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Fatally Flawed? Illinois Municipal League’s Model Streaming Subscription Tax

The Illinois Municipal League (IML) represents the interests of 219 home rule municipalities in Illinois.[1] The IML recently released a revised draft model, “Municipal Streaming Tax Ordinance,” (the model) for use by the home rule municipalities in imposing an “amusement tax” on, inter alia, music and video streaming services and online gaming.[2] If the subscriber’s residential street address is within the corporate limits of the municipality, the subscription fee would be subject to the tax.[3] However, the tax proposed by the model has at least two fatal flaws: it is barred by the Internet Tax Freedom Act (ITFA) as a discriminatory tax on electronic commerce and is an unconstitutional extraterritorial tax under the home rule article of the Illinois Constitution.[4]

NATURE OF THE STREAMING TAX

The model proposes a tax on the privilege of viewing an amusement, including electronic amusements that either “take place within the” municipality or are delivered to subscribers “with a primary place of use within the jurisdictional boundaries of” the municipality.[5] The model incorporates the definition of “place of primary use” from the Illinois Mobile Telecommunications Sourcing Conformity Act.[6] That statute requires sourcing to the subscriber’s “residential street address.”[7] The streaming tax operates like a familiar sales tax in that it is imposed on the subscriber but collected by the streaming provider and remitted to the municipality.[8] The model tax would also be imposed on “paid television programming” (sat TV), but not paid radio programming (sat radio), transmitted by satellite.[9] The tax is not imposed on transactions that confer “the rights for permanent use of an electronic amusement” on the customer.[10]

THE NATURE OF MUSIC AND VIDEO STREAMING AND ONLINE GAMING SUBSCRIPTIONS

There are many service providers that allow internet access to the databases of music, videos and games (content). Customers typically enter into an automatically renewing subscription agreement with the provider that allows access to a database such that the subscriber can “stream” the content from any fixed or mobile device with internet connectivity. Subscribers are able to access the content from anywhere at anytime so long as their subscription is current and they have internet access.

Because the subscription fees are paid in advance, there is no way for either the provider or the subscriber to know where and when the subscriber might access the content, if at all, during the month. Also, because the streaming tax proposed under the model is on the subscription fee, the tax must be collected before any streaming occurs. It may be that the subscriber doesn’t access the content either from within the corporate limits of the municipality or at all during the subscription period.

FATAL FLAWS

1. Barred Discriminatory Tax on Electronic Commerce

The ITFA generally bars state and local taxes that discriminate against electronic commerce.[11] A tax discriminates against electronic commerce if it is imposed on transactions that occur over the internet but not [...]

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Circuit Court of Cook County Upholds City of Chicago’s Imposition of Amusement Tax on Internet-Based Streaming Services

On May 24, 2018, the Circuit Court of Cook County granted the City of Chicago’s Motion for Summary Judgment in the case captioned Labell v. City of Chicago, No. 15 CH 13399 (Ruling), affirming the City’s imposition of its amusement tax on internet-based streaming services.

City’s Amusement Tax and Amusement Tax Ruling #5

The City imposes a 9 percent tax on “admission fees or other charges paid for the privilege to enter, to witness, to view or to participate in such amusement. …” Mun. Code of Chi., tit. 4, ch. 4-156 (Code), § 4-156-020(A); see also id. § 4-156-010 (defining “amusement” in part as a performance or show for entertainment purposes, an entertainment or recreational activity offered for public participation and paid television programming). On June 9, 2015, the City Department of Finance (Department) issued Amusement Tax Ruling #5, taking the position that the amusement tax is imposed “not only [on] charges paid for the privilege to witness, view or participate in amusements in person but also [on] charges paid for the privilege to witness, view or participate in amusements that are delivered electronically [emphasis in original].” Amusement Tax Ruling #5, ¶ 8.

The Ruling sought to impose an amusement tax on subscription fees or per-event fees for the privilege of: (1) watching electronically delivered television, shows, movies or videos; (2) listening to electronically delivered music; and (3) participating in online games, provided the streamed content (i.e., movies, music, etc.) was delivered to a customer in the City. See id. ¶¶ 8, 10. The Ruling stated that “this means that the amusement tax will apply to customers whose residential street address or primary business street address is in Chicago, as reflected by their credit card billing address, zip code or other reliable information.” Id. ¶ 13. A copy of the City’s Amusement Tax Ruling #5 is linked here. (more…)




Chicago Mayor’s Tax-Heavy Budget Passes: Lease and Amusement Tax Implications

Last week the Chicago City Council approved Mayor Rahm Emanuel’s 2016 revenue ordinance as part of his tax-laden budget proposal. The revenue ordinance included noteworthy changes to the personal property lease transaction tax (lease tax) and amusement tax, both of which we have covered in-depth since the Department of Finance (Department) issued two rulings over the summer officially extending a nine percent tax to most services provided online. The portions of the revenue ordinance related to the lease tax were drafted in response to the concerns raised by the startup community. As discussed in more detail below, the lease tax amendments provide little relief for the vast majority of businesses dreading the January 1st effective date of the ruling. The amendments to the amusement tax provide no relief whatsoever.

Chicago Lease Tax Amendment

The changes to the Lease Tax Ordinance include: (1) a narrowly defined exemption for small businesses; (2) a reduction of the rate for cloud-based services where the customer accesses its own data; and (3) codification of the applicability of the Illinois mobile telecom sourcing rules. The amendments were touted by the mayor as addressing many of the concerns expressed by small businesses after the Department administratively interpreted the nine percent lease transaction tax to apply to most cloud-based services in June. In response to an outcry from the startup community, the Department subsequently delayed the effective date of the ruling to January 1, 2016. Unfortunately the mayor’s solution falls short of providing any significant relief and will not alleviate the concerns of the vast majority of customers and providers affected by the ruling.

Effective immediately upon publication, the lease transaction amendments approved yesterday will:

  1. Exempt “small new businesses” that are lessors or lessees of non-possessory computer leases from their respective lease transaction tax collection and payment obligations. For this purpose, “small new business” is a business that (1) holds a valid and current business license issued by the city or another jurisdiction; (2) during the most recent full calendar year prior to the annual tax year for which the exemption provided by this subsection is sought had under $25 million in gross receipts or sales, as the term “gross receipts or sales” is defined for federal income tax purposes; and (3) has been in operation for fewer than 60 months. For the purpose of calculating the $25 million limit, gross receipts or sales will be combined if they are received by members of a single unitary business group. This will exclude most subsidiaries from taking advantage of the “small new business” exemption.
  2. Reduce the rate from nine percent to 5.25 percent of the lease or rental price in the case of the non-possessory lease of a computer primarily for the purpose of allowing the customer to use the provider’s computer and software to input, modify or retrieve data or information that is supplied by the customer.
  3. Codify the use of the sourcing rules set forth in the Illinois [...]

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In Chicago, Taxing the Cloud Will Wait (Mostly) Until 2016

The City of Chicago has announced that it will be delaying the effective date for its recent ruling under the Personal Property Lease Transaction Tax until January 1, 2016. Personal Property Lease Transaction Tax Ruling #12 takes a broad view of how the 9 percent tax applies to cloud-based services. It was scheduled to come into effect on September 1, 2015, but after an outcry from the startup community, Chicago has pushed back the date on which it expects cloud-based providers to begin collecting and remitting tax. The additional time will allow the city to further consider potential exemptions for small businesses. Providers of information services, software as a service (SaaS), platform as a service (PaaS), and some forms of infrastructure as a service (IaaS) that have nexus with the city will now have until January 1, 2016, to begin collecting the tax. (See a detailed discussion of Ruling #12 and its implications in a previous post.) The delay could backfire for the city because taxpayers will now have more time to launch challenges to the tax.

Ruling #12 is only part of Chicago’s two-pronged approach to taxing the cloud. The city had at the same time issued Amusement Tax Ruling #5, which provides that charges for video streaming, audio streaming, computer game subscriptions and other forms of online entertainment, as well as temporary download rentals, are subject to the 9 percent Amusement Tax—not the Lease Transaction Tax. That ruling also was issued with a September 1, 2015, effective date.  This effective date for the Amusement Tax Ruling has not been changed, and the city has indicated that no such extension is currently under consideration.




Chicago, Searching for Tax, Taxes Searchable Websites

Taxpayers providing services over the internet need to carefully consider two recent City of Chicago rulings: Lease Transaction Tax Ruling #12 and Amusement Tax Ruling #5. Issued together on June 9, 2015, the rulings extend a 9 percent tax to most services provided online. Charges for video streaming, audio streaming, computer game subscriptions, and other forms of online entertainment are subject to the 9 percent amusement tax. Charges for essentially any other kind of interactive website or online service, with only a handful of exceptions, are subject to the 9 percent lease transaction tax. The lease transaction tax is supposed to be a municipal sales and use tax on the leasing of tangible personal property, but the City is stretching the tax to encompass the deemed use of the provider’s computer in accessing a website or program over the internet. As detailed in this On the Subject, providers of information services and cloud-based services need to evaluate the applicability of the City’s guidance and consider whether to comply or challenge the imposition of tax.

Read the full article.




More Tax Money for the City of Chicago in 2015: Broader Bases, Increased Rates and Lesser Credit

The City of Chicago’s (City’s) 2015 budget includes a number of changes to taxing ordinances found in titles 3 and 4 of the Chicago Municipal Code.  The City of Chicago Department of Finance has notified taxpayers and tax collectors of the amendments, effective January 1, 2015, via a notice posted on its website.  The text of the amendments can be found on the Office of the City Clerk’s website.  The amendments, designed to bolster the City’s coffers, affect multiple City taxes by enlarging tax bases, increasing tax rates and tightening credit mechanisms.  The amendments include:

  • Hotel Accommodations Tax(Section 3-24-020(A))
    • The definition of “operator” (the tax collector) was amended to include: (1) any person that receives or collects consideration for the rental or lease of hotel accommodations; and (2) persons that facilitate the rental or lease of hotel accommodations for consideration, whether on-line, in person or otherwise.
    • A definition of “gross rental or leasing charge” (the tax base) was added that excludes “separately stated optional charges” unrelated to the use of hotel accommodations.
  • Use Tax for Non-titled Personal Property(Section 3-27-030(D))
    • A credit is available for sales and use “tax properly due” and “actually paid” to another municipality against the City’s 1 percent use tax imposed on the use in the City of non-titled tangible personal property that was purchased outside of the City.  The added definitions of “tax properly due” and “tax actually paid” exclude other municipal taxes that are rebated, refunded, or otherwise returned to the taxpayer or its affiliate.
  • Personal Property Lease Transaction Tax
    • The exemption from the tax for a “car sharing organization” (i.e., Zipcar) was eliminated.  (Sections 3-32-020(A) (definition) and 3-32-050(A)(13) (exemption))
    • The definition of “lease price” or “rental price” (the tax base) was amended to exclude nontaxable, separately-stated charges only if they are optional.  (Section 3-32-020(K))
    • The tax rate was increased from 8 percent to 9 percent.  (Section 3-32-030(B))
  • Amusement Tax
    • The amusement tax was amended to be imposed on the full charge paid for the privilege of using a “special seating area” such as a luxury suite or skybox (Section 4-156-020(F)).  Credit against this tax is available in the amount of any other taxes the City imposes on the same charges (for example, food and beverage charges) if the taxes are separately-stated and paid.  Previously, tax was imposed on 60 percent of the charge for a special seating area and did not include a credit mechanism.
    • Credit against the amusement tax was eliminated for franchise fees paid to the City for the right to use the public way or to do business in the City.  (Section 4-156-020(J))
    • The amendments eliminated the additional tax imposed on ticket sellers (Section 4-156-033).  The tax was imposed on sellers selling tickets from a location other than where the taxable amusement occurs on the amount of the service fee (as distinguished from the taxable admission charge).  Now, all ticket sellers must [...]

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Bear Down: In a Preseason Loss to Cook County’s Poor Play, the Appellate Court Finds Chicago Bears Ticket Holder Amenities Taxable

The First District of the Illinois Appellate Court, in Chicago Bears Football Club v. Cook County Department of Revenue, 2014 IL App (1st) 122892 (Aug. 6, 2014), has  affirmed an administrative determination finding the Chicago Bears owe Cook County over $4.1 million in amusement tax and related interest, on the basis that the amenities and privileges enjoyed by Bears premium ticket holders are taxable admission charges.  The ordinance at issue imposes tax on “admission fees or other charges paid for the privilege to enter, to witness or to view such amusement” but excludes “any separately stated charges for non-amusement services or for sales of tangible personal property.”  Cook County, Ill. Code of Ordinances, part I, ch. 74, art. X, § 74-392(a), (e).

The charges at issue include those for club level seats, luxury suites and the Skyline Suite.  For club level seats, the assigned seat location varies from the 50-yard line to the end zone.  On the face of the ticket, the charge for the seat and for the amenity license is separately stated.  The price of the seat is constant regardless of location, while the price of the license varies depending on the seat location.  Amenities provided to a club seat ticket holder include access to a “club lounge” for use before, during and after the game.  The lounge has buffet and bar areas (food and beverage not included in ticket price), better food selection than that available in the regular seating area and high-definition televisions for viewing the Bears game in progress and other National Football League games.  A club level ticket holder cannot view the entire field from the lounge.  Other amenities provided include rights to early ticket purchases to playoff games and non-Bears game events at Soldier Field, special parking privileges, invitations to autograph sessions and merchandise giveaways, free gameday programs and invitations to appreciation events year-round.

The luxury suites provide a private enclosed area for up to 20 guests.  Seating is not assigned.  Tickets list a single price.  Amenities of the suite include individual temperature controls, private bathrooms and high-definition televisions.  Food and beverage generally are not included in the ticket price.  Other available amenities include first option to use the suite for most non-Bears events at Soldier Field, travel arranged by the Bears for certain away games, invitations to non-football gameday events, participation in gameday drawings for special prizes, parking passes, special recognition in Bears publications and invitations to appreciation events year-round.

The Skyline Suite is an open area shared by multiple licensees and has non-assigned seating.  Food and beverage are included in the price.  Like luxury suite tickets, a single price is listed.  The same amenities available to luxury suite ticket holders are available to Skyline Suite ticket holders.

The appellate court affirmed the county’s assessment, concluding tax is owed on 100 percent of the club seat ticket price and on 60 percent of the luxury suite and Skyline Suite licenses.  For club level seats, the court reasons that [...]

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