Chicago customers lost a challenge to the Chicago 9% amusement tax on Internet streaming services, popularly called the “Netflix” tax. A Cook County court held that the amusement tax did not violate federal or state laws or Constitutional clauses as claimed by the customers. The court found that the 9% tax:
- did not violate the federal Internet Tax Freedom Act (ITFA);
- did not violate the U.S. Commerce Clause;
- did not violate the Uniformity Clause of the Illinois Constitution; and
- was within Chicago’s taxing authority.
Federal Internet Tax Freedom Act
The court found that Chicago did not apply the amusement tax unfairly by taxing only Internet streaming services. The ITFA prohibits states and cities from imposing taxes that discriminate against e-commerce transactions for goods and services. In Chicago, other forms of amusement not subject to the tax, such as live performances and automatic amusement machines, are not similar to services streamed over the Internet. Thus, the tax does not discriminate; it applies to a different type of amusement.
U.S. Commerce Clause
In addition, the amusement tax is consistent with the U.S. Commerce Clause. First, it applies to an activity that has nexus with Chicago. Second, it does not discriminate against e-commerce. Third, it is fairly apportioned as the tax liability is based on the customer’s billing address. Finally, the tax relates to services provided by Chicago to streaming customers that live in Chicago.
Uniformity Clause of the Illinois Constitution
The amusement tax does not apply differently to streaming services than it does to other amusements in Chicago. The Uniformity Clause enforces the reasonableness of tax differences between groups of taxpayers. Again, the court noted that there are substantial differences between streaming services and live performances. It also found that the convenience of imposing a flat tax rate on amusements justified taxing the streaming services differently from live performances.
Services Streamed Outside Chicago
The court also found that the Illinois Mobile Sourcing Act authorizes Chicago to impose the tax based on billing addresses.
Labell v. City of Chicago, Circuit Court (Illinois), Cook County, 15 CH 13399, May 24, 2018, ¶403-337