46 California Cities Join Rush To Impose 'Netflix Tax'

Last year, Chicago proudly declared that the city would be expanding its 9% amusement tax (traditionally covering book stores, music stores, ball games and other brick and mortar entertainment) to online streaming services and cloud computing. While Chicago was hungrily pursuing the $12 million in additional revenue the expanded tax would provide, it ultimately faced a lawsuit questioning the legality of Chicago's move. The ongoing lawsuit by the Liberty Justice Center claims Chicago violated city rules by not holding a full vote on the changes, and is violating the Internet Freedom Tax Act.

Legal or not, Chicago's push to impose a Netflix tax has opened the floodgates.

Earlier this year, the Pennsylvania legislature expanded the state's 6% sales tax to cover digital downloads and subscription services like Netflix and Hulu -- but also music, e-books, apps, online games, and ringtones. And now Pasadena, California, has joined the fun, applying its own 9.4% tax on streaming video providers such as Netflix, HBO Go and Hulu. In fact, Pasadena is one of 46 total California cities that are rushing to embrace the tax to help shore up city budget shortfalls. But much like Chicago, there are a number of groups ready to sue over the move, claiming these cities don't have the authority:

"Jon Coupal, president of the Howard Jarvis Taxpayers Association, called the tax “very suspect.” The association’s legal team is currently investigating the legality of the new interpretation of the tax.

"We will be taking a very close look at this,” Coupal said. “If we determine this is an extension of an existing tax, then under the Constitution, they need voter approval. They can put as much lipstick on this pig as they want, but the pig is still a tax increase."

Pasadena, however, says that city laws have always provided it with the authority to tax cloud-based services:

"Pasadena’s Finance Director Matthew Hawkesworth made his determination Thursday that the tax applies to video games and streaming services similar to cable “regardless of the content of such video programming, or the technology used to deliver such services,” according to a memo to City Manager Steve Mermell.

"It’s our interpretation because of our code, these types of video services have always been eligible to be taxable," Hawkesworth said. "The administrative ruling is instructing the various companies that offer video service that the tax includes their services as well, and it will be incumbent upon them to collect the tax and remit it to the city."

The efforts to tax all cloud services are creating an absolute legal minefield over determining exactly where a cloud-based transaction is taking place, when to apply said tax, and who intends to collect it. Who pays sales tax when an app developer in New York relies on a cloud computing provider in New Jersey, and sells to customers in Illinois? Nobody appears to know and the answer may differ state by state. But one thing's for sure: lawyers certainly won't be going to bed hungry as cities rush to cash in on the rise of the internet video revolution.

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