Video streaming services and the next evolution of OTT: What about taxes?

Disney made major headlines when it announced the launch of its new ESPN-included streaming service — a move that was quickly followed by Discovery, Viacom, and AMC. This news signals an important shift in the market. If an increasing percentage of consumers say they're willing to pay for unbundled TV services and abandon cable altogether, it might mean pay TV is about to lose its last groups of loyal stalwarts. 

As these over-the-top (OTT) streaming services proliferate and evolve, there's one question that should not be lost in the focus on related business decisions: What about communications tax? It can be easy to overlook communications tax and regulatory compliance when a company gets caught up in a whirlwind of innovation and change.

However, as bundles are broken down and rebuilt to meet new consumer demands, it's important for providers to remember that streaming services can come with significant communications tax obligations. It might be tempting to assume that video streaming services are not subject to the same taxes as traditional cable services and that sellers only need to be concerned with sales tax, but this is often a false hope.

The biggest problems we see occur when a company moves forward with a new offering while assuming that certain communications taxes and regulations will not apply. In fact, in jurisdictions across America, taxing authorities are still working to determine how OTT content offerings should be categorized, how they differ from traditional communications services, and how to apply taxes accordingly.

For example, that could mean a state will decide that video streaming services fit its definition of "pay television" and assess taxes accordingly — as happened in Iowa in a recent case involving Amazon Prime Video. Or it might mean the nuanced differences between digital goods versus digital services will come into play: A video that's streamed is a service, while one that's downloaded becomes a product. Some states weigh this difference as being significant, and say that the product that's kept is taxable while the streaming subscription service is not. Other states will do the converse.

As more consumers opt for these new offerings and other a la carte streaming subscriptions over traditional cable services, it's critical to understand when streaming services may be held to the same taxability standards as cable. This is especially relevant as the cable and wireless industries continue to merge (both companies and product offerings) — which means many taxing jurisdictions and regulatory agencies are paying attention. In some states, video services are already being subjected to communication and utility taxes in lieu of, or in addition to, sales tax. 

Bottom line: As the video streaming industry expands, taxation and regulatory oversight are bound to expand along with it. For this reason, it's important to be prepared to meet requirements as they evolve and change.

Did you know? Avalara AvaTax for Communications is continually updated to reflect the latest communications tax rules and rates as they change.