A City of Chicago ruling which expanded its ‘amusement tax’, better known as the ‘cloud tax’ and which went into effect this month, is expected to boost the city’s coffers by $12 million annually.
The controversial tax applies to services such as movies, music, online games and TV shows delivered by electronic means to customers within Chicago city limits. The 9 per cent initial tax does not apply to sales of these items.
Netflix Inc., one of the cloud based services most impacted by the cash grab, said they would add the tax to its subscriber charges. There has been no comment as yet from other online companies which stream entertainment and are also affected.
The ruling also affects “cloud computing, cloud services, hosted environment, software as a service, platform as a service or infrastructure as a service.”
International law firm ReedSmith released a statement this week saying the City may not have the authority to charge the tax, but did not indicate if it will challenge the moves.
The statement read
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. As a consequence, the time to look at the impact of these rulings is now, before mounting exposure and interest accrual makes challenging these positions economically infeasible.
Thus far most companies have kept quiet on the issue though they may be readying legal challenges and do not want to risk exposing their positions before filing lawsuits.
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