Will YOU Pay the Netflix Tax?

Category: Cloud

This month, the City of Chicago extended its 9% “amusement tax” to include “electronically delivered amusements” such as Netflix, Amazon Prime, and even pay-per-view cable TV programs. And these new taxes could be headed to your city next. Here's what you need to know...

Can Local Governments Tax Cloud Services?

Do you subscribe to Netflix, Spotify, or Pandora? How about Amazon Prime, iTunes, HBO Go or Hulu? Do you enjoy online gaming via Xbox Live, PlayStation Network, Gamefly, or Google Play? If you answered yes to any of those, you could be paying more for them soon.

In addition to the new taxes on consumer "amusement" services, Chicago simultaneously expanded its unique 9% tax on business property lease payments to include “nonpossessory computer leases.”

That includes Amazon Web Services, Microsoft Office 365, MLS real estate listings, Google Apps for Business and just about any cloud-based business service used from a computer in Chicago. Adding irony to the insult, if you're a Chicago-based law firm and subscribe to LexisNexis or WestLaw online, that means you'll be taxed just for reading the list of new taxes.
Netflix Tax

City officials are claiming this is not a new tax, but simply a "clarification" of long-standing use tax policies. Right…. The effect is that an $8.99/month Netflix subscription will now cost Chicagoans $9.80/month. That example may be trivial, but Chicago’s tax authorities estimate the “clarified” rules will generate an extra $12 million per year in revenues.

Oddly, the amusement tax is applicable only to streaming services; it does not apply to music or video files purchased outright and downloaded to a Chicagoan’s hard drive. (Purchases are subject to state and local sales taxes.)

Odder still is Netflix’s instant capitulation to the Chicago tax rulings. The company says it’s already working on a way to tack the extra 9% onto its Chicago users’ monthly bills. Other streaming entertainment providers have yet to weigh in on this issue. You'd think Netflix might, for the benefit of their subscribers, at least put up a little fuss. But no.

Less Legalese, Please!

The “nonpossessory computer lease” tax applies to just about any subscription to a searchable Web site. The key is whether the consumer’s control over the remote computer is more than “de minimis,” or negligible. In its new rules, the Chicago tax authority compared a passive stock price feed (which may require a subscription) to a searchable database of real estate listings. The stock price feed would not be taxed but the database subscription would be taxed.

The rules don’t specifically address non-subscription payments for use of remote computing resources. But Chicago’s tortured interpretation of a taxable “lease” could easily encompass one’s monthly eBay, Etsy, or other ecommerce platform bills.

That’s the point, of course. Chicago, like every other municipality, has watched its brick-and-mortar tax base erode over the years. Expanding old sales and use tax laws to encompass new, Internet-based modes of commerce is one way to recoup those lost revenues. And if Chicago gets away with it, other municipalities will certainly follow.

But *can* Chicago get away with this? Legally, the city (and, by extension, all cities) seems to be on shaky ground, according to Catherine A. Battin, a partner in the Chicago office of law firm McDermott Will & Emery LLP; she writes:

“(I)t is questionable whether Chicago can impose tax on the deemed use of hardware and software physically located outside of its jurisdiction, particularly when the control over the hardware and software is so attenuated. Moreover, the tax can be challenged on the grounds that such an imposition of tax exceeds the City’s home rule powers, violates the Uniformity Clause of the Illinois Constitution, the Internet Tax Freedom Act, and the Commerce Clause of the United States Constitution… a challenge to the tax by a taxpayer or a coalition of taxpayers is imminent.”

Just Put it Back in the Mailbox

It's pretty easy for some to evade this tax. Chicago relies on a user’s billing address to determine if he/she is “in Chicago” for the tax’s purposes. So a multi-location law firm, like Battin’s, can simply pay its Lexis-Nexis bill from a non-Chicago location. Netflix users can shift their billing address to an out-of-Chicago friend or family member. But it would be impossible or impractical to do the same for Amazon Prime and all your other online accounts, just to save a few dollars a year.

Finally, this tax is due from users, not providers. Such “use taxes” are notoriously difficult to collect because users simply don’t report themselves voluntarily. Obvious big targets, such as law firms and software developers, will see greater scrutiny from Chicago’s tax auditors. But without the cooperation that Netflix has inexplicably offered, I don’t see Chicago and like-minded municipalities successfully collecting these taxes from many consumers and small businesses.

Your thoughts on this topic are welcome. Post your comment or question below...

 
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Most recent comments on "Will YOU Pay the Netflix Tax?"

(See all 23 comments for this article.)

Posted by:

Allen
28 Jul 2015

It appears that this will amount, at least to an extent, to the double imposition of the "use" tax where the user is already being taxed on the bill from the internet provider. I know that your high speed cable bill from Comcast or Time Warner is already subject to a sales, i.e., use tax, where I am. In the case of Amazon Prime, the delivery charges on items ordered is subject to taxes as part of the purchase price. Let's not forget that the primary purpose of prime is to defray delivery charges. This is over reach by city hall.


Posted by:

JP
28 Jul 2015

I'll go you one better, or worse, actually. Time Warner Cable recently imposed a $2.50 fee on its cable TV customers for sports programming -- even if the customer hasn't subscribed to any sports channels! I'm about to cut the cord.


Posted by:

David
28 Jul 2015

Well, we all have to pay for local services somehow. Better a tax on mindless entertainment than a perennial tax on your home. But of course, we'll see both. I bet more is spent on enforcement of the "Netflix tax" than is collected at first, because Chicago has to prove it's serious. Then Chicago will stop being so serious, a most cities do with hard-to-enforce laws.


Posted by:

AlanRC
28 Jul 2015

This Chicago amusement tax sounds pretty bogus to me, but I'm thinking it's only a matter of time before we have to pay sales tax on all items we order online. Technically, we are already supposed to be paying that, but unless the company is located in the same state as the buyer, it doesn't get charged. I think that will have to change. Otherwise, companies like Amazon have a huge advantage over local stores.


Posted by:

JIMeans
28 Jul 2015

Once that happens, I'm out. It would be double taxation in my estimation. Netflix is just one of the things I can access via the Internet, and I'm already being taxed for having that. A novel idea. Why don't cities start cutting back on their budgets? I have to live within my means, and so should the cities in which we live.


Posted by:

Sheila
28 Jul 2015

Well, I will cancel Netflix if they start charging me a "use" tax. I subscribe to their service but actually USE it very little.


Posted by:

GARRY
28 Jul 2015

I suppose REDBOX and other movie rentals will be charging for this tax coverage also.


Posted by:

terry jones
28 Jul 2015

This is the same Chicago which closed Meigs field in the middle of the night, contrary to FAA regs, so I would not be surprised at anything.


Posted by:

Linda Comparillo
28 Jul 2015

Isn't it amazing how many politicians are against 'big government' unless it can put money into 'their' coffers?? I don't think this will pass legal scrutiny when challenged, but you never know. Aren't they just great with taking money, but ask for funding for schools, hungry children, veterans, women's health, etc and it's every man (or woman) for himself. Disgusting :(


Posted by:

Cros'
28 Jul 2015

With politicians---Its Never Enough! The game never stops on their ploy to get more money. Meanwhile they spend millions upon millions to get elected...what does THAT tell you?
This is just the first step...if they get away with it, it will be "Open Season" on the internet.


Posted by:

Richard Dengrove
28 Jul 2015

I know Illinois in general is desperately in debt. I imagine Chicago is too. Of course, I doubt they're going to get much for this use tax.


Posted by:

emilio
28 Jul 2015

tax & spend (lavishly), tax & spend (lavishly), tax & spend (lavishly), etc. -- it's all what the left is great at doing


Posted by:

R Wayne
28 Jul 2015

What do you expect from an ex-Obama tax-o-matic advisor who believes in taking from those that have and give to those who do not have.


Posted by:

RichF
28 Jul 2015

I don't understand how the citizens in Illinois keep re-electing these politicians who keep coming up with new ways to tax us so they can stuff more money into their pockets.


Posted by:

RandiO
28 Jul 2015

I am sticking w/the 2 acronyms I coined 6 years ago:
DSOP$ = DON'T Spend Other People's Money
DSOPt = DON'T Spend Other People's time
If anyone violates either of these, then they are off my peachy list forever! I am hoping Mr. Chicago reads your great newsletter.


Posted by:

Ron M.
28 Jul 2015

http://bit.ly/1MTDr6Y Looks like my over the air antenna is going to get a workout.


Posted by:

Raymond Combs
28 Jul 2015

I don't understand how a State with a Republican Governor, Lieutenant Governor, and half of the House, as being "controlled" by the Left (as stated above)!


Posted by:

RichF
28 Jul 2015

Raymond, It makes no difference whether they're Democrats or Republicans when they're like hogs in the sty and just interested in filling their pockets instead of governing.


Posted by:

Diane
28 Jul 2015

To my way of thinking this is purely a greed money grab. I'm Canadian.


Posted by:

noseitall
28 Jul 2015

Since Chicago's handouts are used to buy votes, this amounts to service users subsidizing the Democrat party through taxes.


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