Chicago, desperate for revenue, has decided to push its power to impose transaction and amusement taxes about as far as they will go, wants to tax Chicagoans’ use of NetFlix, Spotify, and even online reference services used by businesses like YCharts:
Chicagoans who pay to stream movies and music from services like Netflix and Spotify will now need to fork over an additional 9 percent for the privilege, as will Chicago businesses that pay to use everything from real estate to court databases online, under a decision the city quietly made recently to expand its taxing power.
The added costs are the result of a ruling by the city Finance Department that extends the reach of ordinances governing two types of taxes — the city amusement tax and the city personal property lease transaction tax — to cover many products streamed to businesses and residents alike.
My offhand guess is that the city’s move has two problems: jurisdiction and vagueness. I can see the argument for taxing local services just as local theaters are taxed but it’s a lot harder for me to see how the city has any authority over services provided by companies that don’t have a physical Chicago presence. Additionally, everything on the Internet is arguably a service. How can you tax NetFlix and Hulu but not Youtube? Isn’t a search engine a service? Why wouldn’t the tax apply to Google or Microsoft as well? Because the services are “free”? They’re not free to their customers, the businesses that pay for search priority.
If this law holds up at all, I wouldn’t be a bit surprised if the city ends up paying more in legal fees that it can realize in revenues.
States (*) can tax interstate transactions, but they have no way to force the out-of-state seller to collect the tax unless the seller has a physical presence in the jurisdiction. The tax is legal, but only applies to some sellers. Groupon?
(*) AFAIK, the jurisdictional issues all arise under the U.S. Constitution’s Commerce and Due Process clauses, and would be satisfied if the seller had a physical presence somewhere in Illinois, even Cairo. The question then becomes whether Illinois law gave Chicago this taxing authority.
That was what I was referring to. Does NetFlix have a physical presence in Illinois? The main effect of the tax may be to force companies that provide Internet-based data services out of Illinois.
Also as you suggest, Chicago’s powers to levy taxes under home rule are actually quite circumscribed by the state. I’d need to look at the relevant statutes to determine if Chicago has the power to levy this particular tax. Of course, legality has never done much to deter the Chicago city council.
I may have been cavalier about the Cairo example. (For those that don’t know Cairo is the Southernmost tip of Illinois) If a streaming business in Cairo gets a bill for back taxes and penalties, they are going to complain a violation of due process due to lack of notice and insufficient nexus. I suspect its more of an issue of state law though.
“Of course, legality….”
It may or may not be the law to need physical presence. As a practical matter, local taxing authorities gin up nexus arguments. We have had about a half dozen instances where we either had to pass on a transaction because of trailing tax liabilities or litigate until settlement upon sale of a company over the issue. Apparently if you have a website accessible in a state (snicker), send an installation crew in for a week, or buy a sub component etc…..you have a physical presence and must collect. I concluded long ago that physical presence was less important than negotiating leverage and perceived deep pockets. California is the worst.
But then I know none of this is true, and I’m hallucinating, as governments creating difficulties for businesses is a vast right wing myth.
Establishing a nexus for purposes of retail sales tax can be a complicated issue and may vary from state to state. I recently counseled a client to avoid adding a service to his present, mostly web-based business because it would result in his establishing a nexus in most states.