Apple latest tech firm to challenge Chicago's 'Netflix tax,' says tax on streaming media illegal

By Scott Holland | Sep 4, 2018

Apple has joined a host of other tech companies suing the city of Chicago over its so-called “Netflix tax” levied on streaming media.

In a Cook County Circuit Court complaint filed Aug. 27, Apple called on a court to award declaratory and injunctive relief against the city and Comptroller Erin Keane over a June 2015 Chicago Finance Department ruling that streaming media companies are supposed to collect the city’s 9 percent amusement tax from customers.

Earlier this year, on May 24, Cook County Circuit Court Judge Carl Anthony Walker granted summary judgment to the city and denied it to a plaintiff class attempting to challenge the tax. In so doing, he rejected arguments about the way the city taxes other forms of amusement, such as coin-operated machines or live performances, the latter of which are “not sufficiently similar to performances or movies delivered through online streaming services,” and taxing machines 9 percent per use versus $150 per year would be “administratively inconvenient for the businesses, customers and the city.”

This reasoning supported the city’s position on both the Internet Tax Freedom Act, as well as the state uniformity clause, Walker said, but Apple asserted the tax violates the ITFA as well as the state constitution and the commerce and due process clauses of the U.S. Constitution.

Apple has sued the city of Chicago over its so-called amusement tax on streaming media.   Shutterstock

According to Apple, the finance department’s June 9, 2015, ruling was the first formal guidance on the definition indicating the city considered “amusement” to apply to charges paid for the privilege of witnessing, viewing or participating in amusements delivered electronically, such as television shows, movies, videos, music and games. It does not, however, extend to media transferred by disc or permanently downloaded.

Apple’s complaint noted its customers secure internet access from service providers unrelated to Apple, and also said the music its customers stream is stored in data centers outside Chicago. Further, it argued the music it provides “is substantially similar or equivalent to other untaxed offline amusements.”

While the company said it collects revenue from customers with Chicago billing addresses, it maintained the city tax is illegal and forcing the company to collect “imposes a significant administrative burden … Apple must incur substantial costs to reconfigure its normal business practices related to transactions with customers with Chicago billing addresses.”

Apple said extending the amusement tax to streaming services violates the ITFA in that it is discriminatory, since the city doesn’t impose the same tax on other similar transactions, such as by taxing automatic devices that play music within the city limit. It further argued the city is exceeding its home rule power by taxing transactions that take place outside the city, since customers with Apple products would be taxed for streaming music even while outside the city.

The fact Chicago residents with Apple devices can use them many places outside the city also supports the company’s assertion the tax violates the commerce clause, saying Chicago’s approach discriminates against interstate commerce. As stated in the complaint: “There is a lack of transitional nexus between the city and the service it seeks to tax.”

In his May opinion, Walker said he believes the tax passes the four Commerce Clause requirements: It applies to residents of the jurisdiction; is based on a customer’s billing address, which meets fair apportionment obligations; does not discriminate against interstate commerce; and “is fairly related to the presence and activities of the taxpayer within the jurisdiction.” Walker also said he believes city residents do the majority of their streaming inside the city.

Representing Apple in the matter are lawyers from the firm of McDermott Will & Emery LLP, of Chicago and Washington, D.C.

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Apple Inc. Circuit Court of Cook County City of Chicago McDermott, Will & Emery LLP

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