As Streaming Subscriptions Spike, So Do Tax Complexities

The upside of spikes in streaming subscriptions

The move toward streaming services is not new, of course. By 2018, nearly 60% of Americans had already turned to streaming video content — and 20% were streaming only. As options expanded, consumers have pieced together their own personalized suites of at-home entertainment with multiple subscriptions. The average household was paying for three different streaming subscriptions at the start of 2020, with 93% planning to either increase or maintain that number.

Adoption has been occurring at such a fast and furious rate that researchers started to caution against subscription fatigue. Consumers would work only so hard to find desired content, the theory went, so it stood to reason that subscription spikes could soon taper.

Then came the stay-at-home orders.

In a matter of mere weeks, overall time spent streaming went up another 36%. One-fifth of surveyed consumers subscribed to new streaming services in March, and many discovered streaming content providers that had previously remained relatively obscure.

Why is this shift establishing a new normal for the streaming industry? Because providers aren’t just looking at a sudden surge in short-term subscriptions. Studies show that 80% of consumers are likely to hold on to a streaming service even after tearing through their initial binge. Whether they’re first-time streaming customers or expanding existing subscription options, these customers are likely to stick around.

And then there’s the fact that the number of cord-cutting consumers was already predicted to triple from 25.3 million in 2020 to 76 million in 2023 — a number that could climb even higher, or peak faster, as people abandon pay TV service in favor of stand-alone packages.

Still, the news isn’t all blue skies ahead for streaming providers. As the wave of consumers moving away from traditional TV continues to rise, jurisdictions may consider restructuring tax requirements to compensate for lost revenues.

Streaming tax implications of subscription spikes

No doubt your streaming company is aware of sales and use tax liabilities. But are you familiar with communications tax obligations?

Any company not yet accustomed to the multitude of nuances of streaming taxes could soon find itself facing a much more complex array of tax rates and regulatory fees as its geographic footprint and subscription volume expand. Here are some reasons why:

• In Florida, a communications services tax with both state and local components — which applies in lieu of sales tax — has been extended to apply to streaming video and audio services
• A 9% amusement tax in Chicago originally written for concert and sporting event tickets has been extended to apply to streaming video services
• When dozens of California cities updated their utility user tax (UUT) ordinances to require collection of tax on video services, a new ruling interpreted those services to include streaming video
• Kentucky and the District of Columbia are applying utility company taxes to certain forms of streaming services 
• What many have referred to as “Netflix taxes” are now a reality in states such as Washington, Pennsylvania, and North Carolina, and have been under discussion in others
• If you have customers in the state of Iowa, you’ll need to collect streaming taxes — both on the streaming itself, and on any other services bundled along with it

These rulings are just the start of what’s likely to be a major transition. Many jurisdictions are still working to determine how streaming content should be taxed. 

How to stay ahead of streaming tax complexities

As taxing jurisdictions start to catch up with these shifts in viewing patterns, streaming content providers will need to be prepared to meet new requirements as they emerge. Here are three essential steps you can take now to get ready — and to future-proof your business for continued growth.

1. Keep up with tax and regulatory changes across jurisdictions. Moving forward, it will be critical to keep up with changes in every jurisdiction where your streaming services are sold. Fast-growing companies could soon be looking at hundreds or even thousands of different taxes and regulatory filings as changes are made at federal, state, county, and local levels. Missing just one new ruling could result in costly overpayments or audits and fees.
2. Proceed with caution when determining new tax liabilities. Because each governing body takes its own approach to streaming taxes, the requirements can vary greatly from one jurisdiction to another. This is one area where it pays to be cautious. Talk to other industry leaders in your space when determining which taxes and fees will apply, and thoroughly document your decisions to back them up in the event of an audit.
3. Prepare your technology for specialized taxes. Make sure the solutions you use — whether they’re existing platforms or you’re vetting potential vendors — are equipped to handle the many nuances of specialized streaming taxes. Communications taxation is much more involved than sales and use tax, and getting it right requires frequent updates. Using the right automation software today can help your business ensure continued compliance no matter how often the landscape shifts and changes tomorrow.

========

Steve Lacoff is General Manager of Avalara for Communications. He previously served as Senior Director of Product Marketing for Avalara’s Strategic Initiatives Group. With a focus on data, VoIP, and video streaming, Steve has spent more than 15 years in various GM, product, and marketing leadership roles in communications and technology industries, including Disney’s streaming services and Comcast technology solutions. Steve now drives overall business unit strategy and regularly provides thought leadership on today’s changing industry landscape and associated tax impacts.