Chicago Fighting Against What May Be the Newest Trend in Tax Law

September 18, 2015

If you were to ask a room filled with 100 random strangers if they have ever used a streaming service, such as Netflix or Spotify, or shopped on an online retail website like Amazon, I bet most, if not all of the people in the room, would raise their hands that they have used it before. For example, streaming has become a very popular pastime within the last decade, and a recent survey conducted by a consulting firm, Deloitte, in 2014 found that about 53% of Americans prefer to stream their television shows compared to the 46% that watch it live. It has especially become the preferred platform among 14-25 year olds.
This in turn has created a tense situation for city tax dollars. States and cities are scrambling to find a way to make up for loss in revenue stemming from the popularity of online stores and streaming companies. This has led Chicago to find its own solution: expand a current tax to include any company that has most of its dealings online.
Chicago’s “Amusement Tax” not only covers the obvious online companies, like Amazon and Netflix, but also affects professional services, such as court cases databases that lawyers use and electronic property databases often used by real estate agents. The amusement tax will charge companies 9% more, which will then increase the price of users in Chicago. The new tax is expected to raise about $12 million a year, according to city officials.
The added amusement tax comes from the city’s original amusement tax, which only covered live events and television programming. However, that all changed when Chicago’s City Comptroller, Daniel Widawsky issued a ruling in June extending that tax to online video, gaming, and music services. Officials hope that this will be the answer to making up for loss opportunities for taxes normally charged when things are purchased in-store.
Now, the people of the city are fighting back. The Liberty Justice Center, a nonprofit company operating out of Chicago, filed a lawsuit this week in Cook County Circuit Court stating that the ruling in June is illegal. The complaint states that “[t]he Comptroller has exceeded his authority under the ordinance by issuing a rule that imposes a new tax that the City Council did not authorize in enacting the Amusement Tax.”

Jeremy Schwab, an attorney with the Liberty Justice Center, further argued in a news release that if Chicago wanted to tax internet-based streaming services, “then it should put the measure through the political process, and let Chicagoans have their voices heard through the democratic process.”

The lawsuit is argues that the amusement tax is over-reaching on two grounds: (1) because the definition of “amusement” under the original law does not include gaming or audio services; and (2) the tax violates the federal Internet Tax Freedom Act because it discriminates against internet-based streaming. This difference in treatment can be seen with Netflix’s subscription for DVD rentals through the mail versus its online streaming plan. Under Chicago’s new tax, only the streaming plan is being charged 9 percent more a month.
Schwab said that tax on television programming should not be interpreted broadly, due to the fact that at the time the provision had passed, internet television wasn’t around. He also stated that even if it is found to be legal to tax online video, it “certainly would not cover gaming and it would not cover music.”
The plaintiffs hope to have the new rule declared unlawful and have any money paid towards the amusement tax refunded.
If the Court finds this new type of taxation constitutional, this could mean a significant change is coming with the way that online-based streaming websites are charging the consumers. Namely, that our already high monthly bills are going to get higher. It will also mean that our city governments will be able to make up for the large debt that they have accrued from the slowing business occurring in stores. But are the extra costs added to a service which consumers pay a monthly subscription the right way to fix the problems occurring with city debt?