The City of Chicago has enacted a 9% “amusement tax” which it imposes on a wide variety of “amusements” in the City of Chicago. In 2015, the City issued Ruling 5, which expanded the scope of the amusement tax to include amusements that are delivered electronically to patrons in the City, which include the privilege of watching electronically delivered television shows, movies, or videos; the privilege of listening to electronically delivered music; and the privilege of participating in games, online or otherwise.
A group of Chicago residents challenged the constitutionality of the amusement tax as it applied to video streaming services such as Netflix, Hulu, and similar services. Specifically, the residents claimed that the tax was invalid because:
(1) streaming services are outside the scope of the City’s amusement tax ordinance;
(2) the City taxes streaming services differently than it taxes equivalent in-person amusements in violation of the Illinois Constitution’s uniformity clause;
(3) applying the tax to streaming services imposes a discriminatory tax on electronic commerce in violation of the federal Internet Tax Freedom Act (ITFA); and
(4) the City is taxing activity outside its borders in violation of the U.S. Constitution’s commerce clause.
The Cook County Circuit Court ruled against the residents and upheld the tax, and the residents appealed. The Appellate Court upheld the City’s imposition of the tax on video streaming services, rejecting the residents’ arguments and finding the ordinance valid. It was significant that the residents challenged the ordinance on “facial” grounds, the most difficult challenge to mount because the City only had to show any circumstance where the ordinance could be validly applied. Labell v. City of Chicago.