Chicago Slaps Cloud Tax on Netflix

Update, 7.9.2015: Startups in Chicago are panicking over the cloud tax and demanding more clarity on the new policy. Mayor Rahm Emanuel’s office has issued a statement indicating it is willing to take these concerns into consideration. The word on the street, confirmed by a city spokeswoman, is that startups could be exempt from paying the 9% tax. According to the Chicago Tribune, the city will “release further guidance later this month.”

The Chicago Department of Finance published an Amusement Tax Ruling on June 30, 2015. It reveals that, effective July 1, 2015, an amusement tax is imposed on any paid television programming. Netflix, this means you. The rate of amusement tax in effect on the date of the ruling (June 9, 2015) is 9%.

Generously, the department “will limit the effect of this ruling to periods on and after September 1, 2015,” in order to “allow affected businesses sufficient time to make required system changes.” However, businesses are expected to comply with existing law.

The announcement references Municipal Code of Chicago Section 4-156-010, which defines taxable amusement as follows:

• “Any exhibition, performance, presentation or show for entertainment purposes, including, but not limited to, any theatrical, dramatic, musical or spectacular performance, promotional show, motion picture show, poultry or animal show, animal act, circus, rodeo, athletic contest, sport, game, or similar exhibition such as boxing, wrestling, skating, dancing, swimming, racing, or riding on animals or vehicles, baseball, basketball, softball, football, tennis, golf, hockey, track and field games, bowling or billiard or pool games;
• Any entertainment or recreational activity offered for public participation or on a membership or other basis including, but not limited to, carnivals, amusement park rides and games, bowling, billiards and pool games, dancing, tennis, racquetball, swimming, weightlifting, bodybuilding or similar activities; or
• Any paid television programming, whether transmitted by wire, cable, fiber optics, laser, microwave, radio, satellite or similar means.” [Emphasis added by the Department of Finance].

Let’s not focus on the fact that entertaining poultry are clumped together with boxing and billiards, fascinating though that is. Most noteworthy is the fact that “any paid television programming” is subject to the amusement tax.

If you watch it in Chicago, it is taxed

The amusement tax applies “to charges paid for the privilege to witness, view or participate in an amusement.” According to the Department, “This includes not only charges paid for the privilege to witness, view or participate in amusements in person but also charges paid for the privilege to witness, view or participate in amusements that are delivered electronically.”

Therefore, the tax applies to charges for the following when they are delivered to a customer in the City of Chicago:

• The privilege of watching electronically delivered television shows, movies or videos
• The privilege of listening to electronically delivered music
• The privilege of participating in games, on-line or otherwise

It should be noted that the amusement tax does not apply to sales of games, movies, music, shows, or videos. It only applies to rentals of these (which the department notes is “normally accomplished by streaming or a ‘temporary’ download”).

When the amusement tax does not apply, other taxes such as the Chicago personal property lease transaction tax may apply.

Bundled charges

When taxable and nontaxable charges are bundled rather than separately stated, “the entire price charged shall be deemed taxable, unless it is clearly proven that at least 50% of the price is not for the use of any personal property.”

Sourcing

In most instances, the amusement tax is sourced to “customers whose residential street address or primary business street address is in Chicago, as reflected by their credit card billing address, zip code or other reliable information.”

Nexus

The ruling does not delve into whether or not sellers have an obligation to collect the tax from customers. Instead, it suggests that providers with questions consult their attorneys or request a letter ruling from the department.

Please see the City of Chicago Department of Finance Amusement Tax Ruling for additional information. The department has also released a personal property lease transaction tax ruling, which references the tax imposed on "(1) the lease or rental in the city of personal property, or (2) the privilege of using in the city personal property that is leased or rented outside the city."

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