Why Chicago’s ‘Netflix tax’ is illegal

Chicago’s 9 percent “Netflix tax” is illegal, and the Liberty Justice Center has sued the city to stop collecting it.

If you live in Chicago and subscribe to Netflix, Spotify or other online entertainment services, you might notice that your bill is higher this month. That’s because the city of Chicago began imposing a 9 percent amusement tax on these services on Sept. 1.

Was this new tax the product of careful deliberation and debate by aldermen – guided by input from their constituents – to determine whether the tax was reasonable and fair? No, it resulted from a determination by an unelected official, with little to no taxpayer input, “interpreting” the existing amusement-tax ordinance. Until the imposition of this interpretation, Chicago’s amusement tax applied to admission fees and other charges for entertainment performances and recreational activities taking place within the city of Chicago. It did not apply to paid Internet-based streaming video, audio and gaming services.

The city will impose the tax on customers with Chicago billing addresses regardless of whether those customers ever actually use the Internet services in the city. However, the city will not impose the tax on people who do use these services in the city but have their bills sent elsewhere.

At the same time the city decided to apply the amusement tax to paid Internet-based streaming media services, it also extended the existing personal-property tax, which until now has applied to the leasing of personal property, to cover cloud storage services. This was done without any debate or vote by the City Council. That move prompted an outcry from the Chicago tech community, which pointed out that many businesses that use or provide cloud services do not have systems in place to pay or collect personal-property taxes. In response, the city has announced that it will delay imposition of the “cloud tax” until next year, and Mayor Rahm Emanuel has indicated that startup tech companies could be exempted from the cloud tax.

The city has not delayed the implementation of the tax on Internet-based streaming services, however, and, unlike the business tech community, customers of these services have not had a voice to complain about the unfair expansion of the amusement tax. That is, until now.

On Sept. 9, the Liberty Justice Center filed a lawsuit to stop the city from collecting the amusement tax on Internet-based streaming media services for two reasons.

First, the comptroller had no authority to extend the amusement tax to cover Internet-based streaming media services because the amusement-tax ordinance does not authorize taxation of those services. If the city wants to tax these services, the City Council must vote for the extension after citizens have had an opportunity to voice their opinions to their aldermen.

Second, the tax violates the federal Internet Freedom Tax Act, which prohibits states or municipalities from treating electronic commerce less favorably than other commerce. Under the amusement tax, tickets for certain live musical and theatrical performances are taxed at a rate of less than 9 percent, but those same performances will now be taxed at a rate of 9 percent if someone views them through an online streaming service. Thus, the tax discriminates against online commerce and violates federal law.

The lawsuit seeks to compel the city to stop collecting the amusement tax for Internet-based streaming media services, as well as a declaration from the court that if the city wants to impose a new tax on Chicago taxpayers, it must do so through the political process, not by merely reading a tax into existence.