Chicago’s “Amusement” Tax is No Laughing Matter

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Posted by Katie McAuliffe, Timothy Wilt on Monday, July 13th, 2015, 4:20 PM PERMALINK

Convenience has a new price for Chicago residents. Thanks to a fiat administrative declaration by Chicago’s Department of Finance, residents are now burdened with a new online “amusement services” tax. That means if your billing address is within city limits, you will be forced to pay a 9% tax for services like Netflix, Spotify, and Xbox Live.

The new policy is predicted to generate an extra $12 million in annual revenue for the city, and is seen by many as a feeble attempt to quench the city’s $430 million budget deficit, and the $530 million in increased payments to police and fire fighter pension funds for 2016.

Government bureaucracies operate under a “see what sticks” mindset, and have no qualms about throwing all types of new taxes on the Internet regardless of legal precedent and future effects.  Chicago already has one of the highest sales tax rates in the country at 9.25%. Now, the tax collector can literally infiltrate the living room.

The meager money grab by the struggling city is not only bad for Chicago’s economy in both the short and long term, but could also set a dangerous precedent for tax discrimination. Consumers of online amusement services will pay taxes that would not be levied if they had chosen the physical marketplace equivalent. Using the Internet to rent a movie will get you the 9% tax, but buying the movie digitally will be taxed at 9.25%.

This leaves open a number of questions.  For example, Chicagoans pay a cable television tax.  Now if they rent or buy a digital movie from their cable provider, will they be hit with a 9% or 9.25% tax on the movie and then the cable tax on their total bill?  That equals double and discriminatory taxation. Definitely a no-no under the Internet Tax Freedom Act.

In addition to the discrimination, the new amusement tax faces heavy criticism for violating other federal law, state law, and Supreme Court precedent. On the Federal level, the new tax is likely, not only a violation of the Internet Tax Freedom Act, but also the Commerce Clause, and of the first and second prongs of the Supreme Court’s Complete Auto test. On the State level, the Dept. of Finance rulings clash with Illinois’ home rule and uniformity requirements.

Congress could bring more clarity to state tax boundaries by passing the Digital Goods and Services Act.  This legislation would ensure consumers are not punished by multiple taxes when purchasing a digital good or service, modernize Congress’s role in tax policy for interstate and international commerce to better suit the digital age, and clearly establish jurisdiction for the taxation of digital transactions.   

Chicago’s “amusement services” tax is emblematic of the wider government agenda seeking to expand tax revenue by taking advantage of the Internet. The Internet holds the potential for a streamline of new revenue for all levels of government, and the fiasco in Chicago emphasizes the need to establish a federal framework through the Digital Goods and Services Act to combat the trend of government overreach. 

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