By: Robert Niska
COVID-19 has fundamentally altered the way we all live. Americans are spending more time at home, working remotely, buying a life-time supply of toilet paper, and binge-watching shows on streaming services. While the pandemic rages on, state and local government officials are grappling with the long-term financial implications. Cities are faced with the grim reality that balancing a budget will be extraordinarily difficult and are searching for solutions. Typical sources of revenue, such as sales tax, have drastically declined due to businesses being shuttered and Americans sheltering at home. However, one area that has exploded during the pandemic has been internet-based services, including Netflix. Given the profit generated by tech companies, cities are now giving serious consideration into seeking tax revenue from online based entertainment services by implementing a so-called “Netflix Tax.”
In 2015, a 9% amusement tax was levied on streaming services by the City of Chicago. The tax, known as Amusement Tax Ruling No. 5, explicitly states that it is directed at amusements experienced in person and “amusements that are delivered electronically.” Not only does the tax apply to digital streaming services for television shows and movies, it also applies to music streaming and online gaming. Notably, the language of the tax emphasizes that providers have a joint and several duty to collect the tax from consumers. As a result, consumers pay more for their subscriptions due to companies such as Netflix opting to pass the burden onto the consumer. It is estimated that extending the amusement taxes to digital services could generate $12 million per year in tax revenue for Chicago.
While the tax provides a novel way to raise revenue, critics questioned the legality of extending the amusement tax to cover digital entertainment. However, an Illinois appellate court affirmed a circuit court decision which upheld the constitutionality of the tax. Subsequently, the Illinois Supreme Court denied the Plaintiff’s Petition for Leave to Appeal.
Opponents to the tax alleged that the tax violated the Illinois Constitution’s home rule provision, which provides municipalities the authority to levy taxes. The appellate court emphasized that the tax was not in violation of the home rule provision because it had no extraterritorial effect and was simply taxing those viewing or participating in amusement within Chicago. Another argument was that extending the tax to streaming services is discriminatory towards electronic commerce, a violation of the Internet Tax Freedom Act (ITFA). The opponents asserted that the tax discriminates because it exempts video-by-mail services and applies differently to certain live in-person performances. The court turned down these arguments and pointed to the opponent’s failure to provide authority stating that both are comparable to streaming services.
Following the Illinois Supreme Court’s refusal to review the decision, municipalities have felt empowered to enact similar tax provisions. While the rush to generate revenue is logical due to budget challenges presented by COVID-19, leaders should be cautious in their approach to doing so. It has been argued that due to the lack of laws regarding streaming services, cities are simply “shoehorn[ing] them into existing tax regimes.” The City of Chicago utilized their amusement tax which was enacted in 1947. In order for cities to tap into the revenue generated by streaming services, they must do so in a way that does not discriminate by selecting specific companies to levy the tax against.
COVID-19 has introduced a great amount of anxiety and uncertainty to society. During these challenging times, many have turned to streaming services to rewatch “The Office” or other reruns to gain a sense of comfort and familiarity. Municipal leaders have taken notice and see it as an opportunity to remedy financial shortfalls caused by the pandemic. Although, the success of the tax largely hinders on how it is drafted, implementing such a tax will likely cause companies to bring challenges in court. Ultimately, the comfort that consumers seek by watching reruns may cost them more if the tax is enacted. Consumers may stay at home to help slow the spread of COVID-19, but they may not be able to slow the spread of the “Netflix Tax.”
 Mark Muro, As COVID-19 Resurges, So Does the Threat To Local Budgets, Brookings Inst. (June 30, 2020), https://www.brookings.edu/blog/the-avenue/2020/06/30/as-covid-19-resurges-so-does-the-threat-to-local-budgets/.
 Mary Williams Walsh, States Are in a Quandary as Taxes Evaporate and Virus Spreading Soars, N.Y. Times (April 15, 2020), https://www.nytimes.com/2020/04/15/business/economy/state-tax-revenue-debt-coronavirus.html.
 Ruth Mason & Darien Shanske, Insight: The Time Has Come for State Digital Taxes, Bloomberg Tax (May 29, 2020, 2:01 AM), https://news.bloombergtax.com/daily-tax-report-state/insight-the-time-has-come-for-state-digital-taxes-55.
 Michael J. Bologna, ‘Netflix Tax’ Could Spread From Chicago as Cities Crave Revenue, Bloomberg Tax (June 19, 2020, 1:46 AM), https://news.bloombergtax.com/daily-tax-report-state/netflix-tax-could-spread-from-chicago-as-cities-crave-revenue.
 Chi., Ill., Dep’t Fin., Amusement Tax Rul. #5 (June 9, 2015), https://www.chicago.gov/content/dam/city/depts/rev/supp_info/TaxRulingsandRegulations/AmusementTaxRuling1.pdf.
 Stephanie Cueman, The Netflix Tax: Chicago’s Extension of Its Amusement Tax To Include Electronically Delivered Entertainment Faces Numerous Changes and Sets the Stage For Taxing on Streaming-Based Entertainment, 15 DePaul Bus. & Com. L.J. 159, 160 (2017).
 Irina Ivanova, Chicago Becomes First City To Collect “Netflix Tax”, CBS News (May 16, 2019, 7:39 PM), https://www.cbsnews.com/news/netflix-tax-chicago-becomes-first-municipality-to-collect-netflix-tax/.
 Danielle Santoro, Chicago Citizens Unamused by Chicago’s Expanded Amusement Tax, 15 Pitt. Tax Rev. 267, 269 (2018).
 Labell v. City of Chicago, 147 N.E.3d 732, 737 (Ill. App. Ct. 1st Dist. 2019), appeal denied, 144 N.E.3d 1175 (Ill. 2020).
 Labell v. City of Chicago, 144 N.E.3d 1175 (Ill. 2020).
 Labell, 147 N.E.3d at 740.
 Id. at 742.
 Id. at 739.
 Cueman, supra note 10, at 174.
 Labell, 147 N.E.3d at 749.
 Bologna, supra note 5.
 Mason & Shanske, supra note 4.
 Jeff John Roberts, Streaming Fee Could Rise 5% as Cities Sue To Impose a ‘Netflix Tax’, Fortune (Aug. 19, 2020, 3:00 PM), https://fortune.com/2020/08/19/netflix-tax-streaming-fees/.
 Labell, 147 N.E.3d at 737.
 Mason & Shanske, supra note 4.
 Megan Burbank, Are You Binge-Watching Reruns Of Your Old Favorite TV Shows? You’re Having a Natural Response To Covid-19, Seattle Times (Aug. 28, 2020, 6:00 AM), https://www.seattletimes.com/entertainment/are-you-binge-watching-reruns-of-your-old-favorite-tv-shows-youre-having-a-natural-response-to-covid-19/.
 Mason & Shanske, supra note 4.