The Reports of the Netflix Rule’s Death May Have been Greatly Exaggerated


Mark Twain famously said: “The reports of my death are greatly exaggerated.” The same may be true of the so-called Netflix rule (810-6-5.09), which the Alabama Department of Revenue proposed (and withdrew) last year and which would have subjected digital transmissions such as movies, TV programs, and music to Alabama’s rental tax. (Certain modems, routers, and DVRs also were included in the rule.) The tax is imposed on those who are in the business of renting “tangible personal property” in Alabama, and the Alabama Revenue Code defines “tangible personal property” for rental tax purposes to include property “which may be seen, …, or is in any other manner perceptible to the senses.” The ADOR referred to this definition in its proposed rule, and the ADOR obviously took the position that the digital transmissions could be seen or perceived by the senses. However, members of the legislative Joint Committee on Administrative Regulation Review expressed their disapproval of the ADOR’s rental tax proposal, so the ADOR withdrew the rule by letter dated July 7, 2015, but stated that “we will continue to move forward with enforcing the laws for which we are charged to administer.”

Less than 2 months later, the ADOR revoked a 21-year old revenue ruling (94-002) in which the ADOR originally had ruled that information provided to subscribers electronically (by satellite) was not tangible personal property for sales tax purposes. (For sales tax to be due, there must be a retail sale of tangible personal property.) The ADOR based its revocation of 94-002 on “the change in the interpretation of existing law as it applies to tangible personal property,” and referenced court cases concerning electricity and canned computer software. Therefore, the ADOR stated that “electronically transmitted information is tangible personal property for purpose of the imposition of sales and use tax.”

The Netflix rule was based on the belief that the definition (by statute) of tangible personal property for rental tax purposes is broader than the common understanding of tangible personal property for sales tax purposes. (Unlike with rental tax, there is no statute that defines “tangible personal property” for sales tax purposes.) But, with the ADOR now stating that electronic transmissions can be subject to sales tax (with its supposedly narrower understanding of tangible personal property), it is certain that the ADOR still maintains that the renting of digital transmissions is subject to rental tax. And the ADOR likely will act on its belief.

In other words, “it’s like déjà vu all over again.” (Yogi Berra)

Jeff Patterson
Jeff Patterson LLC –
originally published as The Alabama Taxpayer’ Newsletter Issue 1-2016