Pasadena city officials decide to impose so-called Netflix tax on residents

Pasadena, California has become the latest community in the Golden State to begin taxing users of Netflix, HBO Go and Hulu, according to Press-Telegram.

The city’s finance department decided last week to impose a 9.4 percent tax on “video services” to subscribers of streaming video. The so-called Netflix tax will begin on Jan. 1.

Users would be taxed for each service they use, so that could add a dollar or more to what they already pay for streaming services like HBO, Netflix and Hulu. For cord cutters, the new tax could bring them back to the days of paying for added fees levied by their cable provider.

Pasadena may join approximately 45 other California communities that have been advised that they could tax their residents for using their Internet connection to watch Netflix or other streaming providers.

The thinking, according to these experts, is that a new tax can be levied under the city’s existing tax rate for cable providers.

Muniservices, a company that dreams up ways for municipalities to tax its residents, already collects such a so-called Netflix toll from residents of San Bernadino, Glendale, Santa Monica, Culver City and Pico Rivera.

Don Maynor, an attorney assisting cities that use MuniServices, told the Press-Telegram, “As companies begin to provide services that look more and more like cable services, those fall under taxable services. There will be a whole bunch more that will be adopting them in a couple of months.”

Whether Maynor or the city fathers of California are Googling a lawsuit in Chicago challenging the legality of a very similar decision is unclear.

Local residents, tax group already questioning legality of streaming tax

California’s state constitution requires that voters must vote to increase their taxes. The Howard Jarvis Taxpayers Association – the state’s leading taxpayer association — is already questioning the legality of the Pasadena’s new levy.

“We will be taking a very close look at this,” Jon Coupal, the association’s president, told the Press-Telegram. “If we determine this is an extension of an existing tax, then under the Constitution, they need voter approval. They can put as much lipstick on this pig as they want, but the pig is still a tax increase.”

But Pasadena’s Finance Director Matthew Hawkesworth, who was hired by the city a year ago, concluded that the tax should be applied to “video games and streaming services similar to cable regardless of the content of such video programming, or the technology used to deliver such services,” the Press-Telegram reported.

Legal win for residents of Chicago fighting Netflix tax

If taxpayers in Pasadena decide to challenge the new streaming tax in their city, a lawsuit in Chicago may already be shedding light on how to proceed.

A group of Chicago residents filed a class action lawsuit against the city last September for implementing a 9 percent tax on streaming services. Users of Netflix, Spotify and Xbox Live brought the lawsuit, arguing that the new tax could only have been imposed by a vote of city officials, according to Fortune. The lawsuit also says that Chicago’s streaming tax violates the federal Internet Tax Freedom Act. That federal law forbids states and cities from discriminatory Internet-only taxes.

The residents won a significant hurdle in July when a superior court judge refused to dismiss the lawsuit, Courthouse News Service reported.

The court did throw out portions of the lawsuit. But the group of Chicago residents will be able to proceed with challenging whether the city is in violation of the Internet Tax Freedom Act.

You can read the opinion here. That decision could be an important one for the residents of Pasadena. And it should be one for city leaders in Pasadena if they are at all worried about the possibility that their latest idea to generate revenue may only increase their line item for legal expenses.

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