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Netflix hit with ‘cloud tax’ as Chicago targets online consumers

July 1, 2015, 4:13 PM UTC
Netflix Launch
LONDON, ENGLAND - JANUARY 09: An Apple Ipad is used to view Netflix during the Netflix UK launch in London, England on January 9, 2012. Netflix the leading global internet subscription service for films and TV programmes, launches today in the United Kingdom and Ireland, offering instant and unlimited access to a broad range of entertainment for the low monthly price of ?5.99 in the UK and ?6.99 in Ireland. (Photo by Gareth Cattermole/Getty Images for Netflix)
Photograph by Gareth Cattermole — Getty Images

Chicago is marking Independence Day this year with fireworks, hot dogs – and sweeping new tax rules that require companies to collect a 9% levy every time consumers use streaming and cloud services such as Netflix (NFLX)or Amazon(AMZN)Web Services.

The rules, which went into effect today, came about after city officials expanded the interpretation of existing amusement and property lease taxes to encompass cloud-based technologies.

According to lawyers at ReedSmith, which flagged the new rules in a blog post, the taxes now encompass SaaS (software as a service), PaaS (Platform as a Service) and streaming media services. In a phone interview, Wynne described how the tax collection will work in practice:

“It really comes from doing audits of consumers. Take our law firm. City officials will audit us for a bunch of taxes, and may find online services,” said Wynne, explaining that officials will now check if the firm has been paying the 9 percent tax on those services.

This raises the question of who is responsible for collecting and paying the tax, which is technically levied on consumers.

“Let’s say an audit of our firm reveals we an invoice from Amazon or someone else with a Chicago address,” said Wynne in a hypothetical example. “The city authority has the choice of either going after the law firm or the companies who didn’t collect.”

In response to the new rules, Netflix is already making arrangements to add the tax to the bills of its Chicago subscribers, according to the Verge, which points out that costs to consumers will rise as companies like Lexis-Nexis to Spotify may follow suit.

The new Chicago tax interpretation comes at a time when local tax jurisdictions are confronting a loss in sales tax revenue from traditional main street stores. As a result, the booming cloud industry appears to present a tempting target to make up the shortfall.

For cloud and streaming companies, however, Chicago’s aggressive approach could provide major compliance and accounting headaches if thousands of other local jurisdictions follow suit.

Meanwhile, members of Congress are trying once again to introduce a law that would oblige online retailers to collect sales tax when they sell to out-of-state residents.