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Federal Judge Throws Out Town’s Tax Lawsuit Against Netflix, Hulu

Michael King

A federal district court judge threw out a lawsuit last week that was brought by an Arkansas town that was looking to tax streaming revenue from Hulu and Netflix. The suit claimed the streamers owed money to the southwestern Arkansas town of Ashdown, because of their use of broadband infrastructure that used the public right-of-way.

Attorneys for the town said in the lawsuit that Netflix and Hulu “should be and are required by the Arkansas Video Service Act to pay each of those municipalities a franchise fee of 5% of their gross revenue, as derived from their providing video service in that municipality.”

The attorneys claimed that an Arkansas state law requires a fee from a “video service provider” making use of “wireline facilities” such as “broadband” facilities located at least, in part, in public rights-of-way. According to US District Court Judge Susan Hickey, consumer streaming by Netflix and Hulu falls within an exclusion for public internet usage that is also part of Arkansas state law.

Municipalities around the nation have lost revenue on an increasing basis as more and more consumers are cutting the cord, so to speak, and moving away from traditional cable television viewing. Since communities have often been able to charge cable television providers for access to public rights-of-way and other infrastructure, as well as charging local taxes based on a percentage of gross receipts, the loss of cable television subscribers has meant a loss of local revenue for many of those municipalities.

With community leaders recognizing the increase in viewership from streaming, they are seeing the potential upside from charging streaming services based on the bandwidth that consumers are using — especially as a means of replacing some of the lost income.

The costs of such a charge by those municipalities to streamers, if successful, are likely to be passed along to consumers in the form of increased rates.

Lawsuits similar to the one filed in the Ashdown case have been filed in other states across the nation regarding the use of local infrastructure. The Ashdown lawsuit sought federal class-action status, on behalf of “all Arkansas municipalities in which one or more of the Defendants has provided video service.”

The judge’s order described the state’s 2013 Video Service Act as allowing “video service providers to avoid the need to negotiate separate authorization from every political subdivision served by their networks.” In addition, the judge said that the attorneys had argued that streamers offered only to are not offered over the so-called “public” internet.

“The Court finds the analogy offered by Hulu on point: whether a driver locks the car doors while driving does not affect whether the road taken is a public road,” the judge said.

While this particular battle has been won by streaming services, it does not end the overall war. As communities continue to see dwindling cable television revenues, multiple lawsuits will certainly continue to work their way through the courts — just as they are in Texas, Nevada, Ohio, Tennessee, Indiana, Georgia, and elsewhere. Eventually, the matter will likely be adjudicated in the Supreme Court, as a final decision regarding the definition of a streaming service is rendered.

The question of who will be the victor — consumers or cash-strapped local governments is one that will have to be eventually answered one way or another.

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