NCPA - National Center for Policy Analysis

The Chicago Cloud Tax

September 23, 2015

On September 1, Chicago's "Cloud Tax" went into effect, levying a 9% amusement tax on internet streaming services such as Netflix, Spotify and Amazon Prime Video. These services are revolutionizing the way we access media and the Windy City wants in on the action.

But a lawsuit filed on September 9 shows that not everyone is keen on this expansion of the city's taxing power. The first of its kind, the lawsuit will impact similar taxing schemes being considered by local municipalities across the country searching for new streams of revenue to plug widening gaps in their budgets.

The lawsuit challenges whether Chicago's comptroller, Dan Widawsky, was within his rights to expand the city's "amusement tax" to include streaming services for media.

  • Chicago expects to bring in $12 million under the new law.
  • Plaintiffs argue the comptroller exceeded his legal authority by reinterpreting the Amusement Tax beyond the scope of the statute.
  • The federal Internet Tax Freedom Act (ITFA) bans states and local governments from levying discriminatory internet-only taxes triggered when consumers do business or receive services online rather than through local merchants.
  • The tax would only apply to subscribers with billing addresses within the city.

The plaintiffs point out several instances where Chicago's cloud tax may run afoul of the anti-discrimination provisions of the ITFA. Subscribers to Netflix's streaming-only plan are hit with the nine-percent amusement tax; those who subscribe to the company's DVD-only plan, where physical DVDs are mailed to customers, are not.

Chicago's "Cloud Tax" is simply bad public policy, but the fight won't end here. State and local governments have only just begun the battle for online revenue sources. The result, if they are successful, will be less online competition, less innovation and higher prices. For the consumer, turning clouds into cash cows is a losing proposition.

Source: Jason Snead, "Chicago Adds Ridiculous 9% Tax on Netflix and Other Streaming Services," The Daily Signal, September 18, 2015.

 

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