An Illinois state appeals court recently upheld Chicago’s tax on streaming services, commonly referred to as the “Netflix tax.”

Four years ago, Chicago expanded its 9% amusement tax to include “charges paid for the privilege to witness, view, or participate in amusements that are delivered electronically,” which led to a flurry of lawsuits from subscribers to services like Netflix, Hulu, and Spotify.

In addition to claiming that the tax violates the federal Internet Tax Freedom Act (ITFA), plaintiffs called the tax an extraterritorial exercise of the city’s taxing authorities because it is based on a customer’s billing address, not where the customer consumes the service.

The court found no violations of the IFTA, which generally prohibits jurisdictions from imposing inequitable taxes on various forms of electronic commerce. Furthermore, the court found that the tax had no unconstitutional extraterritorial effect.

According to the Cook County Record:

The panel said the plaintiffs failed to shut down the city’s justification for taxing residents who stream, as opposed to anyone who streams while in the city. Reyes wrote the city’s argument of administrative convenience is “logical,” and also agreed with the city that streaming services and other kinds of electronic amusement devices, such as a jukebox or video arcade game, can be taxed differently.

…

“Here, there is a real and substantial difference between residents and nonresidents of Chicago; those who reside in Chicago have residential or primary business addresses that are in Chicago, nonresidents do not. The City then uses these addresses to determine the patron’s primary place of use of the streaming services,” Reyes wrote.  “…This classification bears a reasonable relationship to the object of the amusement tax, which is to generate revenue for the City.”

Although sales tax rates, rules, and regulations change frequently, sales tax law is often slow to react to major economic shifts. More and more, sales of services outpace the sales of goods, but most services remain exempt from state sales and use taxes. Similarly, though digital goods and services such as software, digital music, and video streaming services are making up an ever-larger portion of the market, laws often fail to address them.

More states are exploring the possibility of a tax on digital services, especially because the U.S. Supreme Court last year cleared a path for states to collect sales and use tax from purchases made online.

Useful Links

Cook County Record: Appeals Court Upholds Chicago’s 9%TRax on Netflix, Other Streaming Services

Previous Conduit Street Coverage: SCOTUS Opens Door To State Taxation of Internet, “Remote” Sales