Chicago’s “Netflix Tax” Is Wasting Good Policy Bandwidth

November 21, 2018

Unfortunately, Chicago’s poorly-designed “Netflix tax” is still alive and kicking.

In 2015, Chicago’s Department of Finance determined that its 9 percent amusement tax applied to streaming services, such as Netflix, Spotify, and Hulu. This interpretation has been challenged in court, but as Bloomberg Tax recently reported, Sony has voluntarily agreed to collect the tax for PlayStation customers in the city.

States and localities do indeed have issues with their consumption tax base. Most state sales tax statutes are out of step with the modern economy and typically only apply to physical goods. These days people rarely buy their favorite music and movies in hard disk form. More and more consumers subscribe to a service for access to these items, with that access based on potentially changing license agreements between the content creator and distributor. A plain reading of most sales tax laws would find that these services are not included.

There is a right way and a wrong way to tax digital goods. Washington and Pennsylvania chose the right way, adopting legislation that explicitly made clear that their sales tax applies to streaming services. With the goal of a broad tax base to support lower tax rates, these laws make sense.

Chicago, on the other hand, has sought to shoehorn streaming services into an old, narrow tax without the benefit of engaging stakeholders on crafting a new law. Using outdated legal language to assert taxing authority over different transactions creates confusion and uncertainty for taxpayers. The rationale of Chicago’s interpretation is further called into question when considering that actual downloads of movies and music are exempt; the amusement tax only applies to streaming entertainment.

10. The amusement tax does not apply to sales of shows, movies, videos, music or games (normally accomplished by a “permanent” download). It applies only to rentals (normally accomplished by streaming or a “temporary” download). The charges paid for such rentals may be subscription fees, per-event fees or otherwise.

More importantly, the justification for such a tax is lacking. Watching streaming video is consumption, just like buying or renting a DVD is, and ought to be subject to the sales tax—but the city hasn’t articulated a rationale for why streaming services should pay a special high-rate tax. Such excise taxes are typically imposed where there are significant externalities associated with an activity, where the tax functions as a fee-for-use (think gas taxes), or where the government is trying to restrict consumption (the health rationales for cigarette and soda taxes).

None of that seems to apply here. Watching streaming video doesn’t impose any outsized costs on society or government, and it seems unlikely that Chicago’s goal is to get consumers to ditch their subscriptions. Chicago’s tax is inequitable because it singles out one type of transaction for disparate treatment without any real reason other than that it can.

Given Netflix’s market share, you’ll likely continue to see news headlines about policymakers seeking to implement a “Netflix tax.” But there is much more to a tax than just the name. If Illinois and Chicago want to tax Netflix-like services, they should drop the amusement tax push and fix the sales tax.

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