Chicago's Tax on Netflix, Spotify Subscriptions Challenged in Court

Netflix Apple Watch Spoof H 2015

Netflix Apple Watch Spoof H 2015

The City of Chicago's recent move to extend its 9 percent "amusement tax" to streaming services is an abuse of authority, claims the Liberty Justice Center in a lawsuit filed on Wednesday in a circuit court in Illinois.

The conservative legal group, representing local residents who pay for subscriptions to Netflix, Amazon Prime, Spotify, Hulu and XBox Live, challenges the way in which public officials extended the definition of "amusement" in June. The rulemaking happened not by a vote of the city council, but rather through the interpretation of an old municipal code by the comptroller, who "exceeded his authority," according to the complaint.

The Chicago Tribune reports that the tax change is expected to bring in $12 million annually to help close a budget gap.

But even if the tax was voted on by lawmakers, the Liberty Justice Center has other theories why the so-called "Netflix tax" is impermissible.

First, the legal group asserts that the definition of "amusement" under the law doesn't include audio services nor gaming services.

Second, and more provocatively, the 1998 Internet Tax Freedom Act is being cited as interfering with the imposition of a tax on streaming services. That federal law has generally been understood to bar state taxes on Internet access, but not necessarily state sales taxes on goods or services acquired through the Internet.

However, the federal law also speaks unkindly of a "discriminatory tax" on electronic commerce, and so the legal group questions how Chicago's tax "applies to Netflix’s video streaming service but does not apply to Netflix’s video-by-mail service."

What's more, the complaint adds that the newly interpreted amusement tax "imposes a higher tax rate on theatrical, musical, and cultural performances that are delivered through an online streaming service than it imposes on those same performances if they are consumed in person," given exemptions to live performances where less than 750 persons are in attendance.

The plaintiffs want damages for past tax fees paid as well as an injunction going forward.

"The City has not yet seen the complaint, but we are confident that the ruling is a valid application of the existing Amusement Tax," Chicago law department spokesman John Holden told the Tribune.