The Alabama Department of Revenue has issued a proposed regulation that, if finalized in its present form, would substantially expand the scope of the state and local rental tax applied to video-on-demand and other digital streaming services. Proposed Administrative Rule 810-6-5-.09 accomplishes this goal by defining “digital transmissions” made available to customers “regardless of the method of transmission, whether rented by subscription or for a definite or indefinite period, or on an demand-basis for a definite or indefinite period” as tangible personal property, within the meaning of the Alabama rental tax statute. Examples of digital transmissions in the proposed regulation include “on demand” movies, television programs, streaming video, streaming audio, and other similar programs that are made available to customers.

The expanded rental tax would be imposed on certain “cable or satellite television providers, online movie and digital music providers, app stores, and other similar providers of digital transmissions.” For the purposes of sourcing, a digital transmission would be taxable by Alabama and those localities that levy a parallel rental tax if it is “used in Alabama.” The customer’s service address will determine whether the digital transmission is “used in Alabama,” similar to market-based sourcing for corporate income tax purposes.

The proposed regulation carves out “monthly cable television subscriptions whereby the customer must view pre-set programming, on the provider’s pre-set schedule.” This may be the Department of Revenue’s attempt to bypass the application of the Alabama Court of Civil Appeals’ longstanding ruling in White v. Storer Cable Commc’ns, Inc., which held that the rental tax does not apply to separately stated charges for set-top converter boxes used to receive premium cable channels such as HBO or Showtime. The logic in that ruling was based on the Court’s conclusion that the converters were merely a means to an end, i.e., only a means to receive a non-taxable cable programming service. The proposed regulation adds, however, that “multi-purpose cable boxes that function as digital video recorders (DVR) and/or perform other functions in addition to accessing basic cable are subject to the rental tax.” (emphasis supplied).

The Alabama Administrative Procedure Act (“APA”) requires the Department to submit an economic impact statement (“EIS”) along with each proposed regulation. The EIS for this proposed regulation states that the Department anticipates a revenue increase if the regulation is implemented in its present form, but does not list a specific dollar amount. Nor does the EIS discuss the likelihood that many, if not most, affected industry members will pass the tax through to their customers. The EIS also states that the regulation is intended to “clarify” existing law so streaming services should be taxable “in the same way that hard copies are taxable.”

Although an unofficial draft of the regulation delayed its effective date until October 1, 2015, the official version does not contain this limitation and would therefore become effective immediately after the APA process is completed. That could be in as little as 75 days if the Alabama Legislature’s Joint Committee on Administrative Regulation Review, otherwise known as the Legislative Council, does not intervene to review, recommend changes, or veto the proposal.

The hearing on the proposed regulation is set for Wednesday afternoon, April 8, at the Department’s headquarters in Montgomery. We understand the Department expects a good deal of feedback from the industry.