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Chicago citizens, concerned that the city has violated federal law by imposing a surcharge on internet streaming services, have filed a lawsuit to halt the “Netflix tax” before it starts impacting their pocketbooks.
Six Chicagoans have sued the Windy City over its new 9 percent tax levied as part of the “Amusement Tax Ruling” that went into effect on September 1.
The tax, which the city of Chicago maintains is “not an expansion of the laws,” imposes an additional surcharge on various online services, including Netflix, Spotify, Hulu, Xbox Live, and others…
The lawsuit, which was filed on September 9, alleges that the tax goes beyond the Finance Department’s mandate and violates the federal Internet Tax Freedom Act. If successful, the ruling would be declared invalid and the amount that the plaintiffs had already paid would be refunded.
The nine plaintiffs assert that the city of Chicago overstepped its boundaries when it designed the surcharge, which took effect September 1st, raising Spotify, Hulu XBox Live and Netflix costs (among others) by around 9% on average.
The city of Chicago contends that they are authorized, under an existing “amusement tax” provision, to levy the surcharge, even though the “amusement tax” has no specific reference to Internet-based amusements. The provision itself covers a wide-range of activities – basically any event that charges admission or a fee to participate – but, until now, has never been interpreted to include electronically-transmitted entertainment (though it does include pay-per-view television).
The plaintiffs also assert that Chicago violated federal law when it extended its amusement tax to entertainment streamed directly from the web. The Internet Tax Freedom Act, adopted by Congress just this year, notes that a city must be non-discriminatory in applying taxes to goods and services purchased over the Internet, meaning that where products are available both through brick-and-mortar and online stores, the tax has to be the same on both products, regardless of purchase medium. The plaintiffs note that Chicago does not levy a 9% surcharge for Netflix’s rental-by-mail services, as they do to streaming rentals, even though they are basically, according to the Plaintiffs, the same service.
Regardless of the legality, the surcharge’s imposition itself is interesting. The city clearly identified a source of revenue it was not benefiting from, and created a tax system to handle it at the first available opportunity. Netflix customers should beware, across the country, that other states and municipalities will follow Chicago’s lead.