Chicagoans Fight 9 Percent Netflix Tax

CHICAGO (CN) - Chicago's most recent attempt to close its budget gap with a tax on services like Netflix and Hulu is illegal, residents claim in court.

Several people are challenging the city and comptroller Dan Widawsky over his extension of a nine percent amusement tax to Internet-based streaming services for movies, music and games, which was announced in June. Their lawsuit says these are "services the city has never taxed before and which the city council has never authorized the finance department to tax."

The six Chicago residents, who are represented by the Liberty Justice Center, collectively use the streaming services Netflix, Amazon Prime, Xbox Live, Spotify and Hulu, and claim "their costs for these services have increased, or will imminently increase, by nine percent."

According to their complaint, Widawsky has "exceeded his authority" in implementing the tax because Chicago's municipal code does not "authorize the comptroller to impose new taxes that the city council has not authorized through a city ordinance."

Mayoral spokeswoman Elizabeth Langsdorf told reporters in July that the June finance department ruling was simply a clarification of the old law and meant to "ensure that city taxation is uniformly and fairly applied," according to a Chicago Tribune report.

But fair is exactly what the six Chicagoans say the ruling is not, accusing it of violating the Internet Tax Freedom Act that says a municipality cannot "impose multiple or discriminatory taxes on electronic commerce," according to their lawsuit.

The nine percent tax is applied only to streaming rentals, not online sales of the same media, and people who use membership services like Amazon Prime and Xbox Live will be charged the extra tax on things like free shipping and discounts that have nothing to do with amusement, the complaint states.

The lawsuit also claims that the city charges no taxes on live performances where the capacity of the venue is under 750 people, and a five percent tax on those over that number, making watching the same performance on a streaming service taxed at a higher rate of nine percent.

"The ruling thus forces plaintiffs to pay a higher tax rate if they choose to consume a musical, theatrical, or cultural performance through a streaming media service than if they choose to attend a performance in person," the complaint states. "In this way, the amusement tax, as interpreted and applied by the ruling, imposes an unlawful discriminatory tax on electronic commerce."

The city's budget deficit in 2015 was roughly $297 million, which ignores $550 million in contributions needed for police and fire pension funds, according to Crain's Chicago Business. Those payments are due in 2016.

The amusement tax expansion is expected to generate $12 million each year. Companies must begin tacking the tax onto their fees Sept. 1, according to the Chicago Tribune.

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