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Apple Loses Bid to Overturn Chicago’s Unique ‘Netflix Tax’ (1)

March 14, 2022, 4:54 PMUpdated: March 14, 2022, 9:25 PM

An Illinois trial court judge has dismissed Apple Inc.’s latest effort to jettison Chicago’s “Netflix tax,” but he left the door open for the tech giant to file an amended complaint.

Cook County Circuit Court Judge Dan Duffy granted Chicago’s motion to dismiss the lawsuit objecting to Amusement Tax Ruling No. 5, a 2015 revenue program imposing a 9% tax on streaming entertainment services. Duffy wrote that Apple is not required to present evidence at this stage of the litigation, “but it must plead facts” sufficient to state a cause of action upon which relief can be granted.

In a brief order issued Friday, Duffy dismissed Apple’s complaint without prejudice, but he granted the maker of the iPhone and producer of streaming entertainment services an opportunity to file a second amended complaint within 35 days.

Stephen Kranz, counsel to Apple in the case and a tax partner with McDermott Will & Emery LLP, declined an opportunity to comment on the court’s order. Kristen Cabanban, a spokeswoman for Chicago’s Law Department, said the city had no comment on the ruling.

Apple’s lawsuit was originally filed in 2018 and asserts violations of the federal Internet Tax Freedom Act, and the commerce and due process clauses of the U.S. Constitution. The challenge was placed on hold for more than two years while Illinois courts dealt with a related action captioned Labell v. Chicago, brought by users of Netflix Inc., Hulu LLC, and Spotify. Chicago survived the challenge, winning trial court and appeals court rulings. In March 2020 the Illinois Supreme Court declined to review a September 2019 appeals ruling that found nothing improper in Chicago’s tax program.

In its amended complaint filed one year ago, Apple argued that the Labell case was a “facial challenge” to Chicago’s streaming entertainment tax program, while it sought to challenge the tax as it has been applied to Apple’s particular menu of electronically delivered amusements. In that regard, the complaint claimed Labell was about customers of entirely different companies and services and had no bearing on Apple’s particular services and customers.

Duffy found Apple’s complaint was insufficient to make an “as applied” challenge to Ruling No. 5. The company’s complaint isn’t “pleaded with remotely sufficient specificity to set out an ‘as applied’ challenge to the constitutionality of the Amusement Tax on any of the grounds cited,” Duffy wrote. “The allegations that concern Apple’s electronic offerings, for example, are completely generic.”

David Hughes, a state and local tax partner with HMB Legal Counsel in Chicago, said he found the court’s ruling surprising, as Apple had previously amended its complaint and tax matters are rarely dismissed for failure to sufficiently state a claim. At the same time, Hughes noted the court signaled flexibility for Apple to proceed with a more comprehensive presentation.

“While the judge acknowledged that Apple was not required to present all its evidence in the complaint, he concluded that their allegations were too generic to support a cause of action,” Hughes said in an emailed message. “And this came after Apple amended its complaint last year to add more facts regarding its video streaming, news, and other electronic services. The judge did, however, give Apple more time to amend its complaint (again), which suggests that the judge thinks Apple might be able to sufficiently plead its case with more facts.”

The case is Apple, Inc. v. Chicago, Ill. Cir. Ct., No. 2018 L 050514, order 3/11/22

(Adds David Hughes comments in final paragraphs.)

To contact the reporter on this story: Michael J. Bologna in Chicago at mbologna@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergindustry.com; David Jolly at djolly@bloombergindustry.com