For many, audio and video streaming services like Netflix, Hulu and Spotify are a relatively new and irreplaceable part of the daily routine — so much so that traditional forms of media like cable and terrestrial radio are struggling to keep up with the consumers they've lost.
At the same time, the cities in which these customers live may be having any number of issues related to revenue and spending, and some are exploring new, unconventional sources to try to even out the books, preventing public services from being cut.
Those two developments may strike you as mutually exclusive things. However, in Chicago, the nation's third-largest city, those streaming services will come with an additional 9 percent tax for Windy City residents after a ruling by the city's Finance Department that took effect this month.
The companies who provide the newly taxed services under the ruling are required to pay taxes to the city starting Sept. 1, although it's likely that companies like Netflix will begin collecting it from consumers before then.
While this tax on online streaming and other cloud-based services falls under the city's amusement tax, which levies similar charges on concerts and sporting events, the ruling has business implications, too. An expansion of the city's personal property lease transaction tax will see online databases such as those used for real estate and court cases charged, according to the Chicago Tribune.
However, the majority of people affected by the new policy will be consumers of the streaming services. And if a massive city like Chicago can issue a new tax on such popular services, are others next?
Netflix seems to think it's a real possibility.
"Jurisdictions around the world, including the U.S., are trying to figure out ways to tax online services," a Netflix spokesperson told The Verge. "This is one approach."
Some of those jurisdictions in the U.S. already did before Chicago's decision. Surprisingly, some states have taxes on various digital goods, including Washington state, which taxes digital media regardless of a physical download or streaming. Other states like Mississippi, Wyoming and Vermont tax downloads on iTunes. But Chicago's tax appears to be the first municipality-based tax for solely streaming services.
In Chicago's case, the tax feels like an overreach, especially when so many people successfully fought against the private sector singling out services like Netflix during the recent net neutrality debate. It's also estimated to bring in merely $12 million in revenue when the 2015 city budget is nearly $9 billion. But it is borne out of a desire to replace a revenue stream that has largely dried up.
"Twenty years ago, the same albums and movies were consumed at video rental outlets and music stores — which paid local property taxes, potentially paired with municipal sales taxes and other brick-and-mortar duties," Russell Brandom writes for The Verge. "But as online subscription services take over more and more of our music and video budgets, that money ends up disappearing from the traditional municipal tax base."
There's some argument as to whether Chicago's tax is even legal under both the Internet Tax Freedom Act and the Telecommunications Act. Recently, there has been talk that Chicago Mayor Rahm Emanuel's office may exempt startups who may be affected by the tax due to the subsequent uproar it's caused in the city's tech community and the lack of clarity that many say the policy is suffering from.
Like many tax laws, the rules governing taxes on digital downloads and streaming media are endlessly complicated and vary widely. Chicago's new policy is no exception, and how the backlash to it is handled will likely go some way in determining whether other major cities could follow suit.
