A Challenge to Chicago’s “Netflix Tax”

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Chicago has found itself in a serious situation when it comes to taxing internet only streaming services, which have become increasingly popular and are threatening to transform a significant tax base for local municipalities across the United States.

 In the ever-changing landscape home entertainment, streaming services are on the front lines of the revolution that is creating a new world of entertainment access. Broadcast TV was the first to offer television programming to the masses, allowing individuals to access television just by putting an antenna on their sets. Then the advent of cable television offered programming at a cost, but with more reliability and options.

Cable television has become a reliable source of taxes for many municipalities. The transfer of so many individuals from the ranks of cable subscribers to national streaming subscription services has created a significant loss of revenue for local governments. Recently some local governments have begun to try to recoup that money by taxing streaming services.

Subscribers to services like Amazon, Hulu and Spotify have filed suit against the city of Chicago for attempting to replace that revenue by extending its 9% amusement tax to online and streaming services. Residents aren’t happy about the advent of this tax and some are taking action against Cook County in the state court. The claim might well have national significance, as the suit is filed under the federal Internet Tax Freedom Act, a law that disallows any state or municipality from imposing any tax that applies only to the internet. In the suit, claimants argue that the tax is illegal as it does not apply to DVD mail services while at the same time offering a higher tax rate on live entertainment. Normally this tax applies to things like football games and live theatre, but now Cook County is attempting to use the same tax for an incredible range of online services. This measure was done without creating a new tax, which would require a vote by elected city officials. Complaintants argue that the comptroller has overstepped his bounds by extending a tax well beyond what it was originally meant to do.

Current law requires that local taxes must have some basis in the physical world in order to be valid, however cloud based services offer a gray area in which the services are experienced in a specific locality but originate far afield. Localities and consumers are struggling to make sense of this new economy.

 The City of Chicago is expected to fight the legal battle with determination, as the tax is slated to bring in nearly 12 million dollars and to go a long way to closing the budget hole that has been plaguing the city during Mayor Rahm Emmanuel’s term.

The outcome of this lawsuit could have wide ranging implications as it could define how cities and states are allowed to tax portions of the internet economy. Online services represent a whole new realm of business that crosses state lines easily, often circumventing the local economy. Local governments have felt this pinch of lost tax revenue in addition to other economic pressures bearing down. Collecting these new taxes proves to be a challenge for many businesses, as the specifics are often unclear and rarely spell out the details of when and how to collect the money. Court challenges are sure to make that complexity even more pronounced.

Consumers should expect to see more taxes like the Chicago “Netflix tax” as municipalities seek to uncover more streams of revenue.

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