The city of Chicago has recently announced that they will begin targeting online databases and streaming entertainment services with a new “cloud tax.” This new tax will affect users of online streaming service such as Netflix and Spotify.
The new tax is composed of two recent ruling made by the city of Chicago’s Department of Finance. The first, covers “electronically delivered amusements” and the second covers “nonpossessory computer leases.” These rulings are essentially extensions on existing laws to include an extra 9 percent tax on certain types of online services. It is assumed that first of these ruling will affect services such as Netflix and Spotify and the second will affect services such as Amazon Web Services or Lexis Nexis.
Consumers of such services should not worry just yet about increased payments, as Netflix has already begun making arrangements to add the tax to the cost charged to its Chicago customers. This means that while the tax is technically levied upon customers of these services, the companies are likely to actually carry the burden of the tax.
This new “cloud tax” is likely to be just the beginning and online streaming services recognize that they need to prepare for this to be a trend utilized by more areas across the country in the future. As these massive online streaming services have taken vast entertainment resources and moved them online, it has made it a challenge for cities that have previously relied on tax from the sale of these entertainment services at local businesses. The “cloud tax” is a move to fight back against the loss in tax revenue due to the online streaming services.
Many have already voiced their displeasure with this new tax. After the announcement was made, Michael Wynne argued that the tax violates the Federal Telecommunications Act and the Internet Tax Freedom Act, intended to prevent discrimination against services delivered over the internet. In his response, Wynne stated “I could do that same activity of research using books or periodicals without being tax, so it seems like I’m being picked on because I chose to do it online.”
This “cloud tax” is clearly a response by cash-strapped cities to the continuing loss of tax revenue from sales previously made in brick and mortar stores. Online services are swallowing up business that use to be conducted within the city but is now happening online. Before the rise of these services, people would consume entertainment at video rental outlets and music stores – which paid local property taxes along with municipal sales taxes – and now these entertainment outlets have become irrelevant with the birth of online services. The cities clearly are looking for a way to make up the difference in lost tax revenue, and the new “cloud tax” seems to be the prevailing option.