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To Be or Not to Be A Multichannel Video Programming Service – That is the Question

Netflix, Inc. v. Commonwealth of Kentucky, Finance & Administration Cabinet, Department of Revenue, Kentucky Board of Tax Appeals, File Nos. K13-R-31 and K13-R-32.

by Erica Horn

Netflix has filed two petitions of appeal at the Kentucky Board of Tax Appeals (“KBTA”). The first (K13-R-31) challenges the Department of Revenue’s denial of Netflix’s refund claim of the gross revenues tax on multichannel video programming and communications services, imposed pursuant to Kentucky Revised Statutes section 136.616 (“Gross Revenues Tax”) and the excise tax on multichannel video programming services, imposed pursuant to section 136.604 (“Excise Tax”) (collectively “Taxes”). The Second (K13-R-32) challenges the Department of Revenue’s denial of Netflix’s refund claim for utility gross receipts license tax (“UGRLT” or “school tax”). The disputes only apply to the streaming services of Netflix and not its DVD rental business. The issue in each case is whether the streaming service is subject to the gross revenues, excise or school tax.

Kentucky is attempting to impose three separate Taxes on the provision of “multichannel video programming service.” First, Kentucky imposes, on the provider of the service, the Gross Revenues Tax at the rate of 2.4% of gross revenues. KRS § 136.616(2)(a). Second, it imposes, on the consumer of the service, the Excise Tax at the rate of 3% of the retail price. KRS § 136.604(1). 3rd, Kentucky imposes the UGRLT on the provider, which the provider may pass-through to the end user. KRS § 160.614. Netflix’s maintains its streaming service is not a multichannel video programming service.

“Multichannel video programming service[s]” are 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 provided through wireline facilities without regard to delivery technology . . . .” KRS § 136.602(8) (emphasis added). Federal statutes define “video programming” in the same terms, namely as “programming provided by, or generally considered comparable to programming provided by, a television broadcast station.” 47 U.S.C. § 522(20) (emphasis added). The federal definition is used for the purposes of identifying entities subject to regulation by the Federal Communications Commission (“FCC”). 47 U.S.C. § 521.

Netflix maintains it meets neither the Kentucky nor federal definition related to video programming. The Department argues Netflix’s streaming service is a digital product delivered electronically and thus, subject to the Taxes.

Currently, the parties are engaged in discovery. A hearing before the KBTA is scheduled for September 16, 2014.