Chicago Rages Against The Future With 9% Tax On Netflix, Spotify And Other Streaming Services

from the tax-the-future dept

Thu, Jul 2nd 2015 12:44pm — Timothy Geigner

Almost exactly three years ago, Mike wrote up a post that discussed Planet Money pulling together five economists with differing political views to see what they could all agree on. The result was several policy ideas that appeared to transcend politics if economics was the driving motivator instead of any kind of partisanship. The whole post is awesome, and has influenced my thoughts on economic policy and taxes to a large degree, but I came away from it with one general concept firmly in mind: tax what you want to discourage, don't tax what you want to encourage, and never tax innovation or the future.

And now my home city is taxing the future. You see, the city of Chicago recently announced that it will extend its 9% amusement tax to online streaming services and cloud computing.

A ruling by Chicago’s Department of Finance allows the city to add an extra nine percent tax onto “electronically delivered amusements” and “nonpossessory computer leases.” In an odd combination, buying a subscription to streaming media, such as Netflix or Spotify, would qualify, as would using a cloud computing platform, such as Amazon Web Services. Each would be subject to 9% tax; Chicago is the first major American city to levy a tax on either streaming services or cloud computing services.

Amusement taxes in and of themselves generally violate the concept I highlighted in the opening. After all, if you're a municipality, taxing fun is essentially saying you want less fun. But what makes this re-write of the amusement tax already on the books silly is that it is purely a money-grab. Here's what happened: the amusement tax in Chicago worked primarily to collect revenue from book stores, music stores and movie rental stores, which are obviously becoming increasingly in short supply as consumers move to online stores and streaming services like Netflix and Spotify and Amazon for all of the above. This is actually a good thing from a public interest standpoint for a variety of reasons: less pollution from physical products, more efficiency in the marketplace, the opening of more creative outlets for members of the city, and more access to more content from more places and devices, meaning a more robust economic marketplace. The future, in other words, although increasingly the present as well. And Chicago wants to tax all this, effectively discouraging its use, in order to collect an additional $12 million a year.

Chicago, mind you, is in the hole for roughly one hundred times that amount.

Cities with amusement taxes have lost revenue as more people forgo book stores, record shops and video rental stores in place of online outlets. But $12 million isn’t going to be much more than a drop of water in the bucket of the city’s $1 billion operating shortfall.

Fighting the future doesn't even yield much of a reward, so why do it at all? Don't tax what you want to encourage and tax what you want to discourage. This makes it look like the city of Chicago really wants a tax policy to make the city operate like it was 1995.

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Filed Under: chicago, entertainment, internet, streaming, tax
Companies: netflix, spotify

56 Comments

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Anonymous Coward, 2 Jul 2015 @ 12:46pm

I question the legality of such a tax.
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- John Fenderson (profile), 2 Jul 2015 @ 1:10pm
  
  Re:
  I question all excise taxes where the money raised isn't being used to mitigate the costs to society caused by the thing being taxed.
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- PRMan, 2 Jul 2015 @ 1:14pm
  
  Re:
  The whole reason for taxes in America given by Ben Franklin originally was for business owners to all pay together to sweep the streets so that people would want to walk around downtown and frequent their shops, giving them more money.
  
  It was about the greater good and rising all boats.
  
  Even most sales taxes make sense, since the city has to pay for roads and traffic lights and sweeping and (in Chicago) plowing snow.
  
  But this is just plain and simple theft. Chicago is not contributing a single thing to help Netflix, Amazon or anyone. It's just a hamfisted cash grab from the city of thugs.
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  - Anonymous Coward, 2 Jul 2015 @ 1:39pm
    
    Re: Re:
    If Amazon sends you physical goods then they are still using the roads and other infrastructure in Chicago (assuming that's where you have it sent), so it does make sense to allow Chicago to tax it in that case.
    
    But online streaming on the other hand, definitely agree, Chicago doesn't even own any Internet infrastructure. And if they did, such a tax would basically be a net neutrality violation that discourages people from using netflix.
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    - Michael Long (profile), 2 Jul 2015 @ 3:04pm
      
      Re: Re: Re:
      Local businesses need to pay local and state sales taxes because they use and depend on roads, water, gas, police, fire departments, and other local infrastructure. Internet-based businesses do not.
      
      Now, Amazon does, in fact, ship things to you... via trucks owned by shipping companies that pay local taxes, and via trucks licensed locally, and fueled locally.
      
      IOW, that local FedEx warehouse pays property taxes and income taxes. The truck driving down your street is licensed and pays excise taxes. The gas in it is taxed. And so on.
      
      In short, those trucks that are still "using the roads" have already paid to do so, and taxing them twice over makes no sense at all.
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    - tqk (profile), 4 Jul 2015 @ 8:48pm
      
      Re: Re: Re:
      If Amazon sends you physical goods then they are still using the roads and other infrastructure in Chicago (assuming that's where you have it sent), so it does make sense to allow Chicago to tax it in that case.
      
      No. Roads and transportation are basic infrastructure which everyone expects to be there and working. Why ding Amazon specifically for using basic infrastructure which our taxes paid to be there? Do you work for AT&T?
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- Anonymous Coward, 3 Jul 2015 @ 2:08pm
  
  Grosjean v. American Press Company?
  If only "amusing" media are affected, isn't it illegal under Grosjean v. American Press Company? It is a tax determined based on the type of speech. Presumably a Netflix/Spotify/etc. subscription that only allowed access to non-amusing media (like documentaries and lectures) would be exempt. Offering such a subscription might be a good way to establish standing.
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Roger Strong (profile), 2 Jul 2015 @ 12:50pm

Is that raging against the future, or happily accepting it?
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Anonymous Coward, 2 Jul 2015 @ 12:55pm

This will push more people off of their couches and into the streets so that the cops can shake them down for more of the '1 BILLION Dollar' (said like Dr Evil said 1 million) shortfall.
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Baron von Robber, 2 Jul 2015 @ 12:56pm

"In an odd combination, buying a subscription to streaming media, such as Netflix or Spotify, would qualify, as would using a cloud computing platform, such as Amazon Web Services."

What if you are a DVD only subscriber?
Does looking at YouTube count as amusement?
Would using a VPN out of Chicago circumvent this?
What if my friend subscribes to Netflix in LA, but then uses Skype to show it to me?

This is gonna be fun. :)
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- Anonymous Coward, 2 Jul 2015 @ 1:07pm
  
  Re:
  Does looking at YouTube count as amusement?
  
  Yes, but 9% of a subscription of 0 is easily afforded. This could encourage more people to use it.
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- PaulT (profile), 3 Jul 2015 @ 12:02am
  
  Re:
  "Would using a VPN out of Chicago circumvent this?"
  
  Or, what about people from outside the country using a Chicago IP on their VPN? What about someone who travels to Chicago for a week, watches some Netflix there and then goes somewhere else? Will this affect them, or will it affect only people with Chicago billing addresses? If the latter, what if they leave to work somewhere else for 6 months, do they still get taxed even if they don't use it in Chicago?
  
  Yep, there's a lot of fun questions.
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  - Michael Long (profile), 3 Jul 2015 @ 7:06am
    
    Re: Re:
    No fun questions whatsoever. Is the billing address in Chicago? How about the card used to pay for the services? If so, done and done.
    
    Which doesn't stop it -- especially the internet services part -- from being exceedingly stupid.
    
    Worse, taxing internet services only impacts smaller businesses and startups, as any larger company or corporation will simply setup things so that any services paid for are done elsewhere.
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    - PaulT (profile), 3 Jul 2015 @ 7:26am
      
      Re: Re: Re:
      "No fun questions whatsoever. Is the billing address in Chicago? How about the card used to pay for the services? If so, done and done."
      
      So... someone in Chicago who doesn't want to pay the tax can just use a different billing address or a virtual credit card (such as the one I use to pay services that require a US credit card from outside the US), and they avoid the tax?
      
      Nobody's going to go to those lengths to avoid a single Netflix bill, perhaps, but that setup isn't hard to get around if you want to (technically, of course, legally may be another matter). Your other points, I agree with.
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Baron von Robber, 2 Jul 2015 @ 1:06pm

Dear Nero,

Your taxation of the games has made the poorer Romans, of which there are a majority, very upset. They are no longer distracted from the real problems of Rome and are looking at you. I recommend lifting the tax, more games and more bread.

-your friend, Cicero.

PS. How's mum?
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Anonymous Coward, 2 Jul 2015 @ 1:07pm

Why are you all even offering alternative "whatif" scenarios? Just work around it ..
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- Anonymous Coward, 2 Jul 2015 @ 2:51pm
  
  Re:
  Or just move out of the city into the surrounding burbs or somewhere else entirely. Which is already happening with how bad the current taxes are there let alone this new one.
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Anonymous Coward, 2 Jul 2015 @ 1:19pm

I have to give you some credit here, as this is the first techdirt article I've come across with no redeeming qualities. It attempts to vilify extending a tax on music sales to include music sales over the internet by somehow equating the tax to a discouragement tax. But even a cursory examination reveals that Chicago's amusement tax isn't a discouragement tax. It was created to raise revenue, and interpreting this ruling through some other lens is disingenuous at best.

If you want to talk about taxing the future, learn to recognize the difference between creating new taxes targeted at the future, and pointing out the obvious fact that taxes on music do not contain exceptions for companies deemed sufficiently innovative.
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- Anonymous Coward, 2 Jul 2015 @ 2:04pm
  
  Re:
  But even a cursory examination reveals that Chicago's amusement tax isn't a discouragement tax
  
  Sure it is. All consumption taxes are discouragement taxes, insofar as they discourage consumption of the taxed good. In some cases, the tax may be broad-based enough (e.g., general sales tax) to have no specific target of the discouragement. In this case, the amusement tax discourages the consumption of the taxed amusements, and it is now covering online amusements as well.
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- PaulT (profile), 3 Jul 2015 @ 12:13am
  
  Re:
  "It attempts to vilify extending a tax on music sales to include music sales over the internet"
  
  Read it again. This isn't about sales. It's about streaming (rentals).
  
  If you're going to complain about other misinterpreting the facts, you might as well get your own straight to begin with.
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Anonymous Coward, 2 Jul 2015 @ 1:26pm

So how are they going to collect this tax? How are they going to know who has a Netflix subscription?sirely Netflix won't be volunteering this information.
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- Anonymous Coward, 2 Jul 2015 @ 1:33pm
  
  Re:
  When I first heard about this I assumed they would get ISPs to tack it on to their bills. Alot of others seem to think it will be on your Netflix bill or something but it makes much more sense to just get the ISPs to cooperate the same way phone companies cooperated on the Federal Telephone Excise Tax.
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  - JoeCool (profile), 2 Jul 2015 @ 1:41pm
    
    Re: Re:
    ISP: Sorry, but due to the new FCC Network Neutrality rules, we're just a dumb pipe and have no idea where packets come from or go to.
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  - James Burkhardt (profile), 2 Jul 2015 @ 3:39pm
    
    Re: Re:
    A general 9% tax on your internet bill =/= a 9% tax on online amusements. Even if your ISP determined you vist netflix, they have no idea what tier of service you get, or if there are multiple netflix accounts in a home (because some of the people are tenants with separate Netflix). Nor could your ISP collect a 9% tax on your itunes purchases, or 72 hour digital movie rentals or your purchase of books at amazon. Collecting at the ISP level would not work.
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  - PaulT (profile), 3 Jul 2015 @ 12:15am
    
    Re: Re:
    Not true. The ISP should not be privy to which services you're using. A tax on your subscription with the service provider would make more sense than trying to force ISPs to monitor your connection and guess what you're using (something that might not be possible if you're using a VPN or other security method)
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    - nasch (profile), 5 Jul 2015 @ 2:23pm
      
      Re: Re: Re:
      A tax on your subscription with the service provider would make more sense than trying to force ISPs to monitor your connection and guess what you're using.
      
      Would the city of Chicago have any authority to force Netflix to collect this tax for them?
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Spaceman Spiff (profile), 2 Jul 2015 @ 1:36pm

Chicago can't spell
VPN? Yes, I view my Netflix in Bumfark Iowa Rahm! Not in Chicago!
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David, 2 Jul 2015 @ 1:43pm

This isn't just about Netflix
Remember that this impact Amazon services (AWS and Prime), Microsoft Azure, Google Cloud, Rackspace, Blue Host, Heroku, GoDaddy, etc. So there are many businesses that just suddenly got an almost 10% hit in their infrastructure. If I was a tech company in Chicago that had a lot of Amazon Web Services infrastructure, this sudden 9% could squeeze a lot of margin. If I'm a big cloud user, being in Chicago puts my business at a disadvantage.
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- Michael Long (profile), 2 Jul 2015 @ 3:06pm
  
  Re: This isn't just about Netflix
  Can you say "shortsighted" and "stupid" boys and girls?
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  - PaulT (profile), 3 Jul 2015 @ 12:17am
    
    Re: Re: This isn't just about Netflix
    I can say "someone thought this only affected entertainment services so didn't properly consider businesses", but yours is probably just a shorter way of saying that.
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Anonymous Coward, 2 Jul 2015 @ 1:44pm

The opening premise of this post kinda falls apard if you go back and read the cited and admired article from 2012.

This tax is right in line with the kinds recomended by those five economists because it's a consumption tax.
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- nasch (profile), 5 Jul 2015 @ 2:29pm
  
  Re:
  This tax is right in line with the kinds recomended by those five economists because it's a consumption tax.
  
  It doesn't really say all consumption taxes are good, it suggests replacing income tax with a (general) consumption tax*. Levying additional consumption taxes on specific things that you don't want to discourage is not generally a good idea.
  
  * what's interesting is that consumption isn't a bad thing we want to discourage, it's overall a good thing we want to encourage - after all if people didn't spend money, the economy would crumble. It's just that discouraging consumption is less bad than discouraging income (according to these economists at least).
  [ link to this | view in chronology ]
Anonymous Coward, 2 Jul 2015 @ 1:46pm

Tech drain is coming
The cloud computing tax is the bigger issue here.

Companies are going to be looking for office space outside the city limits to avoid taxes on their AWS usage.
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Anonymous Coward, 2 Jul 2015 @ 1:55pm

Call it what it is!
This is a "legal protection racket" plain and simple. SOP for Chicago. Who would dare to expect any better treatment. I propose a new slogan for Chicago "Chicago the next Detroit".
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Brazilian Guy, 2 Jul 2015 @ 2:33pm

Since those Companies aren't incorporated in Chicago, neither the payment processors, and those sales usually are considered as being made on their address, how will a Municipality impose taxes on it? I know US has a weird tax system, but this seems both hardly legal and unlikely to work.

Maybe those Companies will call for ISDS clauses?
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- NaBUru38 (profile), 5 Jul 2015 @ 5:15pm
  
  Re:
  Can a local government add sales taxes on top of the sales taxes of the U.S. state?
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  - Michael Long (profile), 5 Jul 2015 @ 6:42pm
    
    Re: Re:
    Certainly. State tax, county tax, city and municipal taxes. You can even define special tax zones within a city, something commonly done to build yet another sports stadium or arena financed with tax dollars.
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Anonymous Coward, 2 Jul 2015 @ 3:29pm

Chicago is nothing more than the second most corrupt city in the world. The first being Washington DC.
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Nope, 2 Jul 2015 @ 3:52pm

Ha
All you idiots who support the government getting involved in day to day activities like gay marriage just need to shut up. You asked for more government involvement, you got it. Let that be a lesson to you.
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- Anonymous Coward, 2 Jul 2015 @ 4:18pm
  
  Re: Ha
  Marriage is marriage, the states got involved that's why someone had to step in to clarify that argument there's no difference ,comparing apples to apples is a fail.
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  - TDR, 2 Jul 2015 @ 5:04pm
    
    Re: Re: Ha
    And yet the judges split virtually 50/50 on the vote, and two of them should have recused themselves due to massive conflicts of interest - they were both very liberal, part of the LGBT lobby, and had officiated such ceremonies in the past. Besides, according to the Constitution, the Supreme Court has no right to make the law. Only Congress can create laws, and they can still nullify this decision if they choose to. And many states are likely to not implement it regardless.
    [ link to this | view in chronology ]
    - Anonymous Coward, 2 Jul 2015 @ 5:27pm
      
      Re: Re: Re: Ha
      Speaking of recusal, it's odd that no one expects a gun owning judge to recuse themselves over a second admendment case. And yet you expect a judge who performed a certain type of lawful ceremony to drop out. Care to explain the difference? As to the rest of your nonsense, good luck with that.
      [ link to this | view in chronology ]
    - ottermaton (profile), 5 Jul 2015 @ 10:50am
      
      Re: Re: Re: Ha
      And yet the judges split virtually 50/50 on the vote
      
      So ...? There's a reason there's always an odd number of Justices: so there can never be a tie. Saying that there was "almost a tie" is utterly meaningless. *Many* Supreme Court decisions are 5-4.
      
      they were both very liberal
      
      So they're not allowed to have an opinion? Or just an opinion that doesn't agree with yours?
      
      Besides, according to the Constitution, the Supreme Court has no right to make the law
      
      Well, thank goodness they didn't then! What they did do, however, is making a ruling that making laws discriminating against gay marriage is unconstitutional. There's a BIG difference.
      
      [Congress] can still nullify this decision if they choose to.
      
      Yes, I suppose they could, but that would be a hugely uphill battle, considering only troglodytes consider this an issue worth arguing about.
      
      Just 10 years ago it was common to hear nitwits saying things like, "[Y]ou would let everybody get married who want to get married. You want to marry a turtle, you can." (Bill O'Reilly, one of my favorites). We've come a long way in such a short time. Even O'Reilly himself is now saying things like, "All right, the gay marriage thing, I don't feel that strongly about it one way or the other."
      
      If that troglodyte can evolve can't you?
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      - Michael Long (profile), 5 Jul 2015 @ 2:09pm
        
        Re: Re: Re: Re: Ha
        "Even O'Reilly himself is now saying things like, "All right, the gay marriage thing, I don't feel that strongly about it one way or the other." If that troglodyte can evolve can't you?"
        
        He didn't evolve. He just finds it advantageous to not stick his neck out. Rest assured, if O'Reilly thought the wind was in his favor, we'd still be hearing about turtles.
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- nasch (profile), 5 Jul 2015 @ 2:32pm
  
  Re: Ha
  All you idiots who support the government getting involved in day to day activities like gay marriage just need to shut up. You asked for more government involvement, you got it.
  
  So to you, the government letting all couples get married is "more government involvement"? And when the government is deciding who is and who is not allowed to get married, that's less government involvement? Just want to make sure I have it straight.
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spacy (profile), 2 Jul 2015 @ 6:24pm

Divesting
This is more nickle and diming the populace. The cheap gas dividend is long gone. The problem of how to divest trillions of dollars from the Baby Boomers' pockets is being solved one more tax, one more fee, one more price price increase at a time.
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Anonymous Coward, 3 Jul 2015 @ 5:29am

The result was several policy ideas that appeared to transcend politics if economics was the driving motivator instead of any kind of partisanship.

So, preferring one pseudoscience over another.
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Anonymous Coward, 3 Jul 2015 @ 5:54am

Taxes don't kill innovation; metered connections do.
Grow up people,

Over here in eu-land, every transaction is taxed.

Specified essential items (basic food and drink) are taxed lower, the rest in the high rate around the 20-25% mark.

Does it hinder the future? No. People flock to streaming services because they think it's cool and people have an unmetered flat rate internet connection. (or they pay for an expensive 3/4G connection to stream).

Things that hinder the future are lack of competition and lack of net neutrality.
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- nasch (profile), 5 Jul 2015 @ 2:34pm
  
  Re: Taxes don't kill innovation; metered connections do.
  Specified essential items (basic food and drink) are taxed lower, the rest in the high rate around the 20-25% mark.
  
  In other words, there is no special tax on things like streaming services.
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jlaprise (profile), 3 Jul 2015 @ 8:34am

Shooting Chicago in the Foot
This action is all the more puzzling because Chicago has made significant investments in creating a local Internet incubator economy. Its high density, higher education population, corporate headquarters, and new Goose Island high tech zone are a good start but this tax is demanding eggs from the golden gosling.
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Andrew D. Todd, 3 Jul 2015 @ 8:46am

A Dubious Tax, in Search of Dubious Revenue
"Use Taxes" are generally uncollectable in practice, save on certain large purchases such as automobiles. Most consumers do not even maintain the accounting information necessary to compute such taxes on the ordinary run of small purchases. Amazon, at least, is profoundly unhelpful about providing consolidated information. If you cannot provide the man in the street with something like a Form 1099, you cannot expect him to pay tax on something. I do not know whether Netflix has nexus in Chicago, or might want to acquire nexus. Netflix would presumably like to install cache-servers in telco switch-rooms if it can do so on a net-neutral basis. Netflix has historically had arrangements to pick up physical disks at main post offices, repack them, and send them out again. On inquiry, I find that Chicago's general rate of sales tax is only one-and-a-half percent, in addition to the state of Illinois' six-and-a-half percent. A nine-percent rate, admittedly on items exempted from state sales tax, would therefore be constitutionally suspect, levied on a class of purchases which are, by their nature, out-of-state, and therefore an unlawful import tax or tariff.

In practice, it seems to be difficult to spend large sums of money on the internet. Markets are too efficient, and publicly disclosed prices reflect this. The market price for movies and music is going to be set by services like Amazon Prime. Television is artificially inflated because cable-providers resist selling internet access without television. As I see it, it is only a matter of time before the Venezuelans start broadcasting television from space (*), in sublime indifference to American copyrights. At that point, Netflix will probably go bankrupt like the various music services, unable to span the gap between the competing expectations of consumers and movie studios. The eventual tendency of the internet is to become free. Real money tends to involve much more inherently local goods and services such as food.

(*) Broadcasting satellites are becoming cheaper than even the most minimal kind of navy or air force, considered as a means of projecting "national presence."

Chicago's basic problem is that the vast majority of greater Chicago's population lives in the suburbs, or even in other states, and cannot be effectively taxed. Like every other big city, Chicago has vast tracts of derelict land, populated by street gangs. That isn't going to be addressed by an internet sales tax. Chicago's principal product is poverty, and that isn't something you can sell on the market.
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Anonymous Coward, 3 Jul 2015 @ 10:13am

So a whopping $.72 per month? Oh the humanity!!!
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- Michael Long (profile), 3 Jul 2015 @ 10:19am
  
  Re:
  The 9% tax on cloud-based infrastructure is the larger issue.
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- PaulT (profile), 4 Jul 2015 @ 2:28am
  
  Re:
  On one type of service, yes.
  
  Now, are you one of those ACs who's honest enough to read the actual arguments made against this (tax on cloud infrastructure, which could run into huge extra costs for Chicago businesses), or are you one of those dishonest fools who finds the quickest way to wave away criticism and pretend there's no real issue?
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Anonymous Coward, 3 Jul 2015 @ 4:43pm

Just copying Australia
This is also happening in Australia to help Rupert Murdoch's local pay TV empire defeat the new competition from those that supply content over the internet. Murdoch wasn't happy in just neutering the National Broadband Network's fibre to the home by supporting the current LNP Federal government's already obsolete fibre to the node & corroded copper for the final mile thereby restricting the broadband speeds to less than 25Mb/s.
So now we have a great big new tax on the future, thanks Anthony John Abbott, or Captain Clownshoes as our 'Dubya' clone is known.
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Rekrul, 4 Jul 2015 @ 12:15am

Fighting the future doesn't even yield much of a reward, so why do it at all? Don't tax what you want to encourage and tax what you want to discourage. This makes it look like the city of Chicago really wants a tax policy to make the city operate like it was 1995.

The politicians are doing for the same reason that the scorpion stung the turtle; They can't change their nature, even if it means their own death (even if such "death" is political).
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