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Recent trends in consumer spending are revealing a clear preference for digital media over physical products, which is creating a shortfall in state revenue. In response, states are adding sales tax to streaming services like Netflix and Spotify.
Sales of physical products have been in decline for years, with more and more consumers opting for a digital option instead. Recent research, however, indicates that consumers still put a greater value on physical items over digital ones.
States add Netflix tax
CNBC reported on Monday, February 24, that American consumers may soon see an increase in how much they pay for their chosen streaming services. While Netflix has raised its prices many times, this increase wouldn’t come from them but from the states that have implemented new taxes on streaming services.
In these states, Netflix, Spotify, Hulu, HBO Now, Amazon Prime, and other streaming services are being hit with sales taxes they previously did not have to pay. While these increased taxes have not been implemented across the country, many states are reportedly considering adopting similar tax schemes.
Part of the reason states are implanting these taxes now is that most state tax laws were written in the early half of the 20th century and were focused exclusively on the purchase of tangible goods. “Intangible” products like streaming services weren’t even a concept at the time. As a result, states have thus far been unable to capitalize on a booming industry.
Changing trends in consumer purchases
Deloitte, a professional services network, released a digital media trends survey in March 2019 that found more respondents had a paid streaming service (69%) than a traditional paid TV subscription (65%). That marks the first time in the 13-year history of the survey in which streaming subscriptions outpaced traditional TV subscriptions.
The Recording Industry Association of America (RIAA) also recently reported that streaming revenue accounted for nearly 80% of all music industry revenue in 2019, US$8.8 billion worth of sales overall, which is more than the total amount the music industry made in 2017.
The balance of the music industry’s total 2019 US$11.1 billion haul was made up of digital downloads, physical sales, and licensing deals. It’s notable that digital download sales are in decline as streaming services have become the preferred medium for music consumers. Totaling just US$856 million in 2019, it was the first year since 2006 that digital downloads hadn’t surpassed US$1 billion in sales.
One arena in which digital sales haven’t surpassed physical sales is in the book world. After a steady decline in physical book sales began in 2009, the industry started to rebound in 2013 with consistent growth until 2018. From 2017 to 2019, sales have held relatively steady at just below 700 million units a year. The best year for physical book sales was 2008, with over 775 million units sold.
That total unit number for 2019 equated to US$22.6 billion in sales, according to the Association of American Publishers. That easily dwarfs the slightly more than US$2 billion that e-book sales brought in for 2019.
The value of tangible products
Recent research may also shed light on why physical books are bucking the trend toward increasing digital sales. In a 2017 study published in the Journal of Consumer Research, Ozgun Atasoy and Carey K. Morewedge found that digital goods are valued less by consumers than physical goods.
Across five separate experiments, the researchers found participants assigned greater value to an item if it was physical. For books, films, and photographs, “participants paid more for, were willing to pay more for, and were more likely to purchase physical goods than equivalent digital goods.”
Atasoy and Morewedge concluded that, while digital media can benefit people in a variety of ways, including “increasing access to new information and technology [and] reducing pecuniary costs and nonpecuniary costs,” psychological ownership increases the perceived value of physical goods.
Taxing online sales
The move towards taxing streaming subscriptions follows a recent move by most states to add a sales tax to online purchases. In 2018, the US Supreme Court ruled on South Dakota v. Wayfair, overturning a law that prohibited collecting sales tax on items purchased via the internet.
Of the 45 states that collect sales tax (as well as the District of Columbia), all had either enacted or proposed a new internet sales tax by the end of 2019.
Like the tax for streaming services, the hope in levying online sales tax is to make up for lost revenue as physical brick-and-mortar stores have experienced a loss in sales.