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Chicago’s Controversial ‘Netflix Tax’ Gets OK From Illinois Court

Oct. 2, 2019, 12:28 AM

An Illinois appeals court showed little patience for a constitutional challenge to Chicago’s “Netflix tax,” ruling Oct. 1 the city’s levy on streaming entertainment services had been properly enacted and implemented.

The Appellate Court of Illinois upheld an earlier circuit court ruling that granted Chicago summary judgment in a challenge to the controversial tax. The case had been closely watched by cities across the country because Chicago is one of the few jurisdictions to go after streaming services with a focused tax scheme.

Chicago users of Netflix Inc., Hulu, and Spotify had argued Amusement Tax Ruling No. 5, a revenue program created in 2015 to impose the 9% amusement tax on streaming entertainment, should be scrapped because it treats taxpayers inconsistently. The plaintiffs called the tax an illegal and extraterritorial exercise of the city’s taxing authorities because it focuses on a customer’s billing address, not where the customer uses the service.

But the unanimous three-judge panel upheld the revenue program, finding the tax had no unconstitutional extraterritorial effect because it taxes only customers engaged in such amusements in the city. In addition, the court found the streaming entertainment users failed to prove any inconsistent application of the tax on residents and non-residents violated the uniformity clause of the Illinois Constitution.

The court also found no violations of the federal Internet Tax Freedom Act, which generally prohibits political jurisdictions from imposing discriminatory taxes on various forms of electronic commerce. The plaintiffs asserted Chicago’s tax was discriminatory as it applied to streaming services compared with similar forms of entertainment provided in different ways, such as live performances, which are taxed by the city at a lower rates.

But the court held the plaintiffs failed to “cite to any authority that live cultural performances are similar to streaming services” in their ITFA argument.

Bill McCaffrey, a spokesman for Chicago’s Law Department, said the city is “pleased the Appellate Court affirmed the Circuit Court’s ruling that Chicago is properly applying the amusement tax to Internet-based streaming services.”

Plaintiffs’ counsel Jeffrey Schwab, a senior attorney with the libertarian legal advocacy group known as the Liberty Justice Center, said his clients were disappointed with the court’s decision. Schwab said he would be reviewing his clients’ appeal options in the coming weeks.

The ruling is a blow for tech giant Apple Inc., which had filed a separate but similar constitutional challenge to the Netflix tax. Apple’s case was stayed back in February, pending the outcome of the Liberty Justice Center’s appeal.

Catherine A. Battin, a tax partner with McDermott Will & Emery LLP in Chicago and counsel to Apple in the matter, declined to comment.

The case is Labell v. Chicago, Ill. App. Ct., No. 1-18-1379, 10/1/19

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@bloombergtax.com; Kathy Larsen at klarsen@bloombergtax.com

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