Labell v. City of Chicago
On September 9, 2015, a group of Chicago streaming services customers sued the City of Chicago, asserting that the amusement tax: (1) exceeded Chicago’s home rule authority by taxing services occurring outside of Chicago; (2) violated the Uniformity Clause of the Illinois Constitution; and (3) violated the federal Internet Tax Freedom Act (ITFA). On September 30, 2019, the Illinois Appellate Court upheld the tax, affirming the Circuit Court of Cook County’s May 24, 2018 decision.6
Home Rule Authority
The court rejected the plaintiffs’ argument that the amusement tax on streaming services exceeded Chicago’s home rule authority because it effectively taxed activities that occur outside of Chicago.
Plaintiffs asserted that the amusement tax had an unconstitutional extraterritorial effect because Chicago applied the tax to any customer who provides a Chicago billing address, regardless of whether that customer actually uses the streaming services in Chicago.
Ultimately, the court held that the Ruling does not have an extraterritorial effect. The court approved the use of the MTSCA for the amusement tax on streaming services. The MTSCA allows for taxation by the jurisdiction encompassing the customer’s “place of primary use” of the service.7 The place of primary use is:
the street address representative of where the customer’s use of the mobile telecommunications service primarily occurs, which must be:
(i) the residential street address or the primary business street address of the customer…8
The MTSCA prevented the amusement tax from having an unconstitutional extraterritorial effect, presumably even when the streaming services are delivered by means other than a mobile telecommunications service, like Wi-Fi.
But the court did limit the Ruling in one respect: the court would not permit the imposition of the tax where the primary place of use is based only on a customer’s Chicago billing address. The Ruling had indicated that a customer’s Chicago address is “reflected by their credit card billing address, zip code or other reliable information.” It was “unreasonable” for the Department to state that “it is appropriate to utilize a customer’s billing address to determine residency….” The billing address language is not in either the MTSCA or the amusement tax ordinance. Further, the court noted that, “[w]hile there are certainly instances where a customer’s residential address is the same as his or her billing address that is not always the case. Indeed, a billing address is merely the address where a customer wishes his or her bill to be forwarded.”
The court rejected the plaintiffs’ argument that the amusement tax violated the Uniformity Clause because of being applied differently to: (1) residents and nonresidents of Chicago; (2) automatic amusement devices (i.e., video machines, jukeboxes, and pinball machines) and similar streaming services; and (3) live cultural performances and similar streaming services.9
First, the court held that the tax does not violate the Uniformity Clause on the basis that Chicago residents must pay the tax while nonresidents do not, despite both purchasing the same streaming services. The plaintiffs failed to meet their burden to persuade the court that Chicago’s justification for different treatment is insufficient. Here, there is a real and substantial difference: only Chicago residents have residential or primary business addresses in Chicago. Because streaming products lack a physical situs, Chicago argued that it must presume that a customer’s residential or business address is the primary place where streaming occurs. This classification has a reasonable relationship to the purpose of the amusement tax: the generation of revenue for Chicago. Collecting tax based on such address is administratively convenient.
Second, the court held that subjecting automatic amusement devices to an annual $150 tax, rather than the amusement tax, does not violate the Uniformity Clause. There is a real and substantial difference between automatic amusement devices and streaming services. Automatic amusement devices are for use by the public for a limited duration and solely available onsite during business hours. However, streaming services are primarily used privately for an unlimited amount of time and at any time of the day. Also, the difference in tax systems had the rational basis of administrative convenience.
Third, on procedural grounds, the court declined to determine whether the exemption for certain live cultural performances, based on audience capacity, violates the Uniformity Clause. On this issue, the plaintiffs’ brief violated Illinois Supreme Court Rule 341(h)(7) because the plaintiffs failed to support their arguments with authority. Thus, the plaintiffs “forfeit[ed] review” of the issue.
Internet Tax Freedom Act
The court rejected the plaintiffs’ argument that the amusement tax on streaming services discriminated against electronic commerce and violated ITFA.10 ITFA prohibits Chicago from imposing taxes at a different rate on services provided over the internet than on transactions involving similar services provided through other means. The plaintiffs contested that the tax discriminated against streaming services because: (1) Chicago instead imposed a separate annual $150 per year tax on automatic amusement machines;11 and (2) Chicago exempted from the amusement tax certain live cultural performances.12
The court determined that the amusement tax did not violate ITFA’s prohibition on discriminatory taxes on electronic commerce. The court noted that the plaintiffs’ ITFA arguments were “essentially the same” as their Uniformity Clause arguments and the plaintiffs had failed to cite to any authority to show that live cultural performances are similar to streaming services. Because the court determined that streaming services are not the same as automatic amusement devices and live cultural performances, it held that a discussion of potential discrimination under ITFA was not warranted.
The Arguments Left Unheard
The plaintiffs limited their arguments before the Illinois Appellate Court, opting not to argue that: (1) the City Comptroller exceeded his authority by adopting Ruling #5; (2) the tax violates the Commerce Clause of the U.S. Constitution; or (3) the streaming services at issue were not amusements subject to the tax.
First, the Cook County Circuit Court held, in a July 21, 2016 Order on a motion to dismiss,13 that the question of whether the Comptroller had the authority to issue the Ruling to tax electronically delivered amusements was moot because of the November 2015 amusement tax ordinance amendment. But, note that the City Council made this change by amending a sourcing provision, rather than an imposition provision or the definition of “amusement.”14
Second, the Cook County Circuit Court held in its May 24, 2018 decision that the tax did not violate the Commerce Clause. The plaintiffs opted not to pursue this argument “because of the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018), which overturned Quill Corp. v. North Dakota, 504 U.S. 298 (1992), on which [the argument] relied.”15
Third, the court did not analyze whether the streaming services at issue were the types of services to be subject to the amusement tax. The court expressly noted, “Plaintiffs do not dispute that streaming services are amusements which are subject to tax….”