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Chicago Netflix tax sparks lawsuit, as everyone knew it would.

The moment it was announced, people vowed to fight it. So it comes as no surprise that a suit was filed last week against Chicago’s new tax on electronically delivered amusements, which took effect July 1, 2015.

The complaint, filed by the Liberty Justice Center on behalf of six Chicago residents, argues that the Finance Department was not authorized by the Chicago City Council to extend the city’s 9% amusement tax digitally streamed entertainment. In addition, it contends that the tax is in violation of the federal Internet Tax Freedom Act.

Background

On June 9, 2015, Chicago City Comptroller Dan Widawksy issued Amusement Tax Ruling #5, which declared that the term “amusement” as defined by Chicago Municipal Code 4-156-020, “would now include ‘charges paid for the privilege to witness, view or participate in amusements that are delivered electronically.’”

Customers “whose residential street address or primary business street addresses is in Chicago, as reflected by his or her credit card billing address, zip code or other reliable information” now pay amusement tax on charges for the rental of the following services:

  • Electronically delivered television shows, movies or videos
  • Electronically delivered music
  • Participation in games, “on-line or otherwise”

The tax applies to rentals (temporary downloads), whether charges are “subscription fees, per-event fees or otherwise.” It does not apply when the above products are purchased (permanent downloads).

Harmful tax

Attorneys for the plaintiffs filed a complaint arguing the plaintiffs “are harmed” because the tax increases the cost of various streaming services by 9%. They base the case on the following counts:

  1. The City of Chicago Comptroller has exceeded his authority by adopting Amusement Tax Ruling #5 and by extending the City’s Amusement Tax to Internet-based streaming video services.
  2. The City of Chicago Comptroller has exceeded his authority by adopting Amusement Tax Ruling #5 and by extending the City’s Amusement Tax to Internet-based streaming audio services.
  3. The City of Chicago Comptroller has exceeded his authority by adopting Amusement Tax Ruling #5 and by extending the City’s Amusement Tax to Internet-based streaming gaming services.
  4. Amusement Tax Ruling #5’s tax on streaming services violates the Internet Tax Freedom Act, 47 U.S.C. § 151 note (2015).

Read the full text of the complaint and Amusement Tax Ruling #5.

Let the fight begin

According to the Chicago Tribune, the city’s Law Department will vigorously fight the lawsuit. Department Spokesman John Holden emailed a statement to the Tribune, saying, “The City has not yet seen the complaint, but we are confident that the ruling is a valid application of the existing Amusement Tax.”

A fight certainly seems in order, as the city’s new amusement tax on digitally streamed content is expected to bring in $12 million in revenue annually.

In the meantime, Chicagoans can always move north to Canada, where the prime minister has made it clear that he is “100% against a Netflix tax—always have been, always will be.”

Read Out Out Darn Spotify to learn more about the taxation of digital goods and services.

photo credit: Netflix ottiene il “passaporto italiano”: arriva ufficialmente ad Ottobre 2015 via photopin (license)