CITY OF CHICAGO v. STUBHUB! (September 29, 2010)

The practice of "scalping" tickets, or selling them above face value, is generally illegal in Illinois. But there are exceptions. One is for an Internet auction site -- but only if it registers with the State, either collects and remits taxes or publishes a notice on its site advising the actual reseller of its tax obligations, and agrees to provide information about any reseller if requested by law enforcement or government official. StubHub! operates just such a site and complies with those requirements of Illinois law. It has chosen the "notice" alternative rather than the "collects and remits" alternative. The City of Chicago would rather have StubHub! collect the tax so it does not have to worry about whether each of thousands of resellers pay it – so it amended an ordinance requiring direct payment by StubHub!. The City filed suit seeking a declaration that StubHub! is responsible for the taxes. Judge Andersen (N.D. Ill.) dismissed the complaint on the ground that tickets are "tangible or personal property" and that, therefore, the Preemption Act prohibits a home-rule municipality from imposing the tax. Chicago appeals.

In their opinion, Chief Judge Easterbrook and Judges Bauer and Kanne certified a question to the Illinois Supreme Court. The Court first disposed of StubHub's arguments that federal law somehow barred the tax. First, the Communications Decency Act is simply irrelevant to the issue. Second, the Internet Tax Freedom Act prohibits “[m]ultiple or discriminatory taxes on electronic commerce.” The Chicago tax is neither. Turning back to state law, the Court recognized that an intermediate state court has concluded that a ticket is "tangible or personal property" (ironically, adopting a point argued by the City). A federal court sitting in diversity will frequently follow (even though not required to) an intermediate state court's ruling, if there is no reason to believe that the state Supreme Court would rule otherwise. Even if the ruling is erroneous, later state-court cases that address the same issue can correct the error. Here, however, the Court was concerned that the state Supreme Court might never be heard on the issue. Apparently, there are only two cases that address the issue. Both started in state court but were removed to federal court – and any future-filed case will likely be removable. The Court, therefore, requested the Illinois Supreme Court to advise "whether municipalities may require electronic intermediaries to collect and remit amusement taxes on resold tickets."