Chicagoans will soon be hit with a “cloud tax” for digital entertainment services — that’s 9 percent added onto streaming services such as Netflix and Spotify.
Netflix’s streaming plans range from $7.99 to $11.99, while Spotify’s premium service costs $9.99 a month. The city would collect 9 percent from those plans monthly.
In total, the city expects it will collect $12 million a year from the tax.
The city enacted the change in the amusement tax on Wednesday but won’t begin collecting until Sept. 1 in order to allow the affected businesses time to make changes.
The city’s amusement tax isn’t anything new. Chicagoans pay the tax for everything from going to the movies, seeing a play or concert or attending a basketball game. A citywide audit, in which “online services” is listed, prompted the change to add digital entertainment to the list of city amusements.
The change to the city’s amusement tax will affect “any paid television programming” as well as “electronically delivered music,” according to a city Department of Finance amusement tax ruling.
The city says the change will allow for a more uniform way to apply taxes on digital services.
“In an environment in which technologies and emerging industries evolve quickly, the city periodically issues rulings that clarify the application of existing laws to these technologies and industries,” mayoral spokeswoman Elizabeth Langsdorf said in a statement.
“These two rulings are consistent with the city’s current tax laws and are not an expansion of the laws. These ensure that city taxation is uniformly and fairly applied and that businesses are given clear guidance on the applicability of the city’s tax laws to their operations, and they clarify that the amusement tax and personal property lease tax apply to digital services.”
It’s the first time the city has issued guidance on digital access to entertainment. The tax will affect rentals of shows, movies, videos, music and games. A lease tax will also be placed on cloud computing, financial products and other databases.
The tax will affect customers whose residential street address or primary business street address is in Chicago, as it’s written on their credit card billing address, ZIP code or “other reliable information,” the ordinance says.
Chicago marks the first major city to enact a tax on all digital services, according to attorney Michael Wynne, partner at Reed Smith in Chicago. New York has applied separate taxes for information and amusement services.
Wynne says he’s gotten calls from companies who are against imposing a tax. “Some companies don’t feel like they have to collect. I think they are going to be put in a hard place collecting taxes even if they don’t agree with them.”
Taxpayers United of America, a pro-taxpayer group, say the tax is a stretch for Chicagoans and is just another way to squeeze out money from its residents to deal with the city’s other financial problems.
“We’re definitely opposed to a 9 percent additional tax and this kind of just goes back to what we’ve been seeing recently with the ongoing pension crisis. The city is looking to expand the tax base in any way, even if that means pushing out more Chicagoans over time,” said Jared Labell, the group’s director of operations. “The presumption is that it’s the city’s money first and so if technology changes in any way, we need to recover that tax base instead of trying to push forward making cuts in other places.”
The tax may be a way to make up for the loss of sales tax revenue from storefronts that offered services that have been replaced by streaming services.
Still, Labell says the city should have proposed a new ordinance if they choose to “levy a new tax.”
“Expanding the tax base and using laws that are nearly 20 years old seems pretty ridiculous,” Labell said.