The city of Chicago recently announced a new nine percent cloud tax. To make a long story short, this tax would apply to “patrons of amusement” using services such as Netflix and Spotify, among other cloud products such as Amazon Web Services.
As a former state and local tax aficionado, this kind of thing was a long time coming. City governments have been cash strapped for years and continue to look for other alternatives in raising revenues. Notwithstanding that most tax codes are written from the New Deal era, cities and states will try to stretch the meaning of the words to cover services such as cloud data access. As more and more people move to the cloud for movies, music, etc., cities will continue to see their sales tax revenue from brick and mortar stores decline.
What Chicago is doing will be mimicked by cities and states across the country, should it be successful, as America is a copycat country (although for some reason no one seems to follow Ohio’s Commercial Activity Tax). The problem with that tax is that it can be avoided very easily. As long as your billing address isn’t in Chicago, you just avoided the amusement tax, congratulations!
Chicago officials maintain that this interpretation is not a new expansion of current laws, but in line with them. The ruling reads: “The amusement tax applies to charges paid for the privilege to witness, view or participate in an amusement. This includes not only charges paid for the privilege to witness, view or participate in amusements in person but also charges paid for the privilege to witness, view or participate in amusements that are delivered electronically.”
The issue is the legal challenges that people think it will face. The Telecommunications Act of 1996 and the Tax Freedom Act are two statutory pieces of legislation that might stop Chicago’s ambition of taxing Netflix. The fundamental problem is that the federal government tried to outlaw taxes on internet services when the Internet, as an entity, was in its infancy 20 years ago. They wanted the internet to grow and not be stunted by taxes. I don’t think a nine percent tax will cause the internet to suddenly shut down given how our demand for it is inelastic to no end. I mean, if Philadelphia implemented this tax (certified lock that it will happen), would you really cancel your internet service because you’re paying 72 cents more for Netflix?
Second issue: Government revenue. Chicago finally wised up to the new internet economy and realized they’re missing out on millions in tax revenue. People hate taxes but also hate less government services. It’s kind of a Catch-22 that for some reason doesn’t really resonate. The negative reaction to the tax supports the phrase: Not In My Back Yard. NIMBY was originally used to describe how residents opposed new housing developments that were too close to them but also believed that the new developments were good for society. Well don’t we generally agree that government services should not be cut? Yes. But we also don’t want to fund those services via our own taxes.
For people who are determined to avoid paying the extra 90 cents on their monthly Spotify subscription, there is hope! As clever as city governments such as Chicago are in coming up with this tax, they’re not as clever as they might seem. It’s a known fact that the governments take ages to catch up with change and technology and the issue will be the fact that not everyone is buying in. If city governments across the country don’t buy in the tax in a short time frame, then people could easily avoid the tax by using a billing address outside the city limits.
Make no mistake, I’m opposed to this tax because I wouldn’t want to shell out about $8 more for Netflix a year. However, taxes on these Internet services will be more common and more widespread as governments seek alternative sources of revenue to fund services.