Eversheds Sutherland (US) LLP

On September 30, 2019, in Labell v. City of Chicago, the Illinois Appellate Court upheld the City of Chicago’s imposition of its amusement tax on streaming video, streaming audio and online gaming services.1


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 Ruling concluded that amusements are subject to tax when they are delivered electronically, such as by streaming. In November 2015, the Chicago City Council subsequently amended its ordinance to use the Illinois Mobile Telecommunications Sourcing Conformity Act (MTSCA) to source sales of “amusements that are delivered electronically to mobile devices, as in the case of video streaming, audio streaming, and on-line games” to the place of primary use.5

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.”

Uniformity Clause

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….”

1 Labell v. City of Chicago, 2019 IL App (1st) 181379.
2 Chicago, Ill. Mun. Code § 4-156-020.A.
3 Chicago, Ill. Mun. Code § 4-156-010.
4Amusement Tax Ruling #5, Electronically Delivered Amusements, Chicago Dep’t of Fin. (Jun. 9, 2015).
5 Chicago, Ill. Mun. Code § 4-156-020.G.1.
6 See Opinion and Order, Labell v. City of Chicago, Case No. 15 CH 13399 (Cook Cnty. Cir. Ct. May 24, 2018).
7 35 ILCS 638/20(b). 
8 35 ILCS 638/10.
9 For a nonproperty tax classification to survive Uniformity Clause scrutiny, it 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.  Marks v. Vanderventer, 2015 IL 116226, ¶ 19.
10 See 47 U.S.C. § 151 (note), §§ 1101(a)(2) (“No State or political subdivision thereof shall impose any of the following taxes: … Multiple or discriminatory taxes on electronic commerce.”), 1105(2)(A)(ii) (defining the term “discriminatory tax”).
11 Chicago, Ill. Mun. Code § 4-156-020.D(1).
12 Chicago, Ill. Mun. Code § 4-156-160.
13Opinion and Order, Labell v. City of Chicago, Case No. 15 CH 13399 (Cook Cnty. Cir. Ct. Jul. 21, 2016).
14 See Chicago, Ill. Mun. Code § 4-156-020.G.1; Appellants’ Brief, Labell v. City of Chicago, No. 1-18-1379, at *13 n.2 (Dec. 5, 2018). (“Since Count VII of the Second Amended Complaint challenges the City’s constitutional authority to impose the amusement tax on streaming services, Plaintiffs are not appealing the dismissal of Counts I, II, and III, which challenge the authority of Amusement Tax Ruling #5 to impose a new tax on streaming video, audio, and gaming services without action by the City Council.”).
15 Appellants’ Brief, Labell v. City of Chicago, No. 1-18-1379, at *13 n.2 (Dec. 5, 2018).

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