Since it’s founding in 1833, Chicago has become famous for many things. In the last several years, one of those things has been taxes. On July 1st, 2015, Chicago announced a 9% tax on streaming services. However, major streaming companies like Netflix, Spotify, and Xbox Live are fighting back by suing the city, stating that the tax is illegal, and violates the Federal Internet Tax Freedom Act. This act forbids city and state governments from imposing discriminatory internet-only taxes.
In the growing landscape of internet services, many states and cities are looking at ways to tax the cloud. That is because more citizens are buying goods and services online instead of going to traditional stores. This case is sure to be looked at very closely, as the rules of online services are still in their fledgling stages. If the lawsuit is unsuccessful, that will bring up some large questions.
Some of these questions are things like who actually is responsible for collecting the tax? Where does the transaction take place? When does the tax apply? Is a local tax valid for a company that does not have a location in the city? What about streaming services that are free like Hulu or Pandora or Youtube? Would this apply to any site that was not business oriented? The Supreme Court has determined that for a local tax to be valid, there has to be a physical nexus. The definition of physical nexus is getting pushed in to new areas of interpretation with this tax.
Whereas I appreciate that cities are trying to find new ways of earning income to make up for lost sales, I am not sure taxing streaming companies is the way to do it. Instead of worrying about taxing it’s people, Chicago might consider closing gaps by cleaning up the corruption in the local government there. This is reminiscent of the ridiculous taxes enforced on the colonists by the English. Eventually the colonists revolted because they felt they were being unfairly taxed. We all know what happened in that case. In the mean time, only time will tell who will win this battle between two very well financed sides.
