Regardless of the nomenclature you prefer, one thing’s for certain: a precedent has been set in the city of Chicago that will pave the way for other cities wishing to tax digital services that were once tax-free.
In case you’re not in the loop (pun completely intended), last month Chicago reinterpreted its existing “amusement tax,” which prior to July 1 included entertainment such as wired TV and concert tickets, to now include paid-for streaming digital entertainment such as Netflix, Spotify, Hulu Plus, et al. The tax, a cringeworthy 9% expected to bring in $12M annually, is being absorbed by some service providers from the get-go (Netflix, for example, adds the tax to its monthly premium), while in other instances the consumers of these services are responsible for reporting their use when filing taxes come April.
The institution of the “cloud tax,” is reminiscent of the not-so-long-ago decision to apply state taxes to online goods purchases. Similarly, Chicago’s application of its longstanding amusement tax to new forms of content is paving the way for further taxation of digital entertainment – which, indeed, is a slippery slope into the territory of paid downloads, paid mobile apps, and other fee-based online communities.
One silver lining to Chicago’s cloud tax, though, is a proposal in the works to maintain the spirit of entrepreneurship by exempting companies with revenues below a yet-to-be-determined threshold. If passed, this amendment will showcase the city’s commitment to startup culture by not penalizing those innovators who are working to create new forms of streaming entertainment services. This is critical to Chicago maintaining a competitive environment that can attract and retain tech talent that may otherwise migrate from the Midwest to more supportive coastal meccas.
Even if there are proposed support structures to aid small businesses in operating amidst the steep cloud tax, streaming content customers are given no safe haven in avoiding payment. Mobile media consumers will be a heavily affected audience, as they’re regularly using their devices more frequently to watch long-format videos. The question then becomes, if (or when) this impact will become a deterrent to millennials and other heavy mobile users in purchasing or maintaining subscriptions to streaming services. Is 9% of $9.99-$12.99/month enough to incite change?
If so, it’s imminent that the Popcorn Times of the internet will emerge as the real winners, leading more consumers down the free (or even illegal) path of digital media consumption. Or, should the tax climb high enough or be applied to more digital products and services, it could even deter future generations from living in such tax-burdened municipalities. It likely won’t be long before Chicagoans are enticed by “sales tax holidays” that apply to digital streaming services as well. Although, it’s doubtful such perks will ever suffice alone in lifting Chicago’s heavy tax hand off the shoulders of digital consumers who are used to, and can easily seek out, free streaming alternatives.