NetChoice is First to Challenge Chicago’s Social Media Amusement Tax

SMAT Background: As discussed in our January 5, 2026 Client Alert, Chicago enacted the SMAT effective January 1 of this year. The SMAT applies to for-profit “social media businesses” that collect consumer data from more than 100,000 Chicago consumers in a calendar year. The tax is imposed at a rate of $0.50 per Chicago consumer above the 100,000 threshold, calculated monthly, with payments due by the 15th of the following month.

Complaint Detail: NetChoice, a District of Columbia nonprofit trade association representing businesses engaged in electronic commerce, filed a complaint for declaratory judgment and injunctive relief in the Circuit Court of Cook County. The complaint advances four principal theories challenging the validity of the SMAT:

1. Federal Statutory Preemption Under the Internet Tax Freedom Act. The SMAT is preempted by the Internet Tax Freedom Act, which prohibits state and local governments from imposing discriminatory taxes on electronic commerce. Because the SMAT targets online social media businesses without imposing comparable obligations on similar offline services, NetChoice argues the SMAT is expressly preempted.
2. Illinois Constitutional Prohibition on Unauthorized Occupation Taxes. The SMAT violates Article VII, Section 6(e) of the Illinois Constitution because it constitutes an unauthorized occupation tax, which is a tax imposed on the business of operating a social media website, not authorized by the General Assembly. NetChoice also contends that the General Assembly’s authorization to tax “amusements” does not extend to the SMAT because (i) social media is used for many non-amusement purposes, (ii) the tax is measured by data collection rather than actual consumer engagement with content, and (iii) a social media website is not a physical “place” of amusement.
3. First Amendment Violations. The complaint asserts that the SMAT imposes a discriminatory tax burden on protected speech. NetChoice argues that selective taxation of the media poses a “particular danger of abuse” and triggers heightened scrutiny. The complaint identifies the SMAT’s exemptions for “bona fide news website[s]” and “single-purpose community groups for education or public safety” as content-based distinctions that render the tax presumptively unconstitutional.
4. Violation of the Commerce Clause’s Fair Apportionment Requirement. The SMAT violates the Commerce Clause because it is not fairly apportioned. NetChoice argues that the SMAT fails the internal consistency test: if every jurisdiction imposed an identical tax, multiple taxation would result, disadvantaging interstate commerce. For example, a student domiciled in New York who attends a Chicago university could be considered a “resident” of both jurisdictions, resulting in double taxation.

Implications & Recommendations:

The filing introduces substantial uncertainty for businesses currently subject to the SMAT and those that have already paid the tax. The SMAT is vulnerable to being found unlawful for the reasons raised in the NetChoice complaint, as well as others, such as due process concerns for vagueness and violation of the Illinois uniformity clause. Affected businesses should:

1. Consider whether to file protective refund claims and pay taxes under protest to preserve their rights pending the outcome of this litigation.  (Notably, violations of the SMAT carry significant penalties, including fines of not less than $2,500 nor more than $10,000 for each offense, assessed daily).
2. Monitor for guidance from the City of Chicago regarding tax administration during the pendency of litigation and consult with tax counsel to understand potential exposure and strategic options.
3. Consider filing their own declaratory judgment action to get clarification from a court as to whether the SMAT applies to their business.

Client Alert 2026-063