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But is the Windy City’s newest revenue-generating levy legal?
Chicago Mayor Rahm Emanuel will exempt the city’s startups and small businesses from the city’s new “cloud tax,” but critics say the levy, which will apply to popular streaming services like Netflix, has questionable legality to begin with because it wasn’t legislatively adopted.
The 9 percent tax on streaming digital content and cloud-based services isn’t a new tactic to generate revenue, state tax expert Steve Kranz told Route Fifty. But how the Chicago Finance Department established the tax is.
Monthly payments to Netflix or Spotify—service providers acting as the collectors—will include the cost of the tax starting Sept. 1.
“We don’t tax services in this country, whether they’re legal, journalistic or accounting, and there are lots of economic and policy reasons for that,” Kranz, a tax partner at international law firm McDermott Will & Emery, said. “The question is: ‘Are these new business models, where you’ve got digital content being delivered, services or tangible goods?’ That’s a question that should be resolved by legislators.”
But in Chicago it wasn’t. Members of the City Council didn’t formally authorize the cloud tax.
Every state and some municipalities have tax departments responsible for administering the law, like the Illinois Department of Revenue, which issues rulings interpreting the state’s statutes. The same thing happens at the local level, once a city council passes legislation signed by the mayor.
But the Chicago Finance Department went “well beyond its legal authority,” Kranz said, when it extended the city’s amusement tax to include streaming entertainment and personal property lease transaction tax to cover cloud-based services.
The tax ruling is projected to garner cash-strapped Chicago $12 million a year, the Chicago Tribune reported.
Kranz’s firm is encouraging its Chicago clients to litigate.
The mayor’s office told the Chicago Sun-Times more than 30 states have clarified tax laws on digital goods, but there’s been almost no activity at the municipal level regarding streaming content. Few states tax it, Kranz said.
A national trend is developing where states like Idaho, Michigan and Vermont are with few exceptions exempting cloud-based “software as a service,” sold by providers like Amazon Web Services, from taxation.
Legislation is still pending in Michigan and Vermont, where the legislature is bucking the “aggressive position” taken by the Green Mountain State’s Department of Finance & Management, Kranz said.
The current sales and transaction tax structure seen across the U.S. has been in place since the 1930s and is only truly effective with tangible goods.
In the digital space, “sourcing” transactions—identifying where consumption occurred—is complicated and often impossible. Netflix accounts can be shared by friends and families across state lines.
“Where should that transaction be taxed?” Kranz said. “That’s the problem that you get into when you end up in more than one jurisdiction.”
Dave Nyczepir is News Editor for Government Executive’s Route Fifty.