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Why you'll be paying a 'Netflix tax' soon

They’re calling it a ‘Cloud Tax,’ but it is sounding more to consumers like a Netflix tax. As more consumers turn to streaming video on services like Netflix (NFLX) and Hulu, and music on Spotify, states are looking to fill the taxes lost on the sale of tangible media goods.

Annual U.S. sales of DVDs and Blu-ray discs has fallen from a high of $20.2 billion a decade ago to around $10 billion, according to data from the Digital Entertainment Group, while the Recording Industry Assocation of America reports shipments of CDs fell from $13.2 billion in 2000, to $1.9 billion last year.

In response, the city of Chicago is experimenting with having local taxes collected on cloud computing services and streaming music and video. Other state governments like Tennessee and Idaho are experimenting with new taxes as well.

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Yahoo Finance’s Michael Santoli says while the Netflixs of the world may not like it, it’s not surprising that these tax schemes are arising. “Many [local goverments] have done it under the guise of ‘you can tax services as well,’ so I do think that it's a very predictable thing when you see these municipalities losing revenue from a big consumer area and essentially trying to replace that.”

The bigger concern, in Santoli’s view, is consumers who likely bear the brunt of these new taxes. “It seems like a bigger deal for the consumers themselves who are going to be out of pocket for some of this stuff,” he says. “I guess if you look at Netflix  - if it's $8 or $9 a month for Netflix, then you add a 7% local or state tax on top of that, it doesn't really seem like it changes the equation very much.”

Ultimately though, service providers like Netflix, Hulu, Spotify, and perhaps even cloud service providers like Box will have to face the reality that these taxes aren’t improper, and someone (i.e., their customers) is going to have to pay. “Seems to me like this might be kind of grudgingly... accepted by a Netflix,” Santoli predicts. “I think it reminds me a little bit of when you look at your cable bill and see all the various taxes that are applied there.”  

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