November 17, 2016

Netflix’s Streaming Service Not Subject to Tax in Kentucky

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The Franklin Circuit Court recently affirmed the decision of the Kentucky Board of Tax Appeals (the “Board”) holding Netflix’s streaming service does not qualify as “multichannel video programming service” (“MVPS”) and is not subject to the gross revenues tax and excise tax imposed on MVPS pursuant to KRS § 136.616 and KRS § 136.604, respectively, and the utility gross receipts license or “school” tax imposed pursuant to KRS § 160.614(6).[1]  MVPS is defined by Kentucky’s statute as “programming provided by or generally considered comparable to programming provided by a television broadcast station and shall include but not be limited to: (a) Cable service; (b) Satellite broadcast and wireless cable service; and (c) Internet protocol television . . . .”  KRS § 136.602(8)(emphasis added). 

Netflix’s streaming service is a subscription-based service that streams digital movie or television content over the Internet for viewing either on a television or an electronic device. The Kentucky Department of Revenue (the “Department”) argued the streaming service provided by Netflix is generally comparable to the programming provided by a television broadcast station and, therefore, is taxable.  In support of its position, the Department argued the streaming service offered by Netflix is similar to video on-demand television features available from traditional television providers.  The Board rejected the Department’s arguments, finding the statutory definition of MVPS is not broad enough to encompass Netflix’s streaming service.  The Department appealed.

The Franklin Circuit Court affirmed. The Court held Netflix does not provide a MVPS because Netflix’s streaming service does not contain content in a multichannel format; indeed, Netflix’s service does not include the concept of channels.  The Court noted that unlike traditional cable or broadcast television services, Netflix does not offer linear or sequential programming or live content, such as sports, news, weather, or awards shows.  Instead, Netflix uses algorithms to preselect content for its customers and allows users to create a personal profile and unique viewing experience.

The Court further held that while Netflix may compete with cable and broadcast television services, this alone is insufficient to subject Netflix’s streaming service to tax. The Court stated that it is unreasonable to conclude the legislature intended the statutory definition of MVPS to encompass every possible new technology in the field of transmitting digital content for personal enjoyment.  The Court found the Department’s interpretation of KRS § 136.602(8) impermissibly conflated the concepts of competition and comparability. 

The Department has thirty days from entry of the Court’s Opinion and Order to appeal to the Kentucky Court of Appeals.

The authors’ firm is co-counsel for Netflix.

[1] Commonwealth of Kentucky, Finance & Administration Cabinet, Department of Revenue v. Netflix, Inc., Civil Action No. 15-CI-01117 (Franklin Cir. Court Aug. 21, 2016).