Source: https://www.insidesalt.com/2018/06/circuit-court-of-cook-county-upholds-city-of-chicagos-imposition-of-amusement-tax-on-internet-based-streaming-services/
Timestamp: 2019-04-22 04:32:41+00:00

Document:
The Ruling sought to impose an amusement tax on subscription fees or per-event fees for the privilege of: (1) watching electronically delivered television, shows, movies or videos; (2) listening to electronically delivered music; and (3) participating in online games, provided the streamed content (i.e., movies, music, etc.) was delivered to a customer in the City. See id. ¶¶ 8, 10. The Ruling stated that “this means that the amusement tax will apply to customers whose residential street address or primary business street address is in Chicago, as reflected by their credit card billing address, zip code or other reliable information.” Id. ¶ 13. A copy of the City’s Amusement Tax Ruling #5 is linked here.
As originally filed, Plaintiffs’ lawsuit asserted, among other challenges, that the Department’s issuance of Amusement Tax Ruling #5 exceeded the City’s authority by invalidly imposing a “new tax” on streaming content. After the lawsuit was filed, the City amended the amusement tax to incorporate the rules of the Illinois Mobile Telecommunications Sourcing Conformity Act (35 ILCS 638) to determine “which customers and charges are subject to the tax” on electronically delivered amusements. Code § 4-156-020(G.1). The Court subsequently granted the City’s motion to dismiss those counts of the complaint, finding that the amendment “to specifically include video streaming, audio streaming and online games delivered electronically to mobile devices” mooted Plaintiffs’ claim.
In the Court’s Commerce Clause analysis examining the test enunciated by the US Supreme Court in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), the Court concluded that the “substantial nexus” prong was satisfied based on the “assumption” that the taxable event, streaming of videos and music, would occur in the City. In reaching this conclusion, the Court overlooked the constitutional requirement that a taxing jurisdiction must have sufficient nexus with the transaction or activity it seeks to tax. See, e.g., Quill Corp. v. North Dakota, 504 U.S. 298 (1992); Allied-Signal, Inc. v. Dir., Div. of Taxation, 504 U.S. 768 (1992).
Similar to its analysis of the “substantial nexus” prong, with respect to the “fair apportionment” prong of the Complete Auto test, following its finding that the amusement tax is similar to a sales tax (Ruling at 5), the Court conflated customer billing address with the taxable event at issue. Ruling at 6 (“The tax on streaming activity is based on the customer’s billing address, which reflects that the in-city activity and the primary use of the streaming services will take place at their residences. Thus, the tax meets the fairly apportioned prong of the Complete Auto”). Here, it is difficult to square the Court’s reasoning with US Supreme Court authority related to the fair apportionment prong for purposes of transactional taxes. See, e.g., Oklahoma Tax Comm’n v. Jefferson Lines, Inc., 514 U.S. 175 (1995) and Goldberg v. Sweet, 488 U.S. 252 (1989) (requiring a significant connection between the taxing state and the transaction subject to tax).
In concluding that the tax at issue was fairly related to the public benefits provided by the City in accordance with the Complete Auto test, the Court did not consider whether imposing the tax on streaming services enjoyed by a Chicago resident outside of the City (that would occur, for instance, when a Chicago resident streams music while travelling outside of the City) would satisfy this prong.
Additionally, in holding that tax on streaming services is not an extraterritorial tax in violation of the City’s home rule authority, the Court referred to the Illinois Supreme Court’s ruling in Hertz Corp v. City of Chicago, 2017 IL 119945 (Jan. 20, 2017) (see our prior coverage here). However, the Court seemed to overlook that the Supreme Court in Hertz found an improper exercise of the City’s home rule powers because the tax at issue was based on a presumption of use in the City by its residents, rather than actual evidence of use in the City, just like the circumstances before the Court with respect to the City’s attempt to tax streaming services used by City residents.
Plaintiffs will have 30 days from the date of entry of the Circuit Court’s Ruling to either seek reconsideration or appeal from the trial court’s ruling. An appeal is expected.

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