TABLE OF CONTENTS INTRODUCTION I. THE CHICAGO CLOUD TAX: WHY IT EXISTS, THE POLICY BEHIND IT, AND WHERE IT FAILS A. Why Tax the Cloud? B. Chicago's Cloud Tax Ruling and Municipal Code C. State and Local Tax Policy II. QUILL'S NEXUS AND THE ILLINOIS FRAMEWORK OF AMUSEMENT TAX ANALYSIS A. Quill and the Nexus Dilemma B. Amusement Tax Analysis 1. Membership Fees Involving Amusement and Nonamusement Components 2. The Risk of the Occupational Tax 3. Uniformity and the Cloud Tax 4. The Internet Tax Freedom Act and Discrimination III. A NEW PROPOSAL AND A RESPONSE TO OTHERS PAST PRESENT, AND FUTURE A. A Privilege-Based Framework 1. Per-Transaction Privilege 2. Subscription Privilege 3. Hybrid Privilege 4. Nexus B. Other Proposals, Analogues, and Nontax Alternatives CONCLUSION INTRODUCTION
On June 9, 2015, the Chicago Department of Finance created an uproar when its Comptroller, Dan Widawsky, issued two rulings extending the reach of Chicago's amusement tax to include online streaming media, calling into question whether and how a tax can apply to film, television, and music in an age of streaming entertainment. (1) But, the idea of an amusement tax is nothing new, dating back to at least the 1800s. (2) Although taxing Internet streaming services may seem unprecedented, the amusement tax as a potential vehicle to do so is not. (3) Immediate and widespread opposition, however, suggests that the world is not ready. From a suit challenging the ruling to remarks made by the Federal Communications Commission, to proposed federal legislation, and even to delays in implementing the tax due to complaints from local businesses, Chicago's tax ruling is already subject to bad blood. (4)
Even though it is understandable that both businesses and consumers--those ultimately responsible for bearing the cost of the tax--would be hesitant to accept a tax on streaming entertainment, such a tax may be inevitable. (5) With the changing media landscape and transition to Internet consumption, state and local jurisdictions, without a means to tax many remote vendors, lose out on millions of dollars. (6) Implementing a tax on online media allows taxing jurisdictions to recoup some of the losses the cord-cutting trend of transitioning from cable to online entertainment imposes on them; (7) Chicago alone expects revenues of up to $12 million. (8) Despite opposition, this Note operates on the presumption that such a tax is foreseeable given changes in consumption habits and foreign trends to tax the same. (9) Furthermore, the purpose of this Note is not to debate moral wrongs; nor will this Note delve into concerns about copyright, privacy, constitutional issues, or data security, which have so often been regarded as the focal point of cloud concerns in academia. Rather, the purpose of this Note is to consider how such a tax on online media might mechanically function. The goal is not to evaluate Chicago's Cloud Tax for Chicago's sake so much as it is to model what a cloud tax should resemble in a given jurisdiction.
Part I introduces Chicago's tax rulings, contextualizing them within the city's tax initiatives, as well as state and local tax policy. (10) Additionally, Part I discusses why a jurisdiction would seek to impose a tax on cloud media, as well as points out some of the failures of Chicago's plan. Part II picks up from these failures and analyzes how they fall in line with current case precedent. Specifically, Part II considers some of the inherent problems with taxing remote vendors--especially online remote vendors--under the Supreme Court's precedent established in Quill Corp. v. North Dakota, (11) Part II then uses the Illinois-specific case law as applied to Chicago's amusement tax to formulate a framework through which to understand and evaluate an amusement tax as applied to Internet media. From the framework established in Parts I and II, Part III then offers a proposal on how a cloud tax might work. The proposal pays particular attention to the most common problems with past attempts, as well as those problems that are most overlooked and Internet-specific. The proposal aims to--as simply and wholly as possible--distinguish between different types of Internet media and develop a plan that discerns the license-based subscription services from the transactional purchases in a tax plan that is sound, functional, and uniform. Part III then contrasts this proposal with other past and future approaches to tax streaming media. Again, this Note, for purposes of this discussion, assumes a tax is inevitable, and instead of asking why, should, or when, it seeks the more pressing question of how. After all, in the end this is a question best left for Congress.
THE CHICAGO CLOUD TAX: WHY IT EXISTS, THE POLICY BEHIND IT, AND WHERE IT FAILS
Why Tax the Cloud?
Why Chicago or any municipality would want to tax streaming data is understandable. In 1998, the state income tax replaced the sales and use tax as the most important tax revenue for states, proving that sales taxes are losing weight in a changing economy. (12) Further, the fear that e-commerce adds to this "already eroding tax base" exacerbates the perceived necessity of taxing online media. (13) E-commerce places burdens on states and, in particular, small, local jurisdictions by limiting their tax reach: unlike in-state brick and mortar establishments, nexus requirements prevent jurisdictions from collecting taxes from many e-commerce vendors. (14) Estimates suggest these losses cost the states as much as $7.7 billion. (15) In an effort to understand the effect on a single state, consider that North Carolina alone claims losses of up to $145 million. (16) Some worry that without a means to ensure tax revenue, "local governments could be weakened to the point of irrelevance." (17)
Even though the numbers detailed above consider e-commerce as a whole, it is important to couple them with an understanding of online media consumption in context. During the past decade, consumption markets have changed. The traditional market for ownership has shifted to a market for temporary access, conceptualized as "access-based consumption." (18) Television has been fending off threats since the introduction of home VCRs in the (19) 70s, followed by more modern advancements like DVR, TiVo, and on-demand viewing. (19) This trend not only shifted viewers from prime-time viewing, but also provided a means to fast-forward through paid advertising, or skip it altogether, creating a rift in how programming earned its profits. (20) The Internet, however, has made the greatest impact: it has instant distribution and access, limited--if any--advertising, zero cost margin, and all at the click of a mouse or swipe of a finger. (21) Cable has not lost viewers solely to cord-cutting. Digital media gives access to three screens--the television, the computer, and the mobile device--fragmenting advertising costs, and decreasing revenue for networks. (22) As of 2008, 76 percent of consumers watched video from a computer, and 32 percent from a mobile device. (23) It would be no stretch to deduce that these numbers have increased drastically since then. (24) More to the point, in 2012 alone, Internet traffic in the United States increased 36 percent, and that traffic is expected to triple by 2017. (25) In the same year, prime-time traffic grew 41 percent, with Netflix solely generating one-third of all downstream traffic in the United States during those hours. (26) This suggests not only increased Internet use, but, specifically, cord-cutting trends and the necessity to look to the Internet for tax revenue.
Some argue that e-commerce on the whole should be exempt from tax under theories of "infant industry," the socioeconomic "digital divide" of Internet access, the lack of benefit to the burdened remote vendors charged with collecting the tax, and economic benefits of encouraging competition among remote vendors. (27) But there is evidence that some online vendors collect taxes across various states "without major difficulties." (28) For example, Netflix collects sales taxes for its DVD rentals "in practically every state." (29) Netflix can do this "easily and cheaply" by using a company specializing in collecting and complying with tax laws across different jurisdictions. (30) Netflix is not alone; per its terms and conditions, Apple's iTunes Store also collects taxes for various states, and can still turn a profit on sales as low as sixty-nine cents. (31) Thus, rather than introducing new problems, e-commerce merely shines a light on problems already in play--namely, nexus and uniformity. (32)
Chicago's Cloud Tax Ruling and Municipal Code
Before analyzing and proposing an approach to taxing streaming media in the cloud, it is important to place the Chicago rulings in context. The Chicago Municipal Code defines an "amusement" as "(1) any exhibition, performance, presentation or show for entertainment purposes, ... (2) any entertainment or recreational activity offered for public participation or on a membership or other basis ... or (3) any paid television programming, whether transmitted by wire, cable, fiber optics, laser, microwave, radio, satellite or similar means." (33) The Code calls for a 9 percent tax on fees paid in consideration for "the privilege to enter, to witness, to view or to participate in such amusement," to be collected and remitted by every owner, operator, or reseller of an amusement. (34) The Chicago Personal Property Lease Transaction Tax Ordinance, however, places a 9 percent tax on "(1) the lease or rental in the city of personal property, or (2) the privilege of using in the city personal property that is leased or rented outside the city." (35) Despite calling for a tax on any rental or lease on personal property other than real property, the ordinance explicitly exempts the lease, rental, or use of a motion picture film. (36)
Widawsky's amusement tax ruling...