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Tax Law

Streaming Services Not Subject to 3 Kentucky Tax Regimes

In September 2015, the Kentucky Board of Tax Appeals ruled that Netflix’s “streaming services” were not taxable under Kentucky’s Gross Revenues Tax, Excise Tax, and Utility Gross Receipts License Tax for Schools. In Netflix Inc. v. Finance and Administration Cabinet Department of Revenue, the Kentucky Department of Revenue had imposed and Netflix had paid the state’s Gross Revenues Tax under Ky. Rev. Stat. Ann. § 136.616, Excise Tax under Ky. Rev. Stat. Ann. § 136.604, and Gross Receipts License Tax for Schools under Ky. Rev. Stat. Ann. § 136.614(6) upon Netflix’s streaming services [2015 Ky. Tax LEXIS 162 (Ky. Tax 2015) (Sept. 23, 2015)]. “Streaming services” can be defined as a “subscription based service that streams digital movie or television content over the public internet for viewing on either a television or an electronic device”, as stipulated by the parties in the case. [Id., quoting, Joint Stipulation of Facts No. 10].

At issue in the case was whether the three Kentucky taxes applied to such streaming services. [Id]. As discussed by the Board of Tax Appeals, the text of each of the three Kentucky tax statutes applied to “multichannel video programming services”, and in the case, the Department of Revenue had argued that streaming services were “generally considered comparable to programming provided by a television broadcast station” and that the legislature intended to include services such as streaming services in the definition of “multichannel video programming services.” [Id]. Netflix had argued that streaming services were not comparable to the scheduled or live programming provided by a television broadcast station or cable TV and that neither the federal government nor other states considered the term “multichannel video programming services” to include streaming services. [Id].

The Board of Tax Appeals found that “the plain meaning of the words used” in the tax statutes was “controlling” in the case and that each of the taxes at issue were on “receipts or revenues from ‘multichannel video programming services.’ [Id].

The Board of Tax Appeals looked at the definition of “multichannel video programming services” in Ky. Rev. Stat. Ann. § 136.602(8), which states, in part, that such services mean “programming provided by or generally considered comparable to programming provided by a television broadcast station.” [Id]. The Board found that while Netflix’s streaming services and a broadcast station/cable TV’s on demand TV service were similar, the on demand feature was not enough to make streaming services “generally considered to be comparable to programming provided by a television broadcast station”. [Id]. The Board further found that streaming services did not fall within the statutory definition of “cable services” in Kentucky. [Id].

Noting the importance of the language of the tax statutes at issue, the court stated:

While the legislature in Kentucky did set forth a preamble in which it noted the intent to “provide enough flexibility to address future changes brought about by industry deregulation, convergences of service offerings, and continued technological advances in communications,” it is the specific language used in the enacted tax provisions which must control the imposition of the tax. [Id].

For additional information on the taxation of digital content and cloud services in the State of Kentucky and all 50 states, please see the Lexis State Tax Guide on Digital Content & Cloud Services available at the LexisNexis® Store.