Over the last few years, state and local governments have drastically increased their efforts to tax streaming services, including online video, music, and gaming services, especially as consumers cut the cord on cable television and rely more on the internet for entertainment.
Digital content creators, consumers, and platforms alike should closely evaluate whether their products and/or services may be subject to various state and local taxes and what may be done to mitigate any exposure from tax assessments and penalties.
The City of Chicago’s significant (and sudden) expansion of its amusement tax offers the best example of these ever-changing tax laws and their impact on digital creators and consumers.
The City of Chicago’s Amusement Tax
Like many localities in Illinois, the City of Chicago imposes a 9% “amusement tax” on admission fees or other charges paid by patrons for “the privilege to enter, to witness, to view or to participate” in “amusements” within the City. Chicago, Ill. Muni. Code § 4-156-020.A.
As the name suggests, the amusement tax was historically largely imposed on live theater, music concerts, sporting matches, circuses, amusement parks, and other performances or entertainment activities occurring within the City.
Beginning in 2015, the City of Chicago drastically expanded its definition of “amusement” to include performances and entertainment that are “delivered electronically” to residents in the City, such as by streaming to a patron’s television, computer, table, cellphone, or other electronic device. Chicago Dep’t of Fin., Amusement Tax Ruling #5, Electronically Delivered Amusements, (Jun. 9, 2015). Most notably, this expansive change was done through an administrative ruling by the Chicago Department of Finance, rather than a legislative process subject to debate and deliberation.
In 2019, the Illinois Appellate Court upheld the City’s broadened application of its amusement tax against various legal challenges. Labell v. City of Chicago, 2019 IL App (1st) 181379, 147 N.E.3d 732.
In 2022, Apple dropped its suit challenging the tax, and instead sought a settlement with the city to collect the tax on a number of its streaming products beginning in September 2022. See Apple Inc. v. The City of Chicago, No. 2018-L-050514 (Ill.Cir.Ct. Mar. 11, 2022).
Other entertainment companies have also settled their disputes over the City’s amusement tax. Sony Corp. paid $1.2 million to Chicago in 2019, while Eventbrite, an event-planning company, paid $799,000 back taxes.
Conclusion
We expect state and local governments to continue seeking new and novel methods to broaden the tax base and secure additional tax revenue from electronic and streaming entertainment. These approaches will vary state by state and even by locality.
The entertainment industry should monitor these efforts and engage with state and local policymakers to shape fair and equitable tax reforms. Creators, consumers, and platforms of digital and online products should examine their products and determine whether they are subject to any state or local taxes currently or may be in the future.
