Chicago to Tax Online Entertainment

Blog BannerIn today’s world of fast-paced tech advancement, new gadgets and systems are constantly entering the market. Sometimes our paradigms have a hard time keeping up. This is a known problem with the Consumer Price Index, for example. Twenty years ago, when conceptualizing the typical American family’s basket of consumer goods, we weren’t including digital cameras or personal laptops on the list. To fully serve its purpose, the CPI needs to reflect consumption today and is therefore updated regularly. Some, including Chicago lawmakers, argue that this also the case for taxation laws.

In an effort to keep up with the times (and to solve the budget crisis by increasing tax revenue), the Windy City is reinterpreting its existing tax laws. Specifically, it is expanding the amusement tax and the personal property lease transaction tax. As ridiculous as an amusement tax sounds, Chicago has had one for a long time. A 9% tax applies to performances and participating events like movies, amusement parks, and concerts. The expanded definition of the law includes streaming subscription and pay-per-view services like Spotify or Amazon Prime and goes into effect on September 1, 2015. Netflix has already confirmed that the tax will be added to Chicagoan subscribers’ bills on said date. For the city of Chicago, solving a budget crisis might mean cutting into its Netflix users’ Sunday night “House of Cards” binges.

On a more serious note, expanding these laws could spell trouble for Chicago’s startups and small businesses. The reinterpreted lease tax also includes the 9% tax on “cloud-based” systems. Because cloud technology provides a cheap and convenient option for small companies, this is often the way they choose to store their data. A 9% increase in their cloud costs, assuming that providers choose to increase prices rather than absorb the hit, could be a serious problem. This situation could potentially deter new technology businesses from setting up in Chicago or force established ones to relocate. Perhaps in an effort to avoid such a brain drain, the mayor’s office released a statement saying it “will be taking measures to provide relief to small businesses so as not to put them at a competitive disadvantage.”

Chicago is the first major city to implement these kinds of taxes and is somewhat of an experiment. Depending on how things play out, other areas with similar laws might choose to expand their own taxation definitions. Virginia, Maryland, and Massachusetts are a few other places with amusement tax laws.

Still, there is a small amount of time before the new Chicago tax goes into effect and pushback is certainly expected. While one cannot deny the potential benefits of $12 million in annual tax revenue and the leveled playing field between online and brick-and-mortar businesses that these tax laws would produce, their legality is questionable. According to the Chicago Tribune, the laws were redefined without a debate or a vote, which is bound to upset constituents. Some have also brought up the Net Neutrality discussion and the 1998 Internet Tax Freedom Act in protest.

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