Texas Tussles with Netflix Over Taxes

Sarah Garrett, Staff Writer

According to KXAN, on Dec. 7, 2022, the city of Austin decided to join with other Texas cities and sue Netflix, Hulu, and Disney+. A Texas law from 2005 says that video service and cable providers are required to pay a fee to the municipality for using the transmission lines. According to the firm, Netflix, Hulu, and Disney+ have not been paying this fee. 

Stephen D. Wolens, a lawyer at McKool Smith, said that before 2005, cable services were required to pay a negotiable fee. The law changed in 2005, though, and that is the current law the case is based on. 

Before 2005, Texas had a policy that says that public entities that use the public right away pay the city a franchise fee, and it’s a franchise fee for use of the public right of way,” Wolens said. “The law was changed to center the application process at the state level. Instead of negotiating a rate with each city, they would pay a flat 5% gross receipts tax.”

Senior policy tax analyst Ulrik Boesen said that lawsuits like this are happening nationwide. The U.S. required the cable companies to pay money for using the land to run cables through, but now that cable is not used as often, the localities are changing how they charge the services. 

“People are not apt to stop consuming entertainment,” Boesen said. “They just changed how they consume. So let’s [localities] either expand the tax base, or change the tax so that these companies will also have to be now, that’s where the issue starts. Because there was a legitimate reason why localities tax cable companies they were utilizing right away. The streaming services are using the internet.” 

Boesen also says the reason the streaming services are refusing to pay the fees is because they argue that they don’t have any reason to pay the fee. Streaming services use the internet, not cables. 

Streaming services are claiming you [localities] cannot tax us because you have no legitimate reason to,” Boesen said. “And you cannot say that we provide the same services to cable companies, because we don’t have any cables. That’s really where the short discussion is. More localities think it’s a similar service that should be taxed in a similar way. And the streaming services say, ‘No, it isn’t.’ This is just another option for consumption on the internet to protect other things that we do with Wi-Fi on the internet.”

Mina Shekarchi, the constituent liaison and executive assistant of Mayor Pro Tempore Alison Alter, said that it is time for the streaming services to pay the money. She feels that it is illogical that the different streaming services have avoided paying the fee up to this point. 

Streaming services are a new and unique way of consuming television, and until now, these companies have avoided paying the fees that many traditional cable companies have paid,” Shekarchi said. “Austin, along with other Texas cities, wants these streaming services to pay their fair share.”

Shekarchi predicts that the streaming services will try to avoid paying the fees. Shekarchi says that the services may try to claim that the customers should pay the fees. 

“I can say that it seems like the fees, if collected, would be used to benefit Austinites through other City services,” Shekarchi said. “Streaming services have their content moved through the same transmission lines as traditional cable companies, so it seems illogical that the streaming services have not received similar treatment.”

Boesen says that many times, the streaming services win the court cases. According to Boesen, because of the rise of the internet, and the speed at which it progresses, tax policy is often trying to catch up to the developments. 

“From what I’ve seen, in a lot of the places the streaming services win the court cases, but it really depends on the specific language and local tax code,” Boesen said. “I doubt that we’ll have cable taxes on streaming services commonly. Most places just charge sales tax on these kinds of things, and I suspect that that will be the norm.”