The Netflix Tax that Broke the Camel’s Back

The Netflix Tax that Broke the Camel’s Back

It’s just 72 cents.

For those of you that neurotically check your bank and credit card apps every morning on the CTA, you likely saw a 72 cent increase on your Netflix subscription this month (or 81 cents if you pay $8.99/month). That 72 cents was probably enough to do a double take, but in the pre-coffee, early morning fog, 72 cents isn’t enough to raise a red flag. ‘Netflix must have decided to increase its rates’, you thought briefly, before moving on to your sports apps, news feeds and work emails.

Well, that’s exactly how the City of Chicago’s Finance Department hoped you would react to its newest sales tax on Internet-based streaming services.

For those of you who missed the Chicago Tribune’s article regarding Mayor Rahm Emanuel’s “cloud tax”, let me catch you up.

On June 9, 2015, the City of Chicago’s Finance Department issued a ruling extending the city’s 9% “Amusement Tax” (which had previously only been used to tax traditional forms of entertainment like concert and sporting event tickets) to cover Internet-based streaming video, music and game services such as Netflix, Amazon Prime, Hulu, Spotify and Xbox Live. According to the Chicago Tribune, the city expects to bring in about $12 million each year from this re-interpretation of the tax code.

Unfortunately for the City of Chicago, the Liberty Justice Center, “a non-profit, non-partisan public-interest litigation center that fights to protect economic liberty, private property rights, free speech, and other fundamental rights in Illinois and beyond,” is not so keen on the re-interpretation.

On September 9, 2015 the Liberty Justice Center, on behalf of six Chicago, digital-streaming subscribers, filed for declaratory and injunctive relief against the City of Chicago and Comptroller Dan Widawsky. The complaint declared that: (1) Dan Widawsky had exceeded his authority by adopting Amusement Tax Ruling #5 (which re-interpreted the Amusement Tax to include Internet-based streaming services); and (2) the re-interpreted Amusement Tax violates the federal Internet Tax Freedom Act (which prohibits discriminatory taxes on electronic commerce). As an example of such discrimination, the Liberty Justice Center noted that the re-interpretation taxed Netflix’s “video streaming service” but not its “video-by-mail service.”

Whether or not the Liberty Justice Center wins this battle is irrelevant. The door is now open, the conversation has begun, and the days of tax-free Internet-based streaming services are over. If the City of Chicago’s Law Department loses this battle against the Liberty Justice Center, the Comptroller and Finance Department will go back to the drawing board and find a new, more ‘democratic’ way to tax Netflix subscribers.

And once they do, the fight is no longer between the City of Chicago and the Liberty Justice Center—the fight is between the City of Chicago and you. What would it take for you to cancel your Netflix subscription? What would it take for you to leave the city of Chicago just to avoid paying taxes on your Netflix subscription? What’s your threshold? 72 cents? One dollar? Five hundred dollars?

Subscription services like Netflix spend millions of dollars every year to answer that question, hiring consultants and strategists to determine the best possible pricing model. How many lost subscribers would it take for Netflix to fight a digital-streaming sales tax? 72 cents imposed on its Chicago subscribers? What if that same sales tax was imposed in New York, Los Angeles, Houston and Philadelphia?

Is this 72 cents the straw that breaks the camel’s back?

Perhaps I’m over analyzing the situation and I should just go back to binge watching my favorite shows on Netflix. Perhaps the new Netflix tax really just is … 72 cents.

Katherine (Kate) Imp is an entertainment attorney at Ramo Law PC and Chicago native. She specializes in film finance, production and distribution for clients in Illinois and across the country. Contact Kate at @KatherineImp or kate@ramolaw.com.

Disclaimer: The information in this column is intended for general information purposes only and should not be construed as legal advice.