Chicago appears to be the first U.S. city to levy a new "cloud tax" of nine percent that affects use of cloud-based services such as Netflix, Spotify and other video and music streaming services, or use of any cloud-based computing service as well.
The Amusement Tax ruling specifically taxes charges paid for:
- “watching electronically delivered television shows, movies, or videos”
- “listening to electronically delivered music”
- “participating in games, on-line or otherwise”
As a consequence, streaming a movie, listening to streaming music, or playing a game on a smartphone or tablet will now trigger a nine-percent tax on the subscription charge for those services if those activities are done at a location in Chicago.
Furthermore, the ruling addresses “bundled” transactions, by providing that “unless it is clearly proven that at least 50 percent of the price” is not for the amusement, the entire charge, except for any separately stated non-amusement charges, is subject to the Amusement Tax.
All other forms of content appear to be covered as well, including news, current events, sports, movies, music or other types of television programming.
In principle, new taxes also are incurred by consumers who pay for cloud-based real estate listings, car prices, stock prices, economic statistics, and “similar information or data that has been compiled, entered and stored on the provider’s computer.”
In addition, under the ruling, the Lease Transaction Tax will apply to the online sourcing of “word processing, calculations, data processing, tax preparation” and “other applications available to a customer through access to a provider’s computer and its software.”
In other words, the tax applies to SaaS (software as a service), PaaS (Platform as a Service) and streaming media services.
In the ruling, the Department expressly notes that these “examples are sometimes referred to as cloud computing, cloud services, hosted environment, software as a service, platform as a service, or infrastructure as a service.”
And some even think the new tax will apply to satellite TV services received by customers who live in Chicago. The new tax appears to apply to streamed content only, not downloaded content.
That presumably means consumers using web services providers such as Amazon Web Services will owe the nine percent tax on their usage.
It isn’t immediately clear how tax collection will take place. But Netflix apparently is preparing to act as tax collector on behalf of its customers, and already is said to be making arrangements to add the tax to the bills of its Chicago subscribers.
Chicago's new tax results from two recent rulings made by the city's Department of Finance. A new interpretation of amusements taxes now has been extended to cover "electronically delivered amusements."
The other ruling extends an existing computer lease tax. Each extension takes an existing tax law and extends it to levy an extra nine percent tax on certain types of online services.
The first ruling presumably covers streaming media services like Netflix and Spotify, while the second would cover remote database or computing platforms like Amazon Web Services or Lexis Nexis.
As a result of the two rulings, each effective July 1, 2015, the city of Chicago will attempt to tax the “cloud” more directly and comprehensibly than any other U.S. jurisdiction.
Chicago apparently will determine whether the customer is within the city of Chicago for purposes of the Amusement Tax and the Lease Transaction Tax rulings by looking at the service or credit card billing address.
Having a Chicago billing address and engaging in the activities covered by the two rulings will incur the tax, even if the actual place of use or access was outside of Chicago.
Whether the new rules are lawful or not is the issue. Lawsuits are anticipated.
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