Monday, September 14, 2015

Labell v. City of Chicago - The suit over Chicago's 9% streaming tax.

On July 9th 2015 the city of Chicago expanded its 9% 'Amusement Tax' to include internet services in addition to its preexisting tax on various forms of 'Amusement' (such as baseball games or events). With this tax, services such as Netflix, Amazon, Xbox Live, and Hulu would be effected as now consumers would have to pay more for the service. This caused outcry when brought up and implemented as many saw this as unfair and just a way for the city to get more money out of people. Finally on September 9th 2015, a group of Chicago residents filed suit against the City of Chicago as well as the City's Comptroller - Dan Widawski.

This is the first page of the filed complaint.
Link [Here]
In the suit the plaintiffs claimed that the City's Comptroller had overreached his authority by applying the tax to online services. In addition they added that this would create a "new tax" for the people and that only the city council had the ability to authorize a tax via city ordinance.

Secondly, the plaintiffs claim that they are being harmed by the tax as they now have to pay more for the services they use.

Lastly, the plaintiffs claim that the city is breaking the law by violating the Federal Internet Tax Freedom Act. This act states that states and local government cannot "impose discriminatory internet-only taxes".  With this in mind, the plaintiffs believe that the city has violated this by creating a tax on internet services.

The Supreme Court also has had a say on something similar. Quill Corp. v. North Dakota was a case where the state of North Dakota attempted to tax Quill Corp who had no actual physical presence in North Dakota (They only sold things to people within the state). The supreme court agreed with Quill Corp. and during their official statement said:

"The lack of a physical nexus in a state is sufficient
grounds to exempt a corporation from having to pay
sales and use taxes"

So what do you think?

Do you think the City of Chicago has any legal ground to implement this new tax?

Do you think the Comptroller has exceeded his power?

Do you think the plaintiffs have a strong legal standing?

Link to article [Here]
Link to legal complaint [Here]


Jared Mayerson said...

I do not think that the city of Chicago has any legal grounds to expand their 9% "Amusement Tax" due to the Supreme Court case, Quill Corp. v. North Dakota, alone. The Supreme Court has already said that having no "physical nexus in a state" prohibits the ability to tax companies such as Netflix, Hulu, or even Quill Corporation, who only sell products online to residents of certain states, without having a physical location in that state. In Netflix's case, their headquarters is in California, roughly 2,000 miles away from Chicago. I believe that the comptroller has exceeded his power in attempting to gain revenue for Chicago, which should be gained in other ways. They claim that the city ordinance authorized them to create these new taxes, yet local government does not trump federal law. The supremacy clause of the United States Constitution clearly states that their law supersedes state law, making the legal basis behind this tax null.

Anonymous said...

I agree with Jared, this case may be more black and white than others that we have seen. The Federal Internet Tax Freedom Act "bars federal, state and local governments from taxing Internet access and from imposing discriminatory Internet-only taxes such as bit taxes, bandwidth taxes, and email taxes (" It's amazing they were able to implement this streaming tax. So I think the plaintiffs have a good case, the comptroller shouldn't do this legally, and I definitely don't think Chicago has legal ground to continue with this tax.

Lea Tan said...

I agree with both Jared and Teague. The lawsuit against the city claims that the tax was slipped in using an interpretation of an old municipal code. The city was able to pass such a tax by simply extending the existing "amusement tax." While they may not have been able to pass a completely new tax, they were able to change an existing tax to include digital streaming, TV shows, and games. This seems wrong to me, as it should not be legal according to the Federal Internet Tax even if the city found some clever way around it. Furthermore, Chicago's aldermen, which represent the many districts in Chicago on the Chicago City Council, did not have a vote in the decision to tax. If this tax were to be passed legally, it should have gone through the city council first.
The tax is also supposed to raise $12 million in order to help close a budget gap. However, with the uproars that the tax has caused, a lot of people will probably cancel subscriptions due to the raised prices. Cancellations, along with streaming service surcharges, will lower Chicago's actual revenue increase from the tax and could make it ultimately not worth the trouble.

Lea Tan said...