Netflix, Hulu Can't Hide Behind Internet Tax Freedom Act in Missouri Fee Fight

Netflix Amazon Hulu Illustration - Publicity - H 2018
Courtesy of networks (Logos)

If 2020 became the year that American cities, burdened by a health pandemic and desperate to find new revenue, declared war on Netflix and other streamers, the year ended with a potentially important court ruling that suggests that the fight won't be an easy one for streaming services looking to avoid local taxation. In two separate orders, a Missouri judge ruled that townships in her state had alleged facts sufficient to support allegations that Netflix, Hulu and DirecTV were covered by Missouri's Video Services Providers Act and that these defendants couldn't avoid utility fees by holding up the Internet Tax Freedom Act.

The case in Missouri has already become an influential one. After the streamers lost an initial battle over the forum of the proceeding, many other cities and towns throughout America decided to similarly sue the streamers. At the moment, there are separate suits pending in Texas, Nevada, Ohio, Tennessee, Indiana, Georgia, Arkansas and likely elsewhere. The Missouri case has traveled furthest, but the other ones are right behind. Indeed on Thursday, a judge in Eastern Texas held a hearing that included consideration of Netflix's argument that local fees infringed the constitutional right to deliver and access Cobra Kai.

"These cases falsely seek to treat streaming services as if they were cable and internet access providers, which they aren't," says a Netflix spokesperson. "They also threaten to place a burden on consumers that the Legislature never intended, and we are confident that the Courts will conclude that these cases are meritless."

The main thrust of the controversy is whether streamers should fork over a portion of revenue (up to 5 percent) to local municipalities as cable operators have for decades. These cable companies once needed “right of way” to dig up the ground and lay their wirelines. They paid for that privilege. Now, the trend of cord-cutting has hit city coffers at the exact moment when COVID-19 is busting budgets. So will Netflix and other streamers be assessed utility fees, or has technology outrun outdated law?

In Missouri, Netflix and Hulu claimed they weren't really "video service providers" under the definition of the statute. There was also comparisons to a television broadcast station. Does it matter that streamers don't have channels in the traditional sense, and don't, in the case of Netflix, exhibit any live content? Does consumers' ability to pick and choose content matter?

In holding that these streamers were indeed "video service providers," St. Louis County Circuit Judge Ellen Ribaudo points to the FCC's 1992 determination that "video-on-demand images can be severed from the interactive functionalities and thereby constitute video programming."

Ribaudo also concludes that the Missouri townships have sufficiently alleged facts in support of the allegation that these streaming services don't fall within an exemption for video programming delivered over the public internet.

"The Plaintiffs highlights the Defendants' content-delivery systems that operate by keeping the video programming within or directly connected to the private network of local ISPs, who from there deliver the streaming content to the subscribers directly," writes Ribaudo (see full ruling below). "These facts support Plaintiff's assertion that Defendants' provision of video programming bypasses the 'public internet.'"

Netflix and Hulu attempted a big backup argument about why the lawsuit failed. The streaming services pointed to the Internet Tax Freedom Act, the 1998 law which bars discriminatory taxes on electronic commerce. Here, Netflix and Hulu pointed to how Missouri cities weren't imposing fees on broadcast television stations. In response, the Missouri cities pointed to fees imposed on Charter, Comcast, and AT&T.

In deciding that the Internet Tax Freedom Act doesn't apply, Judge Ribaudo stresses how the purpose of that federal statute was "to prevent taxes that specifically targeted electronic commerce." She adds that Missouri's law "is technologically neutral; it does not specifically target electronic companies just video service providers who use the public right-of-way."

The ruling appears to be a first-of-its-kind decision that if adopted elsewhere could raise the cost of delivering video programming online. That, in turn, could mean higher bills as streamers pass along the costs.

Today, in Texas federal court, attorneys for Netflix and Hulu appeared virtually in an attempt to shoot down a lawsuit filed by the city of New Boston, Texas.

Netflix argued that the Texas Services Provider Act didn't apply to streamers, that federal law preempts local attempts to impose franchise fees, that the Internet Tax Freedom Act also interfered, and finally, that Texas' law violated the First Amendment. On the latter contention, Jean Pawlow, an attorney for the streamer, mentioned shows like Queen's Gambit and The Crown and said that transmission of content was free speech, and that fees not only burdened Netflix but also its subscribers who wished to access those shows.

"What evidence is that they've signaled you out?" asked U.S. District Court Judge Richard Schroeder at the hearing. "Could it not just be the result of litigation strategy?"

Responded Pawlow, "The fact is that this law has been on the books for a very long time, and the Texas Utility Commission has not said that over-the-top content providers are covered. The city is clearly singling out Netflix and Hulu. Not just this city but in cities around the United States. It's obvious they are trying to increase revenue because their revenue has declined and therefore they are going after deep pockets."