The Illinois Municipal League (IML) represents the interests of 219 home rule municipalities in Illinois. 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. If the subscriber’s residential street address is within the corporate limits of the municipality, the subscription fee would be subject to the tax. 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.
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. The model incorporates the definition of “place of primary use” from the Illinois Mobile Telecommunications Sourcing Conformity Act. That statute requires sourcing to the subscriber’s “residential street address.” 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. The model tax would also be imposed on “paid television programming” (sat TV), but not paid radio programming (sat radio), transmitted by satellite. The tax is not imposed on transactions that confer “the rights for permanent use of an electronic amusement” on the customer.
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.
1. Barred Discriminatory Tax on Electronic Commerce
The ITFA generally bars state and local taxes that discriminate against electronic commerce. A tax discriminates against electronic commerce if it is imposed on transactions that occur over the internet but not [...]