Facts
Chicago imposes a 9 percent amusement tax on admissions fees and other charges for entering, viewing, or participating in “amusements.”1 On June 9, 2015, the Comptroller of Chicago issued Amusement Tax Ruling #5 (applicable to periods on or after September 1, 2015) (the Ruling), extending taxable amusements to include “charges paid for the privilege to witness, view or participate in amusements that are delivered electronically” such as video, music, and online games (collectively, streaming services).2 The tax applies to taxpayers “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.”3
Procedural history
Following issuance of the Ruling, a group of taxpayers filed suit against the City on December 17, 2015, alleging that (i) the Comptroller exceeded his authority by issuing the Ruling and by extending the City’s amusement tax to streaming services, (ii) application of the amusement tax to streaming services violates the Internet Tax Freedom Act (ITFA), (iii) the application of the amusement tax to streaming services violates the Uniformity Clause of the Illinois Constitution, (iv) the application of the amusement tax to streaming services violates the Commerce Clause of the U.S. Constitution, and (v) the tax, as applied to streaming services, exceeds the city’s home rule authority.
On July 21, 2016, as a result of the City Council amending the Amusement Tax Ordinance4 to adopt the Comptroller’s earlier Ruling, the Court granted the City’s Motion to Dismiss the taxpayers’ claims that the Comptroller had exceeded his authority, as moot.5
Determination of the Circuit Court
As to the Plaintiffs’ remaining allegations, the Court first ruled that the amusement tax did not violate the ITFA, as live performances, which are subject to tax at a reduced rate, cannot be equated to music and movies streamed online – “streaming services allow users to stream several movies and shows in any location during any time, while a live performance is enjoyed at a venue in the moment.”6 The Court used this same reasoning to dispose of the taxpayers’ arguments that the amusement tax violated the Illinois Uniformity Clause, finding that streaming services are sufficiently different than live performances and jukeboxes to withstand different treatment under the Uniformity Clause, and that limiting the tax to persons with a Chicago address is reasonable.
The Court also found the taxpayers’ Commerce Clause arguments unpersuasive. Under Complete Auto, a tax comports with the Commerce Clause if it: “(i) is applied to the activity with a substantial nexus with the taxing state; (ii) is fairly apportioned; (iii) does not discriminate against interstate commerce; and (iv) is fairly related to the services provided by the state.”7 The Court noted that limiting the tax to persons having billing addresses in the City was sufficient to satisfy both the substantial nexus prong and the fair apportionment prong as there was a clear connection to the City and only a limited possibility of multiple taxation. The Court also found that the tax was fairly related to the services the City provided to Chicago residents, and the Plaintiffs did not argue that the tax discriminated against interstate commerce. Therefore, the Court found that the amusement tax as applied to streaming services did not violate the Commerce Clause.
In addition, the Court determined that the tax did not violate the City’s home rule authority by taxing extraterritorial activities. While the Plaintiffs argued that sourcing streaming services based on the taxpayer’s credit card billing address would undoubtedly lead to some instances in which streaming services received outside the City were subject to the tax, the Court found the sourcing methodology reasonable, because it was based on the Illinois Mobile Sourcing Act, which uses substantially the same methodology for sourcing mobile telecommunications services.8
Reed Smith insight
The Plaintiffs may appeal this decision to the appellate court. Another taxpayer challenge to the amusement tax on streaming services, Entertainment Software Assoc. v. City of Chicago et al., was voluntarily dismissed by the Circuit Court of Cook County on April 26, 2018.9
- See Chi. Mun. Code 4-156-010 for the definition of “amusement.”
- Amusement Tax Ruling #5, ¶ 8.
- Id. ¶ 13.
- Chi. Mun. Code 4-156 et seq.
- Labell et al. v. City of Chicago et al., Cir. Ct. Cook County, Case No. 2015-CH-13399 (July 21, 2016). On October 12, 2016, Plaintiffs filed a second amended complaint to preserve their arguments on appeal that the Comptroller had exceeded his authority in issuing the Ruling.
- Labell et al., Case No. 2015-CH-13399.
- Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977).
- 35 ILCS 638/20.
- Case No. 2017-L-050509.
Client Alert 2018-128
