‘Netflix Tax’ Challenged In Court

Chicago’s attempts to put a nine percent tax on streaming services such as Netflix are to be challenged in court. The suit claims both the tax and the process by which it was introduced are unlawful.

The tax, which applies to streaming service subscribers with a Chicago address, was not a new measure in itself. Instead it was an extension of an existing amusement tax which already applied to spectactors at events such as sports and entertainment shows.

The city comptroller (the executive in charge of financial matters for the city government) extended the tax to include subscription-based streaming services such as Netflix, Spotify and XBox Live.

The lawsuit was filed this week by seven Chicago residents, backed by the Liberty Justice Center, a group which says its goal is ” constitutional restraints on government power and protections for individual rights.”

The plaintiffs make two main arguments against the tax on streaming. The first says that live entertainment and online streaming are so different that it’s not a reasonable extension of the existing measures. In turn, the lawsuit argues, that means the tax on streaming should have required a fresh vote by city politicians.

The second argument is that the measure violates the federal Internet Tax Freedom Act, which bars city or state taxes that discriminate against online services. According to the lawsuit there are two elements of discrimination here. One is that while Netflix’s streaming packages are taxed in Chicago, the tax doesn’t apply to renting DVDs through the mail.

The second is that some live performances of music and theatre are exempt from the amusement tax if the venue seats below 750 people, while events in larger buildings deemed as cultural performances are taxed at five percent rather than nine percent. According to the lawsuit, the discrimination comes because if a recording of such a performance was put on a streaming service, it (or rather the relevant subscription fee) would be taxed at the full nine percent.

Chicago officials say they believe the extension and application of the tax to streaming is legal and that they intend to contest the lawsuit.