Gamers Challenge Chicago’s Amusement Tax

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By Michael J. Bologna

The video gaming industry is challenging Chicago’s “Netflix tax,” filing an action in an Illinois circuit court asserting violations of the Internet Tax Freedom Act ( Entm’t Software Ass’n v. City of Chicago , Ill. Cir. Ct., No. 2017 L 050509, complaint filed 6/5/17 ).

The Entertainment Software Association filed suit June 5 in Cook County Circuit Court objecting to Chicago’s Amusement Tax Ruling No. 5, a revenue program created in June 2015. The ruling expands the city’s 9 percent amusement tax to streaming entertainment services, including gaming and streaming movies, television, and music. The ESA’s members include the biggest names in the gaming industry—Sony Interactive Entertainment Inc., Microsoft Corp., Nintendo of America, and Warner Brothers Interactive Entertainment Inc.

The ESA called the tax program “illegal,” “harmful,” and without precedent across the country.

“This discriminatory tax makes Chicagoans’ lives more expensive, just because they live in the 21st century and choose to play video games online,” Michael Gallagher, president and CEO, said in a statement. “As one of the most innovative and rapidly growing industries in Illinois, we are proud to take this fight to court and stand up for consumers. Chicago’s tax bureaucrats are out of line in extending their reach beyond legal limits imposed by federal law. We intend to remedy that situation.”

A spokesman for Chicago’s Law Department didn’t immediately respond to a request for comment.

Parallel Litigation

A separate action attacking Ruling No. 5 has been filed by a legal advocacy group on behalf of Chicago taxpayers.

In September 2015, the Chicago-based Liberty Justice Center, a nonprofit litigation center focusing on economic liberty and private property rights, challenged Ruling No. 5 on multiple grounds. The lawsuit seeks to halt the city’s collections and capture damages for the plaintiffs, who are users of various online video, audio, and gaming services including Netflix, Hulu, Spotify, Xbox Live, and Amazon Prime.

Jeffrey Schwab, a senior attorney with the Liberty Justice Center, said Chicago is the first major city to really push a taxation scheme targeting streaming media services. He said the two lawsuits in Cook County would be watched closely by taxing jurisdictions considering similar revenue programs.

“There are probably a lot of cities waiting to see what happens,” Schwab told Bloomberg BNA. “If we lose, I imagine we would see a wave of municipalities across the country trying to do this. If we win, I imagine they won’t.”

Ruling No. 5 asserts that the amusement tax applies not only to charges paid for the privilege to witness, view, or participate in amusements in person, “but also charges paid for the privilege to witness, view, or participate in amusements that are delivered electronically.” The ruling offers a list of examples, including charges paid for the privilege of watching electronically delivered television, movies, and videos; listening to electronically delivered music; and participating in online games.

Discriminatory Tax

The ESA’s lawsuit characterizes Chicago’s program as a discriminatory tax on an electronic commerce activity in violation of the ITFA’s ban on such forms of taxation.

“The amusement tax applies to charges paid by customers with a residential or business street address in the City of Chicago for online amusements occurring outside the City of Chicago but does not apply to charges paid by such customers for offline amusements occurring outside the City of Chicago,” the suit said.

Schwab said the ESA’s litigation differs from his suit, noting that the ESA seeks to represent sellers of gaming services, and he seeks to represent taxpayers.

And while the Liberty Justice Center’s litigation contains a count under the ITFA, Schwab said it also contains counts under the uniformity and commerce clauses of the Constitution. In addition, Schwab’s action alleges that Chicago’s Ruling No. 5 is an example of the city exceeding its state-granted authorities.

The Liberty Justice Center’s action survived a motion to dismiss sought by Chicago. In July 2016, Cook County Circuit Court Judge Carl Anthony Walker agreed that the Liberty Justice Center had adequately stated claims under the state and federal constitutions and the ITFA.

Schwab said the parties are in discovery and will likely submit competing motions for summary judgment in a few months. Assuming no major delay, Schwab said Walker could issue a ruling on the merits at the end of the year.

To contact the reporter on this story: Michael J. Bologna in Chicago at mbologna@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

For More Information

Text of the complaint is at http://src.bna.com/pvZ.

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