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Cash-strapped Chicago slaps CLOUD TAX on Netflix, Spotify etc users

Streaming services to carry 9% fee ... but is it legal?

New changes to tax law in the city of Chicago have effectively raised the prices of online streaming and cloud services in the Windy City, beginning on Wednesday.

The Chicago Tribune reports that an update to the city's "amusement tax" adds a 9 per cent tax to Chicagoans' subscriptions to streaming services like Netflix and Spotify, and indeed to any activity that constitutes "watching electronically delivered television shows, movies or videos," "listening to electronically delivered music," or "participating in games, on-line or otherwise."

Chicago residents who prefer to download their music rather than stream it, on the other hand, are in luck: the change to the tax law doesn't apply to them.

A second new city ordinance adds a 9 per cent tax to "nonpossessory computer leases," a legalese term for when people pay to access online services such as legal research databases, real estate listings, or cloud storage and other services.

In June, national law firm Reed Smith described the new laws as "staggering in their breadth," saying Chicago is attempting to "tax the 'Cloud' more directly and comprehensibly than any other US jurisdiction."

"With these two rulings, the [City of Chicago] has expanded the scope of its tax ordinances to their absolute limit, if not further," the lawyers wrote. "If any state or local governments were wondering how to tax transactions occurring in the Cloud when legislative authority for such taxation is absent, the Department has just sketched a roadmap."

Presumably, this means both rules will face legal challenges. Reed Smith speculates that the changes may run afoul of provisions of the Federal Telecommunications Act, the Internet Tax Freedom Act, and various limits on taxation imposed by both the federal government and the State of Illinois.

A city spokeswoman told the Chicago Tribune that the tax changes are expected to bring the city $12m per year in new revenue, but even that seems unlikely. The taxes will be levied based on Chicago billing addresses, so all a cloud subscriber would need to do to avoid them would be to get a post-office box in a different jurisdiction. Businesses could likewise subscribe to services from out-of-town subsidiary offices to dodge the tax. ®

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