Netflix Sent to State Court to Fight Missouri Cities on Fees

Jason Bateman Ozark  - Publicity - H 2019
Jessica Miglio/Netflix

A Missouri township's efforts to collect fees from Netflix, Hulu, Dish, and DirecTV is headed to a St. Louis circuit court after a federal judge on Tuesday granted a remand motion from the City of Creve Coeur, Missouri.

Creve Coeur is attempting to enforce a local ordinance requiring video service providers fork over five percent of their gross revenues. These franchise fees have typically been applied on cable operators, but as Missourians have shifted their entertainment consumption habits, towns like Creve Coeur are eyeing subscription-based streamers to raise needed money for government services.

In 2018, Creve Coeur filed a class action on behalf of itself and other cities in Missouri with the allegation that Netflix and Hulu were shirking their fee obligations. Subsequently, Netflix and Hulu had the case removed to federal court.

In arguing against the fees, the streamers pointed to Missouri's passage in 2007 of the Video Services Providers Act.

"Netflix does not provide video programming," argued the streaming giant. "But even if Netflix did provide video programming, such programming is specifically excluded from the definition of video service when provided through the public Internet. The Act, and Creve Coeur's ordinance, state that the definition of video service 'does not include... any video programming provided solely as part of and via a service that enables users to access content, information, electronic mail, or other services offered over the public Internet.' This exclusion describes the Netflix Streaming Service exactly."

Netflix would surely prefer to appear in federal court to argue that local municipalities are unfairly attempting to impose fees on a global digital service.

Unfortunately for the company, U.S. District Court Judge Ronnie White refuses to exercise jurisdiction under the Class Action Fairness Act, despite at least 100 municipalities in Missouri with a stake in the outcome. Creve Coeur argued that the doctrine of comity required the federal court back off on state taxation of commercial activity.

"This case is on all fours with Maryland Heights," writes White referring to a past class action from a Missouri municipality seeking relief against a telephone service provider related to collection of local tax ordinances. "First, both Satellite Defendants and Streaming Defendants, by removing these cases, have invited 'federal-court review of commercial matters over which [Missouri and Missouri municipalities] enjoy wide regulatory latitude.' Second, the state court will be a better forum for certain defenses related to application of Missouri law and the Missouri Constitution because '[w]ithout question the state court is more familiar with Missouri's tax laws and the intent of the Missouri legislature.' Finally, Missouri courts are in a better position than this Court to rule on any potential constitutional violation 'because they are more familiar with state legislative preferences and because the TIA [Tax Injunction Act] does not constrain their remedial options.'"

In the order (read here), White has consolidated the lawsuits against the satellite operators (DirecTV and Dish) with the streamers (Netflix and Hulu) and set up a battle in local court over these fees. The decision comes just as the FCC voted to limit how local governments may collect franchise fees. The FCC's rule changes figure to spark a separate battle.

In the meantime, Creve Coeur aims to wring money from Netflix, which, according to one buzzworthy study earlier this year, paid nothing in federal and state taxes despite $845 million in profits last year. Upon that report, a Netflix spokesperson made the rounds and pointed out that the company paid $131 million in taxes — globally if not locally.