Taxpayers Challenge Chicago’s ‘Netflix Tax’

Published October 15, 2015

With the City of Chicago’s Finance Department having approved an expansion of the city’s “amusement tax,” a 9 percent excise tax on any “exhibition, performance, presentation or show for entertainment purposes,” Chicago taxpayers are suing city lawmakers, claiming the new tax on streaming audio and services, such as Netflix, exceeds the Finance Department’s legal authority.

The lawsuit, filed by six Chicago residents and Netflix subscribers in September, also claims the tax violates federal law by taxing digital goods and services. The Internet Tax Freedom Act (ITFA), passed as part of the national government’s budget, prohibits multiple or discriminatory taxes on electronic commerce and online access.

Bypassing Voters

Clark Packard, a policy and government affairs manager at the National Taxpayers Union, says Chicago lawmakers bypassed voters when approving the tax.

“The case presents two foundational questions with far-ranging implications,” Packard said. “The first question is, what type of governmental system do we live in, or do residents of the City of Chicago live in? The important thing to know is the City Council didn’t vote on the tax; it was just an administrative ruling. This highlights the lack of democratic accountability.”

‘Discriminatory’ Tax

Packard says the Netflix tax may also violate federal law.

“Congress passed what’s known as the Internet Tax Freedom Act in 1998, on a wide bipartisan basis, and it was reauthorized in 2014 and signed by President [Barack] Obama,” Packard said. “One of the things ITFA did was keep state and local governments from enacting discriminatory, internet-only taxes.

“In the example of Netflix, Netflix can be streamed through the Internet to your TV, or you can also get content in DVD form delivered in the mail,” Packard said. “Because the tax only applies to content delivered through the Internet, as opposed to through the mail, plaintiffs are saying that violates ITFA.”

‘Fiddling With The Rules’

Ted Lafferty, a tax and fiscal policy analyst for the American Legislative Exchange Council, says new taxes of any kind should not be created by unelected bureaucrats.

“If this is going to happen, it should really be done by the City Council of Chicago through the legislative process, not through the bureaucracy fiddling with the rules,” Lafferty said. “From a rule-of-law perspective, whenever you have a major change in tax policy—which this does amount to—[I] think it’s very important that goes through the proper channels and it is done through the proper legislative process.”

Elizabeth BeShears ([email protected]) writes from Trussville, Alabama.

Internet Info:

Matthew G. McLaughlin, “The Internet Tax Freedom Act: Congress Takes A Byte Out Of The Net,” Catholic University Law Review: