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June 16th, 2017
Video Game Association Challenges Chicago’s Online Streaming Services Tax
One of the nation's most prominent video game associations has decided to challenge Chicago's controversial "Cloud Tax." The Entertainment Software Association ("ESA"), which operates the annual Electronic Entertainment Expo (E3), and whose members include industry leaders like Nintendo, Ubisoft and Electronic Arts, recently filed suit against the City of Chicago in Cook County Circuit Court. ESA's complaint alleges that Chicago's 2015 reinterpretation of its longstanding Amusement Tax violates federal law by requiring ESA members to collect a tax from their Chicago-based customers on all online entertainment services. As similar taxes begin to spring up across the country, the resolution of this case could have a significant impact on video game publishers and other providers of digital content. Here's what you need to know.
The Amusement Tax
For several decades, the City of Chicago has imposed a 9% tax for the privilege of entering, witnessing, viewing or participating in any amusement within the city. Historically, this tax applied only to live events such as musical performances and sporting events. But in 2015, Chicago's Department of Finance issued a tax ruling in which it extended application of the Amusement Tax to amusements delivered electronically. Under the 2015 ruling, providers of online streaming services for music, movies and video games are required to collect a 9% tax on receipts from the sale of those services to customers residing in Chicago or with a Chicago billing address. If the content providers refuse to collect such tax, they are liable to the City of Chicago for the amount of Amusement Tax not collected by them. Although the 2015 tax ruling extended the Amusement Tax to cover charges for streaming services like Netflix, Spotify and Xbox Live, it did not seek to apply the Amusement Tax to purchases of media that are permanently downloaded to a customer's device.
ESA's Complaint
ESA's complaint alleges that Chicago's 2015 tax ruling violates the Internet Tax Freedom Act ("ITFA") by imposing a discriminatory tax on ESA members. Under Section 1105 of the ITFA, states and municipalities may not impose a "discriminatory tax on electronic commerce," defined as any tax not generally imposed on "transactions involving similar property, goods, services, or information accomplished through other means." ESA argues that Chicago's 2015 tax ruling imposes a discriminatory tax because it applies the Amusement Tax to charges for online amusements, such as online video game or music streaming subscriptions, but not to charges for similar games, music and videos purchased on physical media or downloaded. ESA claims that application of the tax to charges for online amusements unfairly burdens ESA members, who must keep track of and charge the tax for all customers with Chicago-based billing addresses or risk being directly liable to the City of Chicago for the tax. ESA asks the Cook County Circuit Court to declare the 2015 ruling illegal under the ITFA and seeks a permanent injunction preventing Chicago from imposing the Amusement Tax on charges for online amusements.
The Future for Online Amusement Taxes
The ESA complaint follows in the footsteps of a similar lawsuit filed by the Liberty Justice Center against Chicago in September 2015. That case, in which the Liberty Justice Center alleged that Chicago's 2015 tax ruling violated the ITFA, as well as Federal and Illinois constitutional provisions, is still ongoing, having survived a motion to dismiss in July 2016. With the explosion of popularity for online streaming services, other cities will be keeping a close eye on the ESA and Liberty Justice Center litigations to determine the future of similar amusement taxes under the ITFA.
If you have questions about taxes for online entertainment services, or about any other interactive entertainment matters, contact Sean F. Kane at (212) 705 4845 or skane@fkks.com, S. Gregory Boyd at (212) 826 5581 or gboyd@fkks.com, Jeffrey Marks at (212) 826 5536 or jmarks@fkks.com, or any other member of the Frankfurt Kurnit Interactive Entertainment Group.
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