Chicago streaming video tax does not violate federal and state law

by Eversheds Sutherland (US) LLP

Eversheds Sutherland (US) LLP

On May 24, 2018, the Circuit Court of Cook County upheld the City of Chicago’s imposition of its amusement tax on streaming services.1 The plaintiffs in the case—consumers of streaming services—are expected to appeal the decision.


Chicago imposes its 9% amusement tax on admission fees or other charges paid for the privilege to enter, witness, view or participate in an “amusement.”2 Taxable amusements are any: (1) exhibition, performance, presentation or show for entertainment purposes; (2) entertainment or recreational activity offered for public participation or on a membership or other basis; or (3) paid television programming.3

On June 9, 2015, the Chicago Department of Finance issued Amusement Tax Ruling #5.4 The Department took the position that amusements are subject to tax when they are delivered electronically. The Chicago City Council subsequently amended its ordinance so that the application of the amusement tax to sales of streaming services was consistent with the Ruling.

Labell v. City of Chicago:

On September 9, 2015, a group of Chicago customers of streaming services sued the City of Chicago, asserting that the amusement tax: (1) violates the federal Internet Tax Freedom Act; (2) violates the Commerce Clause of the United States Constitution; (3) violates the Uniformity Clause of the Illinois Constitution; and (4) exceeds Chicago’s home rule authority by taxing services occurring outside of Chicago. On May 24, 2018—more than 2 years later—the Circuit Court of Cook County granted Chicago’s motion for summary judgment, upholding the tax.

Eversheds Sutherland Observation: The plaintiffs’ appeal of the Cook County Circuit Court’s ruling will be to the Appellate Court of Illinois. The plaintiffs may appeal not just the court’s May 24, 2018, decision, but also its July 21, 2016, Order,5 when the court held that the City Comptroller did not exceed his authority by adopting Ruling #5, which applied the amusement tax to streaming services. In November 2015 (five months after issuing Ruling #5), the City Council amended the Amusement Tax Ordinance to apply the amusement tax to streaming services. However, it is notable that the City Council made this change by amending a sourcing provision, rather than an imposition provision or the definition of “amusement.”6 The Illinois Appellate Court may determine that while the tax does not violate federal or state law, the Comptroller did not have the authority to issue the ruling.

Internet Tax Freedom Act:

The court rejected the plaintiffs’ argument that the amusement tax is a discriminatory tax on users of streaming services, in violation of the Internet Tax Freedom Act. The plaintiffs contested that the tax discriminated against streaming services because: (1) Chicago instead imposed a separate $150 per year fee on automatic amusement machines; and (2) Chicago imposed the amusement tax on certain live performances at a lower rate than on streaming services.

The court determined that the amusement tax did not violate the Internet Tax Freedom Act’s ban on discriminatory taxes because streaming services are dissimilar from automatic amusement machines and live performances. Unlike streaming services, automatic amusement machines (such as jukeboxes) are stationary devices owned by businesses, shared among all of the establishment’s customers, and operated with coins on a per-use basis. Further, according to the court, it would be administratively inconvenient for businesses to charge a 9% tax on the small amount of money customers pay to play individual songs or games with coins. Live performances can only be “enjoyed at a venue in the moment[,]” but “on-line streaming services allow users to stream several movies and shows in any location during any time[.]” And unlike streaming services, live performances foster tourism and business in Chicago. 

Commerce Clause:

The court rejected the plaintiffs’ arguments that the amusement tax violated the Commerce Clause of the United States Constitution because: (1) there was no substantial nexus between Chicago and the streaming services; (2) the tax was not externally consistent; and (3) the tax was not fairly related to the services provided.

First, the court concluded that the substantial nexus prong of the Complete Auto Transit test was satisfied because the tax is applied to customers who receive the services in Chicago, and “it is a fair assumption that the taxpayers’ residence will be their primary places of streaming.”

Second, the court rejected the plaintiffs’ argument that the tax was not externally consistent under Complete Auto Transit’s fair apportionment prong because Chicago taxes use that occurs outside of Chicago. The external consistency test asks whether Chicago has “taxed that portion of revenues from the interstate activity which reasonably reflects the . . . in-city component of the activity being taxed.” The amusement tax applies to only consumers whose billing address is in Chicago. While another jurisdiction could impose tax based on usage outside of Chicago, resulting in multiple taxation, the court held that “this limited possibility of multiple taxation is not sufficient to invalidate the ordinance based on external consistency.” The court held that taxing the streaming service based on the customer’s billing address “reflects that the in-city activity and the primary use of the streaming services will take place at their residences” and satisfies the fair apportionment prong of the Complete Auto Transit test.

Third, the court held that the tax satisfied Complete Auto Transit’s prong requiring a tax to be fairly related to the services provided by Chicago because of the “wide range of benefits provided to the taxpayer,” such as police and fire protection and the use of public roads and mass transit.

Uniformity Clause:

The court held that the amusement tax did not violate the Uniformity Clause of the Illinois Constitution. The Uniformity Clause requires that “[i]n any law classifying the subjects or objects of non-property taxes or fees, the classes shall be reasonable and the subjects and objects within each class shall be taxed uniformly. Exemptions, deductions, credits, refunds and other allowances shall be reasonable.”7 To survive scrutiny under the Uniformity Clause, the classification must: (1) be based on a real and substantial difference between the people taxed and those not taxed; and (2) bear some reasonable relationship to the object of the legislation or to public policy. 

The plaintiffs argued that the tax failed to satisfy the Uniformity Clause because: (1) it treats consumers of streaming services differently based on billing address, not based on where the streaming services are used, while other amusements are taxed only if they take place in the city; (2) it subjects streaming services to greater taxation than automatic amusement machines; and (3) it taxes streaming performances at a higher rate than certain in-person performances.

But the court held that there are real and substantial differences in each instance. First, the customers in question primarily used their streaming services in the city, while Chicago did not attempt to tax customers without a Chicago billing address. Second, automatic amusement devices cannot be moved, but streaming services can be accessed from anywhere within Chicago. Third, live performances, rather than streaming services, “advance the cultural interest in the community.” And the tax classifications bore a reasonable relation to the object of the legislation or to public policy for administrative convenience. 

Home Rule Authority:

Finally, the court rejected the plaintiffs’ argument that the amusement tax exceeded Chicago’s home rule authority by taxing streaming services outside of Chicago. Chicago sources sales by referring to an Illinois response to a federal law that sources the sales of wireless telephone services that can be used in multiple jurisdictions—the Mobile Telecommunications Sourcing Conformity Act. The court concluded that the Act expressly provided the City the authority to tax streaming services using the same scenario. Even if Chicago did not have the express authority to do so, it had implied authority. The court held that it was reasonable for Chicago to use this Act to source sales of streaming services by telecommunications companies, as well as other businesses. Further, the tax was not extraterritorial because: (1) the businesses that stream services to residents with Chicago billing addresses are within the taxing jurisdiction of Chicago; and (2) while the streaming services may be used outside of Chicago, the customers’ main use of the services is primarily within Chicago and the customers are being billed to their Chicago addresses.

Eversheds Sutherland Observation: Labell v. City of Chicago is the main case contesting the Chicago amusement tax’s application to streaming services. During the pendency of the litigation, Chicago continued an aggressive outreach program targeted at streaming service providers not remitting the amusement tax. Now that Chicago has received a court ruling that the tax does not violate state and federal law, taxpayers should expect that Chicago will aggressively step up their enforcement of the tax.


1Opinion and Order, Labell v. City of Chicago, Case No. 15 CH 13399 (Cook Cnty. Cir. Ct. May 24, 2018).
2 Chicago, Ill. Mun. Code § 4-156-020.A. 
3 Chicago, Ill. Mun. Code § 4-156-010.
4 Amusement Tax Ruling #5, Electronically Delivered Amusements, Chicago Dep’t of Fin. (Jun. 9, 2015).
5Opinion and Order, Labell v. City of Chicago, Case No. 15 CH 13399 (Cook Cnty. Cir. Ct. Jul. 21, 2016).
6See Chicago, Ill. Mun. Code § 4-156-020.G.1. 
7 Ill. Const. art. IX, § 2.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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