SALTER: State, local governments coping with tax impacts of cord-cutting and streaming

By: Sid Salter

Local TV stations, cable providers, and companies selling satellite or dish technologies – not to mention the major television news and entertainment networks – are increasingly staggering under the rise of competition from new and potent digital news and entertainment competitors.

State and local governments that have in the past collected tax revenues from the interrelationships of these evolving, declining technologies are noticing the trends as well and are reacting to them with new tax strategies.

In most Mississippi local governments, the renewal of cable television franchises in those communities was a big deal, both from the tax revenue to the municipalities and the availability of programming and services to the individual cable subscribers. Also impacted were sales tax collections on the sale of cable TV hardware, playback hardware, and digital products like DVDs.

The sales of those products – and the subsequent state and local tax revenues – have been in freefall for just over the last decade. Remember, the words “Netflix” or “Hulu” were not part of our vocabulary until 1997 (when Netflix was in the DVD rental shipping business) and Hulu until 2007 (when they began to compete with Netflix) in the streaming business.

How significant are these technological changes on consumer behavior from a tax standpoint in Mississippi at both the state and local levels? A 2021 survey by the Pew Research Center found that 76 percent of Americans reported watching television content provided either by cord-connected cable or satellite television in 2015. By 2021, that percentage had plummeted to 56 percent.

The Pew Research survey asked the cord-cutters “why?” The response from 71 percent said they dropped cable or satellite because they could get the content they wanted from streaming services like Hulu and Netflix – and in most instances at monthly savings. But doesn’t Mississippi lag behind the rest of the country in terms of broadband access?

As recently as when we entered the COVID-19 crisis in 2019, 60 percent of Mississippians living in rural areas lacked high-speed internet access. That translated into some 368,000 Mississippians who didn’t have access to broadband internet that meets the basic speed standard set by the Federal Communications Commission.

At the time, The Northeast Mississippi Daily Journal reported growing parental frustration with how broadband impeded COVID-19 shutdown education: “The average internet speed in the state is 37.5 megabytes per second. Around 80 percent of Mississippians have access to internet speeds of 100 megabytes per second, a speed that would allow a user to perform more activities. These statistics mean that roughly 595,000 Mississippians do not have access to an internet speed with 100 megabytes or more.” Mississippi officials confronted those broadband deficiencies and the numbers are improving.

In reaction to cord-cutting and changes in consumer behavior, state and local government began looking at tax revenue losses from old technology and revenue challenges from emerging technologies. In 2013 and again in 2020, the Mississippi Department of Revenue sought changes that addressed selling, leasing or renting digital products.

Likewise, the DOR is proposing changes to increase sales and use taxes on internet-based business services involving computer software classification and definitions, cloud computing, and the designations and taxability of “software as a service, platform as a service or infrastructure as a service.”

Mississippi and most states with general sales taxes already tax streaming services through general sales taxes. But for the most part, that’s about it. Across the nation, state and local governments are looking to replace lost revenues from the declining cable, satellite and digital content sales markets.

This month, Standard & Poor’s Global Market Intelligence reported that pay-TV revenues had declined from $116.9 billion in 2016 to $91.1 billion in 2021 and forecast a drop to $64.7 billion in 2025.

In Illinois, California, Georgia, Missouri, and other venues, local and state governments have tried streaming-specific franchise or other taxes. The issue is being fought in the courts, but Chicago is collecting 9 percent on what is dubbed there “the Netflix tax,” and it’s being passed on directly to the consumer. The addition of video games to their services offerings brought higher Netflix sales taxes in Alabama and Louisiana.

Eventually, the taxman cometh whether by cable, satellite dish, or broadband stream. Count on it.