My kids are huge fans of Netflix, as am I. I like being able to pick and choose which shows they will watch in advance and a girl can only take so many episodes of Disney’s “Jessie.”
For those of you who don’t know about Netflix, it’s a service that allows you to stream videos online (you can also order DVDs through the mail but who does that anymore?). Other similar services include Amazon Prime, Hulu and Crackle though your mileage may vary depending on your needs. Netflix is on the high side of those services when it comes to cost: while some streaming services are free, Netflix charges a monthly fee for the privilege of streaming videos. It’s worth it for my family – but that said, we don’t live in Chicago.
Chicago is now taxing Netflix and similar internet services in what’s been labeled a “cloud tax.” And the tax isn’t cheap: it’s a whopping 9% add on for the privilege of streaming entertainment.
The city – which isn’t exactly known as tax friendly – is quick to clarify that the “cloud tax” isn’t a new tax, merely an interpretation of the city’s existing tax system. The city already imposes an amusement tax “upon the patrons of every amusement within the city.” That now specifically includes “any paid television programming, whether transmitted by wire, cable, fibex optics, laser, microwave, radio, satellite or similar means.” That language, effective July 1 of this year, was adopted by rule (downloads as a pdf).
The city goes on to clarify that “The amusement tax applies to charges paid for the privilege to witness, view or participate in an amusement. This includes not only charges paid for the privilege to witness, view or participate in amusements in person but also charges paid for the privilege to witness, view or participate in amusements that are delivered electronically.”
In other words, the Amusement Tax now applies not only to traditional entertainment like tickets for concerts and sporting events – where the tax was already being collected – but to electronically delivered amusements.
The tax doesn’t apply to sales of entertainment (a “permanent” download) but only to rentals (think streaming). Those rentals can be a one time event, like pay-per-view, or a flat fee like you pay to Netflix.
The owners or operators of the service are required to figure and collect the tax from their Chicago customers when they have have a physical presence in the city. That means that the 9% tax will be tacked on to your bill. However, end users will have the responsibility to report and file taxes for streaming subscriptions when the owners or operators of the service don’t have a physical presence in the city. Confusing enough for you? It’s the online sales and use tax conundrum all over again – this time at a municipal level.
To try and make things more simple for consumers, some companies are planning to add the tax onto the bill. That includes Netflix which has indicated that it will automatically add the tax to Chicago customers. Of course, figuring out which company has already included the tax could be even more confusing for taxpayers.
So with all the controversy, why the move to include language specifically streaming? Money. The tax is expected to add about $12 million in revenue to the city’s coffers. But that has many concerned.
First, the amount of tax revenue expected to be raised is relatively small. That has some companies inside the city fuming since the cost to comply with the ruling will boost costs.
Second, figuring out exactly what gets taxed based on the source and destination will no doubt be confusing for taxpayers. That’s likely going to result in challenges to the tax as well as presenting difficulties in enforcement – and that could drive up expenses for the city. That expected $12 million in revenue could easily shrink to a fraction of those dollars.
Finally, there’s a real concern about where this sort of nickel-and-dime tax is going to go next. While the city claims that the point of the tax is to bring internet companies into the same tax structure as brick and mortar stores (again, the same argument used in the nationwide online sales and use tax debate), taxing services that are streamed is more complicated than just adding a tax to a Netflix bill. The city has already suggested that the tax will apply to digital music like Spotify and Pandora, as well as videos and cloud-based search services. The latter includes research services applicable to legal, financial and real estate communities and others. So yes, that means that your Multiple Listing Service (MLS), historical Wall Street data searches or your LexisNexis paid subscriptions could potentially be taxed as entertainment/amusement for the purposes of this tax, making the search for a Supreme Court case more or less equivalent to renting old Muppets movies.
The move to expand the tax to include those online services, of course, has taxpayers – and tax policy wonks – wondering whether the tax might catch on in other places and just how far the tax could actually reach in the cloud.
For now, however, when it comes to tax in Chicago, the sky is not actually the limit.
