Alabama May Consider Digital Tax

By Martin Swant/The Associated Press

MONTGOMERY– Media savants might prefer not paying a tax on every song and movie they stream, but the Alabama Department of Revenue could soon catch up its code for the digital era.

Back in the days of the corner video store, customers would pay a rental tax every time they checked out a movie. However, with more viewers opting for online, Alabama is poised to lose millions.

To solve this, the revenue department is proposing a new rule requiring companies pay a 4-percent state tax on digital transmissions such as “on demand” movies, television programs and streaming video or audio.

“When you went to Blockbuster and rented a movie it was always subject to rental tax,” said Deputy Revenue Commissioner Joe Garrett. “New economy versions of renting a movie have replaced that.”

Opponents argue the scope of the law doesn’t allow the department to impose a tax on a fairly nascent industry.

“This clarification is actually a broadening of the tax base, and it is our thinking that a significant broadening of the tax base is an issue that should be brought to the Alabama Legislature,” said Victor Vernon, vice president of policy for the Business Council of Alabama. “Everyone knows that since the election the legislature was going to be focused on fiscal and tax issues.”

Garrett said this would not be a new tax, but rather a clarification of existing tax code that the department considers outdated.

The proposed rule could go into effect on Oct. 1.

Bruce Ely, a tax attorney with Bradley Arant Boult Cummings, said a handful of states have taxed streaming video, but each has used legislative means.

“Every state that has attempted to tax streaming video has done so by legislation, not by regulation or by audit,” Ely said.

Garrett said the revenue department agrees it would be wise to have the Alabama Legislature clarify the tax. He said the department would pay attention to what lawmakers might have to say.

The revenue Alabama loses without collecting a digital transmission tax is “not insignificant.” Garrett said it’s tough to know the exact amount without proper sales data, but lost taxes are estimated at between $5 million and $10 million.

“It’s not really small dollars, but neither is it enough money to solve the budget problems,” he said.

Eric Tresh, an attorney with Sutherland Asbill & Brennan, said the existing rental tax applies to tangible property. The question when applied to digital media is how to define what is tangible.

Tresh gave the example of hearing a song on a music streaming service such as Pandora. He said hearing a song doesn’t mean he has any rights to the digital song; he’s receiving a service.

“The Alabama courts have long recognized that just because something can be seen or heard doesn’t mean it’s property,” he said.

Fred Johnson, general manager of Farmers Telecommunications Cooperative, said attempting to tax digital media in any form ends up grouping all media forms together.

“Whether you’re watching them from Netflix, whether you’re downloading iTunes or renting iTunes movies, or whether you are viewing the most recent edition of The Wall Street Journal online, those are streams of 1s and 0s being transmitted from content providers located internationally, and obviously across the several states, to the end users here in Alabama via the public Internet,” he said.