A new interpretation of Chicago’s amusement tax by Mayor Rahm Emanuel’s administration has officially taken effect as of July 1, and, as a result, starting in September, consumers in the city will be required to pay 9% more for their subscriptions to streaming online services like Netflix and Spotify.

The new tax, which has been referred to as a “cloud tax”, comes not through legislative action but by way of a ruling by Chicago’s Department of Finance, which re-interpreted an existing amusement tax on tickets to concerts and sporting events as applying to streaming online subscription services used within the city. The 9% rate increase is also expected to affect subscriptions to online games. However, sales of downloads of movies, games, music, and other content will not be taxed under the ruling.

The city expects the June ruling to bring in about $12 million each year in the latest example of Mayor Rahm Emanuel relying on boosting various smaller fees and fines to try to help close the city’s yawning budget hole,” noted the Chicago Tribune.

Russell Brandom of the technology magazine The Verge explained, “Chicago’s new tax is actually composed of two recent rulings made by the city’s Department of Finance: one covering ‘electronically delivered amusements’ and another covering ‘nonpossessory computer leases.’” He added, “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.

A client alert letter by the law firm Reed Smith criticized the ruling and said, “There are strong arguments that both rulings run afoul of provisions in the Federal Telecommunications Act, the Internet Tax Freedom Act, and federal and Illinois constitutional limits on taxation. In addition, the rulings gloss over many details of applicable federal law and how telecommunications and computer networks operate, and assume the simplest factual scenarios that do not realistically comport with how many providers and their customers transact business.

The Department of Finance’s ruling indicated 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.” Though the amusement tax is a tax on consumers, it is expected that service providers will collect the tax through the billing process. Active enforcement of the provision has been delayed until September of this year to grant companies time to make preparatory system changes.

In an environment in which technologies and emerging industries evolve quickly, the City periodically issues rulings that clarify the application of existing laws to these technologies and industries. These two rulings are consistent with the City’s current tax laws and are not an expansion of the laws,” read a statement by Elizabeth Langsdorf, a spokesperson for Mayor Rahm Emanuel’s administration.

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