Tags: chicago | web | cloud | netflix | lexis nexis | streaming

Chicago Breaks Out a 'Cloud Tax' on Netflix, Web Services

By    |   Friday, 03 July 2015 02:24 PM

Chicago, looking to take back tax money it's been losing as people shift their media consumption to online services like Netflix and Spotify, has started a "cloud tax."

The new tax, actually two taxes targeting online databases and streaming entertainment services, went into effect earlier this week. It means that Chicago residents who use Netflix or LexisNexis, companies using cloud services, will be paying a 9 percent tax — a move that has many people concerned about how the city's tax will work, reports The Verge

Cloud services can be accessed anywhere in the country, but most taxes are local, and Chicago is using two recent rulings by its Department of Finance to devise the tax.

The first ruling covers "electronically delivered amusements" —  streaming media — while the other covers "nonpossessory computer leases" — or databases and computing platforms — with each taking an existing tax law and using it to extend the tax. Under the tax, an hour of such server time that costs, say, $100 in one part of Illinois would jump to $109 in Chicago.

Netflix is planning to pass the tax on to its Chicago customers, and a representative told The Verge that there are many other jurisdictions in the United States and around the world that "are trying to figure out ways to tax online services."

Many companies that use Web services are likely to move their servers, as well as their offices, out of Chicago. Most likely, streaming services will have to keep track of the taxes though billing addresses or IP tracking.

Michael Wynne, a partner in the law firm Reed Smith, say the taxes violate the Federal Telecommunications Act and 1998's Internet Tax Freedom Act.

"I could do that same activity of research using books or periodicals without being taxed," Wynne says. "So it does seem like I'm being picked on because I chose to do it online."

But tax supporters say it will allow Chicago to recoup taxes that used to come from video rental outlets and music stores, many of which have closed as online streaming takes hold.

Such taxes, though, could spell problems for the newly launched Apple Music or even Spotify's paid tier, as both charge fees from subscribers who hope to avoid advertising, and could therefore be hit by the taxes.

"There's no question that the city needs revenue and I can see where things are escaping the old tax base," said Wynne. "I think the objectionable part is that, instead of drafting new laws for that, we're simply stretching the old laws to fit."

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Chicago, looking to take back tax money it's been losing as people shift their media consumption to online services like Netflix and Spotify, has started a cloud tax.
chicago, web, cloud, netflix, lexis nexis, streaming
Friday, 03 July 2015 02:24 PM
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