CHICAGO (CN) — Chicago residents scored a victory in court Thursday when a judge ruled that three counts of their class-action lawsuit against the city’s tax on streaming media services like Netflix can proceed.
The city started collecting its 9 percent amusement tax on Internet services such as Netflix, Hulu, Spotify, Amazon Prime and Xbox Live last September, the same month the plaintiffs filed suit in Cook County Circuit Court.
The tax is projected to bring in $12 million a year.
Judge Carl Anthony Walker on Thursday granted the city’s motion to dismiss the first three counts of the lawsuit, which challenged its comptroller’s authority to impose a new tax.
Walker said in his opinion that since the city amended the amusement tax in November 2015, “whether the comptroller exceeded his authority by adopting the ruling is moot.”
However, Walker found that the residents’ complaint “alleges sufficient facts to state a cause of action” for the other three counts — violation of the Internet Tax Freedom Act, or ITFA, as well as violations of the Illinois Constitution’s Uniformity Clause and the U.S. Constitution’s Commerce Clause.
The judge denied a motion to dismiss those claims.
The residents claim Chicago violated the ITFA, which says a municipality cannot impose “multiple or discriminatory taxes on electronic commerce.”
They also say the city is attempting to tax services that may not even be used inside its boundaries.
At a June hearing on the city’s motion to dismiss the lawsuit, the plaintiffs’ attorney Jeffrey Schwab of the Liberty Justice Center said live concerts are not taxed at the same rate as streaming services, a clear violation of the ITFA.
Schwab added that “if you have a mobile device, you can use Internet services anywhere,” despite the tax being based on billing address — meaning Chicago residents would be taxed for things they didn’t even do inside Chicago.
The city, he said, “cannot tax things outside its jurisdiction.”
City attorney Weston Hanscom argued at the June hearing that although 50 years ago “there was no question where the venue was” where amusements took place, “technology has developed” and the city is merely playing catch up.
The law “does not prohibit taxing products just because they use the Internet,” Hanscom added.
“It’s excellent that the judge didn’t dismiss the case on its merits,” Schwab told Courthouse News on Thursday. “We’re very happy about that.”
Chicago’s legal department did not immediately respond to an emailed request for comment Thursday.
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