As the Internet has grown in popularity over time, many consumers have found it a cost-effective way to shop and be entertained. In many cases, taxes that apply to other activities in daily life aren’t collected when that activity is completed through the medium of the Internet.
Over the years, many states and localities have made efforts to tax aspects of the Internet. Many states require Amazon to collect sales tax when residents complete purchases through the site. Now, the city of Chicago is looking to collect taxes when consumers use cloud devices and streaming services.
What is Chicago’s Cloud Tax?
Rather than being a technically new tax, Chicago’s cloud tax extends the interpretation of existing taxes on amusement and on personal property leasing. The idea is that if a consumer actively uses devices and services that offer amusement, and/or that offer them access to services that they “lease” by paying a monthly fee, they will need to pay a 9% tax on those items.
Many expect that Chicago will be challenged on this tax because so many people use these services today, and won’t appreciate being taxed for their use. The city’s reasoning for expanding this tax is based on a case from 1989, in which courts decided that it was permissible for Chicago to tax access to the LexisNexis database.
At the time of the 1989 ruling, access to LexisNexis mostly took place through public terminals, like those at libraries, rather than through privately-owned computers in people’s homes. This is where the personal property leasing tax comes in. Even though people are accessing streaming and cloud services from their own terminals, they are accessing information that they don’t actually own. And since the 1989 ruling focused on the database, the city of Chicago is focusing on the information itself, and not the means of accessing it.
The result is that consumers that pay for specific services, such as Hulu, Netflix, Spotify and other streaming and cloud services, will have to pay the tax. For consumers that have been dropping services like satellite and cable in favor of streaming, as well as those that stream music or use paid services to store and access movies and games in the cloud, this could add to costs and be more expensive.
There are also business implications for those that have a presence in the city (even if that presence is only a salesperson). Some startup companies are hoping to see an exemption, since many of the startups that Chicago has been trying to court in recent years use streaming and cloud services as important parts of their operations.
Because Chicago has been trying to court these types of businesses and startups, the city appears to be trying to discover if there is a way to exempt certain companies from the tax, based on their revenue. Consumers, however, might not get the option to look for exemptions until after the tax has been challenged in court — and only if a court rules that Chicago can’t charge the tax.