October 26, 2020

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October 26, 2020

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Circuit Court of Cook County Upholds City of Chicago’s Imposition of Amusement Tax on Internet-Based Streaming Services

On May 24, 2018, the Circuit Court of Cook County granted the City of Chicago’s Motion for Summary Judgment in the case captioned Labell v. City of Chicago, No. 15 CH 13399 (Ruling), affirming the City’s imposition of its amusement tax on internet-based streaming services.

City’s Amusement Tax and Amusement Tax Ruling #5

The City imposes a 9 percent tax on “admission fees or other charges paid for the privilege to enter, to witness, to view or to participate in such amusement. …” Mun. Code of Chi., tit. 4, ch. 4-156 (Code), § 4-156-020(A); see also id. § 4-156-010 (defining “amusement” in part as a performance or show for entertainment purposes, an entertainment or recreational activity offered for public participation and paid television programming). On June 9, 2015, the City Department of Finance (Department) issued Amusement Tax Ruling #5, taking the position that the amusement tax is imposed “not only [on] charges paid for the privilege to witness, view or participate in amusements in person but also [on] charges paid for the privilege to witness, view or participate in amusements that are delivered electronically [emphasis in original].” Amusement Tax Ruling #5, ¶ 8.

The Ruling sought to impose an amusement tax on subscription fees or per-event fees for the privilege of: (1) watching electronically delivered television, shows, movies or videos; (2) listening to electronically delivered music; and (3) participating in online games, provided the streamed content (i.e., movies, music, etc.) was delivered to a customer in the City. See id. ¶¶ 8, 10. The Ruling stated that “this means that the amusement tax will apply to customers whose residential street address or primary business street address is in Chicago, as reflected by their credit card billing address, zip code or other reliable information.” Id. ¶ 13. A copy of the City’s Amusement Tax Ruling #5 is linked here.

Ruling’s Procedural Background

As originally filed, Plaintiffs’ lawsuit asserted, among other challenges, that the Department’s issuance of Amusement Tax Ruling #5 exceeded the City’s authority by invalidly imposing a “new tax” on streaming content. After the lawsuit was filed, the City amended the amusement tax to incorporate the rules of the Illinois Mobile Telecommunications Sourcing Conformity Act (35 ILCS 638) to determine “which customers and charges are subject to the tax” on electronically delivered amusements. Code § 4-156-020(G.1). The Court subsequently granted the City’s motion to dismiss those counts of the complaint, finding that the amendment “to specifically include video streaming, audio streaming and online games delivered electronically to mobile devices” mooted Plaintiffs’ claim.

Basis of Ruling

In this Ruling, in rejecting Plaintiffs’ remaining challenges to imposition of the amusement tax on internet-based streaming services, the Court ignored key constitutional restrictions. In particular, the Court overlooked the fact that the City’s imposition of tax on electronically delivered amusements purports to tax activity occurring outside the City:

  • In the Court’s Commerce Clause analysis examining the test enunciated by the US Supreme Court in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), the Court concluded that the “substantial nexus” prong was satisfied based on the “assumption” that the taxable event, streaming of videos and music, would occur in the City. In reaching this conclusion, the Court overlooked the constitutional requirement that a taxing jurisdiction must have sufficient nexus with the transaction or activity it seeks to tax. See, e.g.Quill Corp. v. North Dakota, 504 U.S. 298 (1992); Allied-Signal, Inc. v. Dir., Div. of Taxation, 504 U.S. 768 (1992).
  • Similar to its analysis of the “substantial nexus” prong, with respect to the “fair apportionment” prong of the Complete Auto test, following its finding that the amusement tax is similar to a sales tax (Ruling at 5), the Court conflated customer billing address with the taxable event at issue. Ruling at 6 (“The tax on streaming activity is based on the customer’s billing address, which reflects that the in-city activity and the primary use of the streaming services will take place at their residences. Thus, the tax meets the fairly apportioned prong of the Complete Auto”). Here, it is difficult to square the Court’s reasoning with US Supreme Court authority related to the fair apportionment prong for purposes of transactional taxes. See, e.g.Oklahoma Tax Comm’n v. Jefferson Lines, Inc., 514 U.S. 175 (1995) and Goldberg v. Sweet, 488 U.S. 252 (1989) (requiring a significant connection between the taxing state and the transaction subject to tax).
  • In concluding that the tax at issue was fairly related to the public benefits provided by the City in accordance with the Complete Auto test, the Court did not consider whether imposing the tax on streaming services enjoyed by a Chicago resident outside of the City (that would occur, for instance, when a Chicago resident streams music while travelling outside of the City) would satisfy this prong.
  • Additionally, in holding that tax on streaming services is not an extraterritorial tax in violation of the City’s home rule authority, the Court referred to the Illinois Supreme Court’s ruling in Hertz Corp v. City of Chicago, 2017 IL 119945 (Jan. 20, 2017) (see our prior coverage here). However, the Court seemed to overlook that the Supreme Court in Hertz found an improper exercise of the City’s home rule powers because the tax at issue was based on a presumption of use in the City by its residents, rather than actual evidence of use in the City, just like the circumstances before the Court with respect to the City’s attempt to tax streaming services used by City residents.

Plaintiffs will have 30 days from the date of entry of the Circuit Court’s Ruling to either seek reconsideration or appeal from the trial court’s ruling. An appeal is expected.

© 2020 McDermott Will & EmeryNational Law Review, Volume VIII, Number 162



About this Author

Mary Kay McCalla Martire, McDermott, local tax disputes lawyer, Internal Audits Attorney

Mary Kay McCalla Martire focuses her practice on state and local tax disputes. She helps clients with audits, tax-related litigation, letter rulings and settlement conferences. Mary Kay has experience resolving disputes involving income, sales and use, utility and telecommunications taxes, as well as premium and retaliatory tax.

Mary Kay has an extensive litigation background in state and federal court, as well as administrative tribunals. She has particular experience in the defense of qui tam (whistleblower) claims filed in the state...

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 McDermott Will Emery Law Firm, Lauren A. Ferrante, Tax Attorney

Lauren A. Ferrante is an associate in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office. She focuses her practice on state and local taxation. Lauren represents taxpayers at all stages of state and local controversy disputes, at the audit, administrative, and judicial levels. She also assists taxpayers with planning, transactional, and compliance matters with respect to various state and local taxes, including income and franchise taxes, sales and use taxes, gross receipts taxes, and other miscellaneous taxes.

Lauren regularly speaks on state and local tax matters and has authored publications on nexus, procedure, and state tax false claims act issues.