the proposed tax.
If Massachusetts wants to tax streaming services neutrally and fairly, it should include streaming services (and other consumer services) in the sales tax system. By broadening the tax base sufficiently, the state could even lower its sales tax rate from 6.25 percent to a more competitive rate. In fact, the five states with the broadest sales tax base have an average rate of 4.475 percent. If Massachusetts levied that rate, it would have the eighth-lowest state rate and the second-lowest state and average local sales tax rate in the country.
By including services in the sales tax base, Massachusetts could also make the sales tax less regressive because higher-income earners tend to spend more of their incomes on services. Shifting the burden of the sales tax and lowering the rate would benefit low-income Bay Staters.
While lawmakers in favor of the new gross receipts tax may say they are taxing large corporations that can afford it, it’s unlikely the corporations will actually bear the burden. Market research suggests that demand for streaming services changes little when prices go up (likely because the alternatives still cost much more than streaming services). Therefore, we can expect streaming companies to successfully pass on the entire tax to consumers.
Most states abandoned broad-based gross receipts taxes decades ago—and for good reason. They’re inequitable and economically damaging, taxing businesses’ revenues without regard for costs or profit margins. Massachusetts policymakers shouldn’t try to force a new industry into an inefficient—and antiquated—tax system. Instead, they should include streaming services in the sales tax base and reduce the sales tax rate, benefitting both taxpayers and the state’s economy.
