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'Netflix tax' shows company labels matter—if the label is 'utility'

Twenty-first century tech has consistently made its products nearly impossible to define. For the most part it’s not really an issue, and the only thing at stake for a startup desperately clinging to the label “tech company” is spin for potential fundraising.

But sometimes it does actually matter, as Netflix is discovering.

Currently the company is fighting attempts in California to classify the streaming service as a traditional “utility,” which would slap its customers with a 9.4% tax—potentially driving some away. Since the municipal government of Pasadena decided to look into implementing a tax on internet streaming services to raise more money, around 40 municipalities have followed suit, according to the New York Times. So far no California city has actually begun collection, and there has been significant outcry from consumers and tech industry professionals alike that reject the utility label.

Recently, Netflix spokesperson Anne Marie Squeo told the L.A. Times: “It’s a dangerous precedent to start taxing Internet apps and websites using laws intended for utilities like water and electricity. It is especially concerning when these taxes are applied to consumers without consent and in a manner that likely violates federal and state law.”

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But there is precedent. The “Netflix tax” has been implemented in Pennsylvania and Chicago.

Changing the label “tech company” to “public utility” would be a big deal, and allow governments to tax it like traditional cable. But it also could further loosen a fairly rigid definition to allow other things—music, video games, or more. A utility, traditionally at least, meant something that was pretty much essential for the public to have—electricity, water, Internet, phone service—and was monopoly-prone because of the high costs of infrastructure for a competing business to emerge.

As essential services, they are subject to more laws than a traditional business. (For example, there can be laws preventing a gas utility from shutting off due to a customer’s delinquency during the winter.)

But does this really apply to Netflix or Hulu—two internet-based subscription streaming services? Broadband is currently viewed as an essential public service, similar to the telephone, and is thus subject to net neutrality rules. But Netflix is not a major information or communication hub with significant infrastructure; it’s a platform for and creator of movies and TV. As such, it doesn’t really pass the sniff test as a “utility.” Still, that may be up to California city governments, which say they have already been given the authority to include Netflix in its utility taxes by the voters.

This isn’t the first time a tech company has evolved to a point of blurring lines of classification. Some large tech companies have come to play dominant roles in society and affect global issues on a large scale—yet still manage to avoid much of the responsibilities other, comparable companies bear.

A prime example of this is Facebook. While the company says it’s a “tech company,” it increasingly appears to be a media company and publisher yet does not behave like one when it comes to dealing with things like fake news content. Still, that debate doesn’t necessarily have a direct impact on the finances of the company, its customers or even its users (remember, they are not the same).

For most of these labels, you could convincingly argue each side forever—the terms are meaningless anyway without context or discussion. (Google, you may not realize, makes its money in advertising. Is it not an advertising company?) Ditto for most “media companies” that don’t rely on subscriptions.

But when it comes to Netflix, its classification now directly carries weight that will affect it. It’s what happens when an underdog company—or industry—finally becomes the king of the hill.

Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumerism, tech, and personal finance. Follow him on Twitter @ewolffmann.

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