Quick How-to Guide to US Tax Management for OTT Services

The US broadcast market is evolving at an incredible rate, and as OTT spreads across regions, navigating communications taxation from one state to the next can prove to be tricky.

In this quick overview blog post, we’ll share advice on how to best approach tax management so that you avoid penalties and other OTT tax adjustments in the United States, especially as each State interprets the taxability of video as digital content individually.

We cover:

• Some tax developments in the streaming industry in the US
• Four key elements you should consider as an OTT player
• The cost of Tax & VAT compliance and management
• The best subscriber billing and tax management solution for top OTT companies

Notable tax developments in the streaming industry in the United States

Here are some states that are pretty interesting to observe (via Avalara):

• California: After a handful of cities updated their utility user tax (UUT) ordinances to require tax collection on video-based services, a draft ruling interpreted such offerings to include streaming video. This change sparked in-depth discussions around potential new requirements for streaming services in a general sense.
• Illinois: A 9% amusement tax, written initially to tax concert and sporting event tickets, was extended to cover streaming-based entertainment such as music, video, and gaming.
• Iowa: Taxing authorities determined that video streaming services included in Amazon's Prime model fit its definition of "pay television" and started to assess taxes based on this notion. The extended description opened the door to telecom taxation for other organizations selling streaming video services, whether on a subscription basis or as an element of bundling.

Four key elements you should consider as an OTT player

And if OTT-based taxation isn’t daunting enough, things get even more convoluted with bundling.

To help you navigate these taxation challenges, there are four critical elements that you (via Deloitte), as an OTT service provider, should consider:

1. Definitions of taxable services count and should be considered accordingly.
2. The location of the consumer in a mobile-based digital age.
3. Tax policy is a work in progress. As the digital age evolves, officials across the globe need help to catch up, which means that nothing fits into a clear, concise box when it comes to tax legislation.
4. Nontraditional business partnerships have nontraditional tax consequences. In many ways, it's a brave new world.

That said, there are measures you can take to face these challenges with success:

• Track your taxations across all jurisdictions with care and due diligence.
• Proceed cautiously during every new deal or initiative, ensuring everything is water-tight before moving forward.
• Ensure marketing and tax teams are in the loop about new offers, discounts, partnerships, and strategies so that every element of your business is compliant.
• Prepare your billing system for this wealth of change, ensuring it's not programmed to bill on a one-size-fits-all, blanket basis.

The real cost of Tax & VAT compliance and management

We've just listed challenges to be aware of within the changing world of OTT-based taxation. Now, we want to share a more pragmatic approach to the cost of setting up the operations for managing tax in an OTT business for the US market.

Let’s break it down into three different cost models.

Model 1 - DIY Tax Management

To deal with tax management internally, you’d need two finance team members to develop the project, an additional colleague to check legal compliance, and after deployment, allocating ⅓ FTE to control and coordinate its progress regularly.

A conservative estimate would lead to a one-off starting cost of approx: $30 to $60k, depending on your organization's proficiency with the subject and tools already available.

Consider an additional monthly fee of $1.5 to $2k for maintenance and standard control.

Model 2 - Invest in a specialized SaaS

Several SaaS solutions specialize in this Tax challenge that helps set up automatic processes for OTT tax management.

Known operators in this field are Avalara, Taxjar, and Hellotax, just to name a few. Now, taking this road means paying a one-off setup fee nearing $10k and an annual license fee of about $20k.

What’s more, if the abovementioned solutions handle a lot of the complexity, it still requires your team to invest time and resources to implement, finetune, and operate the software repeatedly to have it work and provide the value you need for your particular organization.

Model 3 - Receive external advice from tax professionals

Tax management is complex.

So, you will likely require external advisory on the setup to assure tax compliance with the taxing jurisdictions in each state, county and, possibly, city.

We estimate the one-off cost to average $8k, plus a monthly fee of $1,5k to $3k.

—

Fortunately, there’s a fourth alternative. It’s called Merchant.

Meet Merchant: the best subscriber billing and tax management solution for top OTT companies

Alternatively, you could effortlessly outsource subscriber billing and media tax management combined, resulting in no heavy initial investments while still guaranteeing full compliance for just an additional fee per transaction.

This is something you get from Merchant.

The one tool you need to grow your OTT business

Merchant is a specialized billing and tax management solution designed specifically for the OTT industry.

It provides broadcasters with everything they need to easily monetize their content, and deal with tax rates, whether it is for domestic audiences or international viewers.

Merchant also takes care of the consolidation of multiple reports and finances, the handling of chargebacks with banks, or the optimization of credit card settings for optimal acceptance rates.

Another key features is the ability for subscribers to choose their preferred payment methods and make one-click registrations and payments, ensuring a safe and optimized user experience.

Because it takes care of such essential and time consuming tasks, Merchant unlocks time that broadcasters can invest in the most important aspect of their business: growing their OTT streaming platform.

“Payment processing is extremely valuable to us. With the introduction of the handling of tax, it is even more valuable.”

—Samantha Amaral, OUTtv’s Manager of Broadcast and OTT Operations, after using Merchant.

Want to know more? Learn how OUTtv gets easy reporting & tax management with Cleeng.

Focus on what you do best. Let us help you with the boring tax work

Whether you operate in multiple states or even countries, SVOD tax management is a tricky business.

You can either take care of it internally, invest in pricy SaaS to get it out of the way, or rely on Merchant, an all-in-one solution to tick checkout optimization, global reach & compliance and Tax & VAT Management off your bucket list.

—

If you’re curious to hear more, contact our experts!