Toby Bargar: In 2021, Watch for New Federal User Fees, State Tax of Streaming Services

The longest, costliest, most contentious election in U.S. history has finally ended.

Notwithstanding pending legal action, victors have been declared for the most part at the federal, state, and local levels. With the transition of governance underway, it’s time to look ahead to what the 2020 election’s impact might mean for the telecom, streaming, and related industries.

At a macro level, the election of Joe Biden as president heralds a shift in the conversation around communications industry policy issues. And the first year of a new administration is always busy as legislative and regulatory activity gets underway.

Communications industry  consolidation by telecom, streaming, and cable providers, which accelerated during the Trump Administration, is sure to be a hot topic. Also look for renewed debates about broadband deployment and net neutrality.

While these sexy topics will dominate the headlines, the quiet battles will be equally important. On the tax side, look for two issues to rise to the top.

Trend 1: New federal user fees on broadband

Broadband internet usage has mainly been tax-free, but that could change.

The Federal Communications Commission has for decades declined to regulate broadband or collect any fees from internet service providers for broadband connectivity.

Then Congress banned state and local taxation of internet service providers access when it passed the Permanent Internet Tax Freedom Act in early 2016.

So who is paying for broadband deployment and the expansion of broadband into rural areas?

The irony is that the monies for this are coming from the Universal Service Fund, a user fee on legacy cellular, landlines and VOIP services. And the Universal Service Fund fee keeps getting larger. The last increase was a whopping 9 percent on October 1, 2020, to a high of 27.1 percent.

This trend of a shrinking pool funding a burgeoning industry is unsustainable.

As we move into 2021, look for changes. The simplest option is for the FCC to collect a federal USF on broadband. The Commission likely has the legal authority to do so if they reclassify broadband under Title II of its charter. If that happens, then broadband companies (and their customers, as these fees are typically passed along to users) will likely start to pay into the USF.

Trend 2: States turn to streaming services for revenue

Red state or blue state, your state likely has a revenue shortfall and is looking for ways to pay for everything from teachers to first responders. Several factors have contributed to the problem, including state and local tax cuts, falling energy prices, COVID-19 costs, and declining tax revenues during the economic downturn.

One place states and local governments are likely to turn to for revenue is streaming services.

For many jurisdictions, it’s a relatively easy way to increase revenue without technically raising taxes. By determining that streaming services fall under the purview of existing communications rules or pay tv regulations, most governing entities likely already have the authority to collect these taxes or fees.

As a result, your Netflix, Amazon Prime, Hulu, and ESPN+ bills could well see new charges in 2021 and beyond. Kentucky, California, and Florida already tax streaming subscriptions with special pay tv taxes, as does the city of Chicago. Other states and municipalities will likely soon take steps to do the same.

While it’s been an unprecedented year, providers should take this transition period to prepare, because 2021 is sure to be a busy year.

Toby Bargar is the senior tax consultant at Avalara. He has spent more than the last 18 years consulting with clients concerning complex transaction tax issues, particularly in the field of communications tax and regulatory cost surcharges. This piece is exclusive to Broadband Breakfast.

Broadband Breakfast accepts commentary from informed observers of the broadband scene. Please send pieces to commentary@breakfast.media. The views expressed in Expert Opinion pieces do not necessarily reflect the views of Broadband Breakfast and Breakfast Media LLC.