Most Americans who use streaming services probably wouldn’t have a hard time coming up with a list of their biggest gripes with the platforms. They would probably name things like cancellations, anti-password sharing rules, subscription price increases, and so on. One thing that would be very unlikely to appear on that list, though, would be complaints that streaming platforms are “trespassing” into their homes.
That is, unless you ask East St. Louis, Illinois. The latest in a long line of efforts to squeeze digital goods and services companies for special taxes, this one is notable for its sheer brazenness.
In seeking to hit streaming services with taxes, most cities have focused on trying to fold the taxes into their existing "right of way" taxes on the use of cables passing through the city. But those taxes are levied on the physical cables passing through the locality, and are already paid by internet service providers. Local efforts to try and double-dip and tax the companies providing digital services as well as the companies providing the actual internet connection have therefore largely floundered.
Enter East St. Louis, which, frustrated in past efforts to use the right-of-way argument to tax streaming services, is now trying to claim that streaming services are “trespassing” on city property by delivering their products to East St. Louis residents. The city even went so far as to bring this obviously frivolous claim before an Illinois court.
Fortunately, upon being put before a judge, the claim was quickly dismissed. As Magistrate Judge Mark A. Beatty rightly points out, trespass requires an “actual physical invasion by a person or tangible thing,” not to mention some form of physical or tangible damage as a result. East St. Louis is no more damaged by Netflix transmitting streaming content over cables provided by an internet service provider running through the city than it would be by any other form of content.
But while East St. Louis’s argument is particularly goofy, it is emblematic of a broader trend of localities trying to throw legal arguments at the wall to justify taxing streaming services and seeing what sticks. For example, another more prominent Illinois city, Chicago, has done something very similar, but in a way that has thus far been enforced.
Rather than fooling around with “trespass” claims, Chicago designed streaming services as being subject to its “amusements” tax. While that might sound logical, Chicago’s amusements tax is levied against large events such as concerts that require significant city services to coordinate. Consequently, they face a higher 9 percent tax rate than things such as physical DVD rentals, which face a 1.5 sales tax rate.
It’s hard to view this as anything other than a cash grab, trying to shoehorn in a service that should be subject to the normal sales tax rate into a higher, special tax bracket. Nevertheless, Chicago’s position has withstood legal challenges to this point.
The shifts in the economy brought by digital and internet products have emboldened many governments at all levels to try to update their tax codes not in a way that accurately reflects the proper categorization of new goods and services, but that maximizes tax revenue to be gleaned from innovative new products. What’s more, the way in which digital products blur physical boundaries encourages these government officials to shift from taxing their own residents to outsourcing tax obligations onto nonresidents that lack the voting power to punish them for it.
States and localities should avoid piling on this shortsighted revenue grab. Taxes must be based on a reasonable basis of nexus and a responsibility to contribute to government services that the taxpayer benefits from, or else taxpayers can never know who might try and tax them next.
