Several Chicago residents recently filed a lawsuit attempting to block the windy City from going forward with a tax on online streaming services. It may not exactly be the second coming of the Boston Tea Party, but it could have implications for cash strapped cities across the country.
On June 9, 2015, the City of Chicago’s Finance Department issued a ruling extending the city’s 9% “Amusement Tax” to cover Internet-based streaming video services such as Netflix, Spotify, and Internet-based gaming services such as Xbox Live. While the tax had been in place for some time, the city had previously not imposed it on such services.
The plaintiffs had two broad objections – they contend the tax was imposed in violation of the Chicago Municipal Code, and that the tax violates the Federal Internet Tax Freedom Act. I don’t have the time or resources to discuss local Chicago politics (not to mention I’m afraid of getting the wrong people mad at me), so let’s focus on the federal issue.
The FITFA prohibits any state or local government from imposing a “discriminatory tax” on electronic commerce. The statute defines a discriminatory tax as one that is not: “generally imposed and legally collectible by such State or such political subdivision on transactions involving similar property, goods, services, or information accomplished through other means.”
So how exactly does the Chicago tax discriminate? Well, according to the plaintiffs, for instance, the tax applies to Netflix’s video streaming service but doesn’t apply to Netflix’s video-by-mail service. One other way, according to the complaint, is that the tax provides an exemption for inperson live theatrical, live musical or other live cultural performances that take place in any venue with a capacity of 750 or less. And for venues whose capacity exceeds 750, the tax is reduced to 5%.
As the complaint puts it, the ruling “forces Plaintiffs to pay a higher tax rate if they choose to consume a musical, theatrical, or cultural performance through a streaming media service than if they choose to attend a performance in person. In this way, the Amusement Tax, as interpreted and applied by the Ruling, imposes an unlawful discriminatory tax on electronic commerce.”
The filing of a complaint is the judicial equivalent of the kickoff. There is much more activity to come. But I suspect there will be executives at online services, municipalities nationwide and dedicated slackers all watching this case. The outcome is sure to have a far reaching financial impact.