AH Netflix Logo 1.5

Chicago Introduces 9% Cloud Tax

July 2, 2015 - Written By David Steele

Media has rapidly moved from the physical to the digital; twenty years ago, we read real books and magazines, we listened to music on a CD (Compact Disc) player and watched movies recorded onto a magnetic tape media. In 2015, many people read using a digital medium, be this an online magazine, eBook reader (such as the Amazon Kindle) or on websites. Online streaming services have sprung up offering movies, television shows and music for a regular fee. The digital revolution has been quite simply amazing and liberating – it’s something Google have tapped into with the Google Nexus 7 models. It’s also been combined with how consumer spending habits are changing: less of us are buying white goods in a physical store and are instead turning to buying online.
However, there’s been a side effect to this shift towards digital and it’s one of life’s basics: tax. Specifically, it has reduced the tax revenue generated when we spend money through indirect means. You see, twenty years ago we might visit a store in the centre of a city to browse CDs, books and VHS movies but in 2015, we can select our novels, music and movies from the comfort of an armchair and this means that the businesses occupying premises and generating tax income for towns and cities are no longer there.

Chicago has decided to claim back some of the missing taxes by incorporating a new “cloud tax” to target online databases and streaming services. The tax goes against many of the basic assumptions of the Internet and has the potential to upset the digital world by applying a local tax for something that has been universal across the whole of the country. Netflix is the same in Los Angeles as it is in Dallas as it is in New York, but now it’s not the same in Chicago. The new laws extend a 9% tax to cover “electronically delivered amusements.” That $100 worth of server or cloud time Las Vegas will now cost $109 in Chicago. And whilst the tax is levied on consumers, some companies such as Netflix are planning on incorporating it into the monthly bill. A Netflix spokesperson said this on the matter: “Jurisdictions around the world, including the US, are trying to figure out ways to tax online services. This is one approach.”

The implications of this change are potentially far reaching. Once implemented, streaming services will have to keep a closer track of those subscribers falling under the local tax, either through billing addresses or IP tracking. We’ve seen some lawyers taking issue with Chicago’s move as it appears to penalise services delivered via the Internet. Michael Wynne, partner at Reed Smith, said this on the matter: “I could do that same activity of research using books or periodicals without being taxed, so it does seem like I’m being picked on because I chose to do it online.”

It is easy to see why Chicago is taking the tax back to the consumers: the revenue generated by local businesses selling media to consumers has now gone, taken away by businesses based elsewhere. Chicago is facing a severe budget shortfall and it’s easy to see why the city is looking to online media services to fill the gap. This does not make is excusable, but we have here a tax system based on an old world being adjusted to fit a new one. Michael Wayne comments, “There’s no question that the city needs revenue and I can see where things are escaping the old tax base. I think the objectionable part is that, instead of drafting new laws for that, we’re simply stretching the old laws to fit.”