Tax is getting really personal. Want to watch the new season of Orange is the New Black in Chicago? The city now applies a 9% “electronically delivered amusements tax” for everyone with a Netflix billing address located inside the city limits.
Want to drive your Prius to work in Oregon? The state is now testing a tax-by-the-mile program that will tax drivers based on how far they drive, as opposed to how much fuel they use. Why? Because there are so many people driving alternative-powered vehicles in Oregon that the state fears it will lose revenue if it relies solely on a gasoline tax.
When it comes to the “Netflix tax,” Chicago is not alone in its desire to wring additional tax revenue out of the petabytes of data streaming through its airspace every day. As I wrote late last year, many regions around the world, including Buenos Aires, Ontario and the European Union have all introduced some form of a tariff designed to tax consumption based on the location where it is consumed, as opposed to wherever the content provider’s establishment is located.
Oregon’s “tax-by-the-mile” experiment is based on a similar idea. Just as taxes on Internet-derived services needed to evolve to address the inherent portability of data that lives in the cloud, transportation taxes rooted in fuel consumption may also need to evolve to accommodate a world with fewer vehicles powered by gasoline.
Both of these taxes have spurred controversy, with some critics suggesting that they will stifle innovation and others suggesting they are an invasion of privacy. But the real challenge posed by this evolution toward hyperlocal, personalized methods of taxation will fall on corporate tax departments that will need to sort out who owes what.
Consider the case from the perspective of a streaming media company like Netflix, Amazon or Spotify which, until recently, had to apply consumption taxes based only on its home state tax rate. Now, they must navigate a bevy of international, national, state and local tax codes down to the individual zip code. Even from the tax authority’s perspective, monitoring to make sure taxes are being collected properly based on the amount of content streamed to a particular city or based on the number of miles driven by a single person is an administrative challenge of Herculean proportions.
Increasingly, this will be an important area to watch, both from a corporate profitability perspective and from an innovation perspective as more companies develop new approaches to bypassing these taxes and others develop systems for helping companies and municipalities keep track of them all.
