Video game companies: City's 'Cloud Tax' can't be legally applied to online gaming, streaming

By Jonathan Bilyk | Jun 9, 2017

An association representing some of the biggest names in video and computer games have sued the city of Chicago, asking a judge to determine the city’s 9 percent amusement tax can’t be applied to their online streaming video game products.

On June 5, the Entertainment Software Association filed suit in Cook County Circuit Court, asserting a city ordinance and an accompanying “tax ruling” interpretation by the city’s Finance Department force the gaming companies to collect what they believe to be an illegal tax from their customers.

“Affected ESA members are in an untenable position,” the lawsuit said. “They are required to either collect illegal taxes from their customers and suffer financial losses or face assessment of taxes by the City.”

Based in Washington, D.C., the ESA serves as a lobbying group for nearly three dozen companies that specialize in video and computer gaming, including online streaming gaming. Among its members are Nintendo, Sony Interactive Services, 505 Games, Bandai Namco, Capcom, EA, Microsoft and more.

The lawsuit centers on a “tax ruling” issued by City Hall in June 2015, which altered the city’s interpretation of its so-called Amusement Tax ordinance, extending the collection of that tax to “amusements … delivered electronically.” Known by some as the “Cloud Tax,” the ruling was meant to allow the city to slap a 9 percent tax on fees paid to stream entertainment, offered online by such providers as Netflix, Hulu and Amazon Prime, as well as through gaming services, such as Microsoft’s Xbox Live.

The ordinance was challenged in 2015 by subscribers to such services; they were represented by the non-profit public interest litigation group, the Liberty Justice Center. That action is pending in Cook County court.

The new action marks the first direct challenge to the tax ruling by those in the gaming and streaming industry.

Specifically, the ESA argues the city ordinance and accompanying tax ruling violate the federal Internet Tax Freedom Act, which, they said, “prohibits state and local governments from imposing discriminatory taxes on electronic commerce.”

 “The Amusement Tax, as interpreted and applied by the Comptroller … imposes a discriminatory tax on electronic commerce in violation of ITFA’s ban on such discriminatory taxes, because the Amusement Tax applies to charges paid by customers with residential and business street addresses in the City of Chicago for online amusements occurring inside the City of Chicago but does not apply to charges for certain offline amusements occurring inside the City,” the complaint said.

They noted the tax doesn’t apply to games, movies, television or music sold or delivered on solid media, such as CDs or DVDs, or via permanent downloads.

“As a result, customers are subject to an illegal tax,” the lawsuit said. “If ESA’s members do not collect the tax from their customers, they will be directly liable for a tax that the City of Chicago has no power to impose or authority to enforce.”

The ESA is represented in the action by attorneys with the firm of McDermott Will & Emery, with offices in Chicago and Washington, D.C.

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Organizations in this Story

City of Chicago Entertainment Software Association PAC (ESA PAC) Liberty Justice Center McDermott, Will & Emery LLP

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