State and local governments are looking to tax digital platforms like streaming subscriptions and cloud computing to make up for hundreds of millions of dollars or more in lost revenue caused by the decline in DVD and CD sales in recent years, according to a recent report by The Wall Street Journal.
Tennessee started applying its 7 percent sales tax to software and digital games accessed remotely last month. Chicago is one of the first cities to implement what has been referred to as a "cloud tax" or "Netflix tax." The city plans to levy a 9 percent tax on streaming and cloud computing services used by consumers in the coming months, as it has extended the deadline for companies to comply with the new tax to the start of next year and new exemptions are being discussed.
However, this initiative has proven to be much more complicated than just passing a new tax law. That's because items like DVDs and CDs are tangible goods on which a sales tax can be levied. But many argue that a streaming service, such as Netflix, doesn't quite fit into that category because it is exactly that — a service, which is an obstacle Vermont and Idaho ran into when they attempted to pass similar taxes. Idaho also passed a law earlier this year exempting streaming services from sales tax because consumers do not get "a permanent right to the content," according to WSJ.
It's unclear exactly how much tax revenue states have lost as consumers turn to digital technologies for their entertainment because states don't typically track tax collections for individual items. However, states have likely lost hundreds of millions of dollars a year in tax revenue from the sale of DVDs, CDs and video games, all three of which have had declining sales over the past decade, according to WSJ. Cloud computing is also a growing industry expected to reach $115 billion in the U.S. next year, according to Gartner as reported by WSJ, and states are also looking into taxing this area in the future.