In a quiet move last week, the City of Chicago’s Department of Finance issued new rulings to expand existing tax rules and regulations to cover online transactions. The taxes in question are the city amusement tax and the personal property lease transaction tax. The expanded rulings now include streamed entertainment, like Netflix and Spotify, and online databases used by business like real estate brokers and attorneys. In both cases the tax rate is 9%.
The city emphasizes that these are not new taxes but expansions of existing tax ordinances. The goals are to increase revenue to help close the city’s budget gap and to equalize the playing field between traditional brick and mortar businesses and businesses who work mostly online. Previously businesses in the latter category have managed to avoid some of the taxes that brick and mortar businesses must pay such as property tax. Supporters of the new tax regulations say this tax inequality unfairly penalizes traditional businesses.
The expansion to the amusement tax applies to streaming services like Netflix and Spotify. It would also apply to subscription fees for online gaming. Companies have a grace period till September 1, 2015 to comply. Like sales taxes, the tax is owed by the consumer but the company providing the service or product is expected to collect the tax and remit it to the city.
The expansion to the personal property lease transaction tax targets online databases like those used by lawyers for case law and other information. Again the tax is assessed on the consumer for the privilege of using the service but the company providing it is expected to collect the tax (i.e to apply it to the customer’s bill). Here to there is a grace period till September 1, 2015.
Opponents of the new regulations have argued they might violate terms of the Federal Telecommunications Act and/or the Internet Tax Freedom Act. More generally, the charge is that these taxes will disincentive affected businesses from doing business in Chicago, which might overall do more harm than the increased tax revenue would benefit the city. City officials say the new taxes could raise up to $12 million in annual revenue.
Although not directly linked to cloud based services–those weren’t around just yet–a few years back we handled a case, Second Hand Tunes vs City of Chicago, that went to the Seventh Circuit and dealt with a Chicago city ordinance and the music industry. Our tax practice has seen us interact with a variety of industries from gas stations to liquor sores, boats to airplanes, music and chickens. You are welcome to contact us at (312) 787-5533 or firstname.lastname@example.org