Sony Starts Collecting Chicago’s ‘Netflix Tax’ After Lawsuit Ends

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Michael J. Bologna

Sony Corp. has begun collecting Chicago’s first-in-the-nation “Netflix tax” on streaming services purchased through the company’s PlayStation Store after a short-lived legal challenge and months of foot-dragging.

Sony spokeswoman Mary Taing confirmed that the company started collecting Chicago’s amusement tax Nov. 14 on receipts from PlayStation Plus, PlayStation Now, PlayStation Vue, PlayStation Music, PlayStation Video on demand, and PlayStation Video live events from customers with a billing address in Chicago.

“In certain areas, state and local laws require PlayStation Store to collect applicable sales taxes,” Taing told Bloomberg Tax in an email. “In order to comply with these laws, PlayStation Store is collecting sales tax on its products/services where applicable. The City of Chicago’s amusement tax rate is currently 9%.”

Sony’s announcement comes as other tech companies double down in their opposition to the tax.

In August, Apple Inc. filed suit against the city in Cook County Circuit Court alleging violations of the federal and state constitutions and the federal Internet Tax Freedom Act (ITFA), which generally prohibits political jurisdictions from imposing discriminatory taxes on various forms of electronic commerce. A libertarian think tank has also sued the city on constitutional grounds.

Sony’s tax-collection decision is something of a white flag after gamers, through the Entertainment Software Association, sued the city in June 2017. The lawsuit characterized Chicago’s tax on streaming entertainment as a discriminatory tax on electronic commerce activity in violation of the ITFA. Sony is a member of the ESA.

Catherine A. Battin, a tax partner with McDermott Will & Emery LLP and counsel in the ESA action, declined comment but noted the action was voluntarily withdrawn in April. Battin also represents Apple in its lawsuit against Chicago.

New Tax Regime

In June 2015, Chicago became the first major jurisdiction to impose a tax on online music, gaming, and video services. Through Amusement Tax Ruling No. 5, Chicago extended its existing 9 percent amusement tax to streaming entertainment services. The amusement tax affects consumer purchases from online entertainment providers such as Apple and Pandora Media Inc. in the music-streaming sphere, Netflix Inc. and Amazon Instant Video for television and movies, and Sony, Microsoft, and Nintendo Co. for gaming.

Neither Sony nor the city would say whether the company’s decision included a commitment to pay off any outstanding tax liabilities going back to the July 1, 2015, effective date of the program.

Bill McCaffrey, a spokesman for Chicago’s Law Department, acknowledged Sony’s agreement to collect under Ruling No. 5 but declined comment on any other commitments.

“The City of Chicago uniformly enforces the amusement tax and requires all companies to collect and remit the tax when appropriate,” McCaffrey said. “If a business is not collecting the tax where we believe it applies, the city takes the necessary steps and works with the company to ensure compliance with the law.”

Bumpy Road for Apple

A recent court ruling in a third lawsuit against Chicago suggests a bumpy road ahead for Apple and other reluctant companies in the streaming services arena.

In May, Cook County Circuit Court Judge Carl Anthony Walker granted Chicago summary judgment in response to a suit filed by the Chicago-based Liberty Justice Center, a legal advocacy think tank focusing on economic liberty and private property rights.

Walker found no basis for the plaintiffs’ objections to the tax under the ITFA, the commerce clause of the U.S. Constitution, and the uniformity clause of the Illinois Constitution. Walker also rejected the Liberty Justice Center’s assertion that Chicago has no authority to impose a tax on streaming activity occurring beyond the borders of the city.

The think tank argued in its suit that taxpayers paying for streaming services with a credit card linked to a Chicago address, but using those services while living in another city in Illinois or another state, are charged the amusement tax even though it is supposed to apply within the city. In a reverse context, individuals living in the suburbs who listen to streaming radio at work in Chicago aren’t taxed at all, even though they are using an amusement in the city limits, it said.

The Liberty Justice Center is appealing Walker’s ruling.

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