Taxes

Live in Chicago? Your Netflix Bill Is About to Go Up Thanks to This New Tax

Two new tax rules are intended to help close the city's massive budget gap.

|


For years, the city of Chicago has run a giant budget deficit, primarily as a result of ballooning education sector pensions. If you live in the Windy City and watch House of Cards, you'll soon be helping to pick up the tab.

Starting in a few months, city residents who subscribe to online media streaming services like Netflix, Hulu, or Spotify, will be pitching in to help fill the city's budget hole. A related ruling will raise the cost of other online computing services, like Lexis Nexis. Basically, if it's a service that steadily connects your computer to an outside server, the tax hits it. Non-streaming downloads won't be subject to the tax.

Prices for those online services will go up 9 percent, thanks to the city's decision to expand its existing amusement tax, as well as a personal property lease transaction tax, according to the Chicago Tribune. Payments of the tax are due no later than September, but may begin even sooner.

Netflix appears to be passively accepting the new tax, at least for moment, and preparing to make it a regular part of the tab. "We will be adding it to the cost we charge subscribers," a spokesperson for the company told Ars Technica. "Jurisdictions around the world, including the US, are trying to figure out ways to tax online services. This is one approach."

City officials claim, somewhat absurdly, that the ruling isn't an expansion of the taxes. Rather, it's just a clarification of how those taxes work in order to make those taxes consistent across the board. ("The City's new rulings clarify the application of taxes to digital goods to ensure consistency and eliminate revenue gaps," a city spokesperson said in a statement to Ars and other outlets.)  Conveniently enough for the city's overstretched budget, it's a clarification that's expected to raise an addition $12 million annually. 

One potential worry this raises is that this sort of small-ball, intensely localized revenue-boosting gimmickry will become the norm across the country, which would inevitably create all sorts of legal and pricing headaches for Internet services, most of which aren't bound geographically. That, in turn, is likely to lead to businesses gaming the rules' boundaries. As Russell Brandom suggests at The Verge, the most plausible immediate "effect is simply moving servers outside of the city limits — and, where possible, the offices that use them."

In the meantime, however, there's already some question about whether the city is within its legal rights to expand—er, "clarify"—the taxes this way. Both Ars and The Verge point to a client alert post by lawyers at ReedSmith calling the twin rulings "staggering in their breadth" and suggesting that "both rulings run afoul of provisions in the Federal Telecommunications Act, the Internet Tax Freedom Act, and federal and Illinois constitutional limits on taxation." In other words, the city's latest desperate attempt to help paper over the huge problems that public pension obligations have caused its budget may be illegal as well as irritating.