3:48pm PT by Eriq Gardner
Netflix Tells Court It Isn't a Video Service Provider
"Netflix is not a video service provider because it does not provide video service."
This powerful argument comes from a memorandum submitted in Missouri federal court on Thursday by Netflix, which along with Hulu faces a lawsuit from the City of Creve Coeur, Missouri.
Back in 2007, Missouri passed the Video Services Providers Act, which allowed municipalities and counties in the state to collect franchise fees from video service providers. Since then, cable operators in the region have obtained video service authorization and remitted fees.
But according to Creve Coeur, which has a code of ordinance that requires a video service provider to fork over five percent of its gross revenues, Missourians have shifted to subscription-based streaming services like Netflix and Hulu. And those companies aren't paying these fees, which, states the lawsuit, "deprives Missouri municipalities of much-needed revenue."
Creve Coeur seeks a declaratory judgment that Netflix and Hulu are engaged in the business of providing video service within the meaning of the 2007 law, and should the two companies continue to be stingy, restrains Netflix and Hulu from engaging in business in Missouri.
Of course, this case is now coming down to an interpretation of the 2007 law in question.
"Video service" is defined in the statute as "the provision of video programming provided through wireline facilities located at least in part in the public right-of-way without regard to delivery technology."
"Netflix does not provide video programming," argues 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."
Creve Coeur states otherwise in its complaint (read here), but Netflix is arguing that the exclusion had a purpose: to impose a set of regulations and fees on cable service providers, not internet-based services like streaming.
A footnote in Netflix's brief (read here) adds that this sort of issue has come up only once before — when a court in Kentucky in 2016 looking at a local tax dispute came to the conclusion that its state's lawmakers couldn't possibly have subjected every possible new technological development in the field of transmitting content to taxation. The judge in that case wrote, "[I]t is unreasonable to conclude that Netflix's streaming service is generally considered comparable to traditional cable and broadcast television services: the two could not be more different."
Now a Missouri court must come to its own conclusion.
While this may only be the second case of its kind, it likely won't be the last. This dispute might turn on an interpretation of a decade-old statute, but there's a strong possibility that cord-cutting could convince local governments to update laws in order to recover lost tax revenue as consumer habits shift. And the prospect for doing so may have been boosted by a Supreme Court decision in June, South Dakota v. Wayfair, which allowed states to subject internet sellers to local sales taxes over arguments that doing so would violate the dormant Commerce Clause in the U.S. Constitution.
Then again, that was a closely decided case, 5-4, with Justice Anthony Kennedy authoring the majority opinion. Kennedy is now retired. If confirmed, Brett Kavanaugh could provide the next chapter. He's a bit of a stickler for the plain meaning of statutes even if it could gut the television industry as we know it.