Customers and businesses are increasingly embracing the efficiency and convenience of cloud computing, the method of sharing and storing information through a system of online servers hosted by companies such as Google and Microsoft, vs. a private server or personal computer. The technology has revolutionized how entertainment and information are consumed while streaming services such as Netflix, Hulu, and Amazon Prime grow in popularity.
This growth has spurred a debate about taxing cloud computing and movie streaming services. For example, in Chicago, officials approved a 9 percent cloud tax, which they believe will raise $12 million in revenue annually. But this legislation could soon be implemented in major cities across the country.
Since news of the new tax spread this summer, Chicago city officials have delayed the effective date for businesses providing streaming services to begin collecting this tariff from customers. The original effective date was Sept. 1, but opposition from some technology companies and advocacy groups, as well as a lawsuit filed by the Liberty Justice Center, forced the city to push the date back to Jan. 1, 2016.
According to the provisions of the ordinance from the city’s department of finance, the cloud tax is essentially a reinterpretation of an existing tax that’s already imposed upon “the patrons of every amusement within the city.”
Under the new cloud tax, “electronically delivered amusements,” including “any paid television programming,” are subject to taxation, whether they are transmitted “by wire, cable, fiber optics, laser, microwave, radio, satellite, or similar means.”
The city’s position appears to be a way to tax items that have “managed to leak out of the tax base,” says Ann Logue, a lecturer in finance at the University of Illinois at Chicago.
“For example, a movie theater pays taxes, and people buying or renting DVDs pay taxes,” she says. “And people watching movies on cable TV pay taxes to the municipality. Even on free TV, the local station pays taxes. But someone watching a movie on Netflix is not paying any local taxes, nor is Netflix because it is headquartered elsewhere.”
Chicago’s cloud tax also goes beyond targeting only entertainment. Under the city’s existing “lease tax,” it would apply to businesses and individuals that use cloud-computing databases such as LexisNexis and real estate listings, according to Kay Bell, a tax specialist at bankrate.com, who has written about the impending cloud tax.
“In reality, a lot of states already tax digital services,” Bell says. “But the big difference here is Chicago is the first big city to do something like this.”
And several other U.S. metropolitan areas could follow suit.
Critics in Chicago say the city’s cloud tax was pushed through with little or no input from the public or elected officials.
Those involved with the suit filed by Liberty Justice Center claim the tax violates the federal Internet Freedom Act “because it discriminates against online entertainment by taxing tickets for certain live theatrical and musical performances at a lower rate than it would tax access to those same performances if they were streamed online.”
Chicago’s cloud tax could shape how other municipalities do business. Local governments may seek similar cloud taxes as voters voice opposition to increasing other local taxes and property taxes, Logue says.
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