topic 840.40 Leases—Sale-Leaseback Transactions as it applies to situations in which an entity is involved with the construction funding of an asset that will be leased when the construction project is completed. This guidance requires Netflix to be considered the owner (for accounting purposes) of the two buildings.

Accordingly, we have recorded assets on our balance sheet for the costs paid by our lessor to construct our headquarters facilities, along with corresponding financing liabilities for amounts equal to these lessor-paid construction costs. The monthly rent payments we make to our lessor under our lease agreements are recorded in our financial statements as land lease expense and principal and interest on the financing liabilities. Interest expense on lease financing obligations reflects the portion of our monthly lease payments that is allocated to interest expense.

The $4.0 million increase in interest expense is entirely attributable to the interest expense associated with our 8.50% senior notes and line of credit. Interest expense in 2009 includes $2.8 million for our lease financing obligations, $2.6 million of interest payments due on our notes and $1.1 million of amortization of debt issuance costs.

The $1.3 million increase in interest expense is due to an increase in the interest on our lease financing obligations arising when the lease term for the second of our headquarter buildings commenced.

Interest and Other Income (Expense)

Interest and other income (expense) consist primarily of interest and dividend income generated from invested cash and short-term investments.

The $5.7 million decrease in interest and other income was primarily attributable to lower cash and investment balances resulting from the repurchase of our common stock, and a $1.6 million decrease in realized gains recognized as compared to the prior year. The decrease was offset by a $1.8 million dollar gain realized in 2009 on the sale of our investment in a private company which we accounted for under the cost method.

The $7.9 million decrease in interest and other income was primarily a result of the lower cash and investment balances resulting from the repurchase of our common stock. The decrease was offset by a $2.4 million increase in realized gains.

Interest and dividend income was approximately $3.7 million, $9.2 million and $19.7 million in 2009, 2008 and 2007, respectively. Interest and other income included gains of approximately $1.5 million, $3.1 million and $0.7 million on the sale of short-term investments in 2009, 2008 and 2007, respectively.

Provision for Income Taxes

In 2009, our effective tax rate differed from the federal statutory rate of 35% principally due to state income taxes of $10 million or 5% of income before income tax. This was partially offset by Federal and California research and development (“R&D”) tax credits of $2 million. The increase in our effective tax rate was primarily attributable to a cumulative benefit recorded as a discrete item in the second quarter of 2008 for prior period R&D tax credits.

In 2008, our effective tax rate differed from the federal statutory rate of 35% principally due to state