Labell v. City of Chicago

In Labell v. City of Chicago, the Liberty Justice Center is challenging the City of Chicago’s tax on subscriptions to streaming entertainment services such as Netflix and Spotify – the first tax of its kind in the country.

Chicago’s “amusement tax” has long imposed a nine percent tax on certain forms of entertainment, such as theaters, concerts and sporting events, and on certain recreational activities, such as amusement-park admissions, bowling and billiards.

In June 2015, the city comptroller issued a “Ruling” extending the amusement tax to cover new services – Internet-based streaming video, music and gaming services, such as Netflix, Spotify and XBox Live – even though the ordinance itself does not authorize taxation of those services.

The Liberty Justice Center filed a lawsuit challenging the tax on behalf of Chicago taxpayers who subscribe to various Internet-based streaming services and therefore have to pay the new tax on those services.

LJC’s lawsuit challenges the tax on numerous grounds:

• The city’s amusement-tax ordinance does not actually authorize taxation of Internet-based streaming entertainment services. If the city wants to tax those services, it must pass a new ordinance through the City Council – if it can.
• The tax applies to activities outside the city’s jurisdiction: it applies to anyone with a Chicago billing address, even if they only use a service while outside of the city.
• The tax violates the federal Internet Tax Freedom Act because it discriminates against online entertainment by taxing tickets for certain live theatrical and musical performances at a lower rate than it would tax access to those same performances if they were streamed online.
• The tax violates the Illinois Constitution’s Uniformity Clause, which requires the state and local governments to tax similar things at the same rate.