Chicago’s Cloud Tax

Recently, the city of Chicago has decided to extend a 9% tax on streaming services that would include Netflix and Xbox Live. As the city tries to make up losses in tax revenue as consumers shift away from physical entertainment to cloud-based services, local governments are understandably under a lot of pressure to find ways to make up that loss.

However, this specific application of the tax may be problematic. As an article on the Verge reported, this tax is an expansion of older tax law to new media; it is not a new law made to fit new modes of receiving entertainment services. Questions arise such as whether or not service providers will move servers out of the city. Atop this, providers will have to figure out ways of tracking which of their customers fall under the new tax based on where they live and where they access the services. (source)

While the tax is meant to cover digital services in a fashion similar to amusement events, it does not apply to the sale of items like games over Steam. (source)

The main concern, however, is that this tax may not be completely legal. As the Verge article reports, it has been argued that this tax may go against laws that prevent discrimination against services provided over the internet. Basically, taxes should not be taken off internet services in a way that creates a disincentive for their use. (source)

There is a large issue of interpretation, as well. As the Chicago Tribune reports, it is difficult to discern to whom the tax applies (for example, on someone who lives in Chicago, someone who accesses the service in Chicago, someone accesses a service with servers in Chicago, someone who access a service from a company with offices in Chicago and so forth). Additionally, the city has said that they will not expect payments of the tax until September 1st, but has also suggested that the tax could apply to periods before that date to when the ruling was made, or even before that since it is technically not a new law but an expansion of a preexisting one. (source)

Ultimately, the new tax is buried under layers of confusion and questionable application. It is literally unclear who will be taxed, when, and for what specific access. While it is certainly understandable that the tax revenue is needed to maintain a city that is home to millions, the method of how to obtain that goal shouldn’t be based on a rather confusing expansion of a tax law meant for a time when current cloud services were considered science fiction.

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