“Streaming at What Cost?” The Potential Implications of Taxation on Streaming Services

By: Raina Barbee

Chicago has companies clenching their checkbooks as it imposes its amusement tax, better known as the “Netflix Tax.”^[1] However, the tax is two-fold, as it is imposed on consumers and companies alike. Last month, in Labell v. Keane, the Illinois Appellate Court upheld the City of Chicago’s amusement tax on streaming video, streaming audio, and online gaming services.^[2] Chicago enforces its nine percent amusement tax on admission fees or other charges paid for the privilege to enter, witness, view, or participate in an “amusement.”^[3] An amusements is defined as (1) any exhibition, performance, presentation or show for entertainment purposes; (2) any entertainment or recreational activity offered for public participation or on a membership or other basis; or (3) any paid television programming.^[4] However, the tax does not apply to admission fees charged to witness in person live theatrical, live musical or other live cultural performances. Additionally, the Chicago Department of Finance issued Amusement Tax Ruling Number 5.^[5] The ruling concluded that amusements are subject to tax when they are delivered electronically, by streaming or a temporary download.^[6] This excludes the sale of shows, movies, videos, music, or games.^[7]

In Labell v. Keane, a group of Chicago streaming services customers sued the City of Chicago alleging, among other claims, that the amusement tax violated the federal Internet Tax Freedom Act (“ITFA”).^[8] ITFA bars local, state, and federal governments from imposing taxes at a different rate on electric commerce than on transactions involving similar services provided through other means.^[9] However, a state, county, or city may impose its own sales taxes on the electric transaction.^[10]

In Labell, the plaintiffs argued that the tax discriminated against streaming services because: (1) Chicago instead imposed a separate annual $150 per year tax on automaticamusement machines; and (2) Chicago exempted from the amusement tax certain live cultural performances.^[11] The court reasoned that the differences between amusements and streaming products are “real and substantial” and “not similar” for the purposes of the ITFA and that other amusements, such as cable television and movies, are taxed similarly.^[12] Further, the court noted that the plaintiffs failed to cite to any authority to show that live cultural performances are similar to streaming services.^[13]

States are permitted to tax levy their own sales taxes. However, Chicago’s amusement tax violates the ITFA because the implementation of the tax ruling and an additional annual fee for automatic machines is a discriminatory tax as applied. Additionally, streaming services should be considered “internet access services” for the purpose of the ITFA, providing further protection for companies in the streaming-based services industry. ITFA defines an Internet access service as “a service that enables users to access content, information, electronic mail, or other services offered over the Internet and may also include access to proprietary content, information, and other services as part of a package of services offered to consumers.”^[14] Arguably, streaming services enable users to access content, such as movies and games, delivered over the Internet.

The amusement tax may set a dangerous precedent for states to impose multiple taxes on entertainment, particularly against streaming-based services. The amusement tax in Chicago could open up the door for governments to impose taxes, not only on consumers, but on streaming-based services. Further, the tax could potentially force companies to charge more for their services. In August 2018, Apple filed a complaint against the City of Chicago alleging that the amusement tax is illegal, signaling companies interest to halt the taxation of streaming-based services.^[15]

Facebook:Raina Barbee; Instagram:@rainacb

^[1]See, e.g., Michael J. Bologna, Sony Settles ‘Netflix Tax’ Debt, Ending Chicago Legal Battle, Bloomberg Law (May 15, 2019), https://news.bloombergtax.com/daily-tax-report-state/sony-settles-netflix-tax-debt-ending-chicago-legal-battle (discussing Sony, Fandango, and Eventbrite’s settlements with Chicago to remedy amusement tax liability).

^[2]Labell v. Keane, 2019 IL App (1st) 181379, ¶ 27.

^[3]Chicago, Ill. Municipal Code § 4-156-020(A).

^[4]Id.at § 4-156-010.

^[5]Amusement Tax Ruling #5, Electronically Delivered Amusements, Chicago Dep’t of Fin. (June 9, 2015).

^[6]Id.at 3.

^[7]Id.

^[8]Labell, 2019 IL App (1st) 181379, ¶ 4.

^[9]Jeffrey M. Stupak, Cong. Research Serv.,R43772, The Internet Tax Freedom Act: In Brief 3 (2016).

^[10]Id.

^[11]Labell v. Keane, 2019 IL App (1st) 181379 ¶¶ 1, 24.

^[12]Id. at ¶ 60.

^[13]Id.at ¶ 25.