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.