Document Type


Publication Date

Spring 2024


The digital economy’s rapid evolution, most recently with the rise of artificial intelligence, demands a reevaluation of state constitutional limitations on local taxation of digital transactions. Citizens have long feared excessive or unfair tax burdens, hence the adoption of constitutional amendments that prohibit legislators from increasing taxes or imposing new taxes without a public vote. However, these constitutional limitations are now preventing cities from taxing digital transactions that are taking over the economy. This is a serious financial problem for cities whose traditional sources of tax revenue, such as sales taxes and property taxes, are dwindling due to the digitalizing economy.

Without the ability to enact legislation imposing taxes on digital transactions, cities have gone to extreme measures to tax streaming service revenue. Some cities have brought lawsuits against streaming companies such as Netflix and Hulu alleging that these companies should be paying a franchise fee that was historically only imposed on cable providers. While consumers have cut the cord on cable television and replaced cable with streaming services, these video service provider statutes should not be used to tax streaming services. However, constitutional tax limitations left these cities with no choice but to try to use these statutes to replace lost franchise fees from cable television providers.

While this article specifically discusses streaming services, using Netflix’s and Hulu’s business models as examples, this article argues that state constitutional tax limitations are preventing cities from taxing all digital transactions and proposes that constitutional tax limitations should not apply to sales or similar transaction-based taxes.

This article makes three contributions to the tax literature. First, it examines lawsuits brought by cities in California, Nevada, and Missouri against streaming service providers Netflix and Hulu and argues that these lawsuits were brought because state constitutional tax limitations prevented these cities from imposing sales tax on streaming service revenues.

Second, this article adds to the tax literature on constitutional tax limitations by analyzing these limitations in the light of the digital economy. In addition, this article analyzes a unique state constitutional provision that completely prohibits a city from imposing any new sales or similar transaction-based tax.

Finally, this article proposes that constitutional tax limitations should exclude sales and similar transaction-based taxes. The proposal would allow cities to tax revenues from streaming services as well as revenues from the broader digital economy. This article contributes to tax scholarship by evaluating the proposal against tax policy considerations as they relate to constitutional tax limitations on the digital economy.



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