Chicago Taxes the Cloud

 In News

Chicago PostcardJULY 2, 2015 • Like most major cities, Chicago has an amusement tax levied on concerts, movie exhibition and sporting events within city boundaries. In a first for the Unites States, according to The Chicago Tribune, the city Finance Department has ruled in favor of an extension of the 9% amusement tax and the personal property lease transaction tax to include digital services. The former now covers charges to stream video and music content, plus charges paid for the privilege of participating in online games. Professional data services such as LexisNexis fall under the purview of the personal property lease transaction tax. The levy extensions are aimed squarely at entertainment and business data services, not digital content intended to be consumed offline. Netflix has already announced that its streaming fees will be increased 9%. The city projects additional annual revenue of $12 million thanks to the ruling.

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Impact: What a doozy the City of Chicago has wrought… and potentially a bookkeeping nightmare. Purchasing a song via iTunes would not be taxed yet subscribing to Pandora or Spotify would be taxed. Similarly buying a copy of Wasteland 2 via Steam would not be taxed, yet paying a subscription to play World of Warcraft would incur the 9% levy. At face value, every single freemium microtransaction qualifies for taxation, as well as subscribing to Xbox Live and PlayStation Plus. Then there are the gray areas. Playing League of Legends would not be taxed because there are no charges to participate, but buying a copy of Guild Wars 2 might incur the 9% hit since the MMO can only be participated in online. And what about single-player games that are required by the publisher to be connected to the internet for cloud processing or DRM needs? A lot of these situations will take time and effort to sort out for one metropolitan market, which could add greatly to the cost of games as a service. The data provider is charged with collecting the tax based on customer billing addresses, which means intrusive tracking of consumer data. Game publishers with a physical presence in Chicago – development studios or server farms, for instance – will find it difficult to avoid complying with the levy. Consumers potentially have an easier route to avoid the tax by changing their billing address to suburbs outside city limits. Chicago may be the first to widen their tax net to include the cloud, but we expect other municipalities will follow the Windy City’s lead. Can state governments be far behind? Governments have been keen for years to find a way to draw revenue from the internet, and with the growth in cloud services, may have found the perfect target. Next up… the lawyers.

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