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[GK86]

Tax me if old.

The past five years have seen a huge shift in the way we consume media, as brick-and-mortar stores shift to digital subscriptions. It's been a valuable tradeoff for some, building billion-dollar companies and unlocking huge libraries of music and video for relatively paltry subscription fees, but it's also been a challenge for cities that rely on those businesses for revenue. Now, Chicago wants to take back those missing taxes, and the way it's retaking them has some lawyers up in arms.

Today, a new "cloud tax" takes effect in the city of Chicago, targeting online databases and streaming entertainment services. It's a puzzling tax, cutting against many of the basic assumptions of the web, but the broader implications could be even more unsettling. Cloud services are built to be universal: Netflix works the same anywhere in the US, and except for rights constraints, you could extend that to the entire world. But many taxes are local — and as streaming services swallow up more and more of the world's entertainment, that could be a serious problem.

Chicago's new tax is actually composed of two recent rulings made by the city's Department of Finance: one covering "electronically delivered amusements" and another covering "nonpossessory computer leases." Each one takes an existing tax law and extends it to levy an extra 9 percent tax on certain types of online services. The first ruling presumably covers streaming media services like Netflix and Spotify, while the second would cover remote database or computing platforms like Amazon Web Services or Lexis Nexis. Under the new law, what passes as $100 of server time in Springfield would cost $109 if you're conducting it from an office in Chicago.

Although the tax is technically levied on consumers, some companies are already preparing to collect it as part of the monthly bill. Netflix says it’s already making arrangements to add the tax to the cost charged to its Chicago customers. "Jurisdictions around the world, including the US, are trying to figure out ways to tax online services," said a Netflix representative, reached by The Verge. "This is one approach."

The result for services is both higher prices and a new focus on localization. For the web services portion, the most likely effect is simply moving servers outside of the city limits — and, where possible, the offices that use them. Once implemented, streaming services will also have to keep closer track of which subscribers fall under the new tax, whether through billing addresses or more restrictive methods like IP tracking, which is already used to enforce rights restrictions.

Some lawyers have already taken issue with the city's move. After the rulings were announced, Reed Smith partner Michael Wynne argued the taxes violate both the Federal Telecommunications Act and, in the case of the second ruling, 1998's Internet Tax Freedom Act, intended to prevent discrimination against services delivered over the internet. "I could do that same activity of research using books or periodicals without being taxed," Wynne says. "So it does seem like I'm being picked on because I chose to do it online."

But while the law may seem onerous, it's also a response to an increasingly difficult reality for cash-strapped cities, particularly as online services start to take a bite out of the businesses in the urban center. 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. 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. By 2015, the people of Chicago are being entertained by corporations outside of the reach of the city government, leaving it scrambling to make up the difference. Facing a severe budget shortfall, it's easy to see how a city might look toward online services to fill the gap.

Still, the net result for cloud services and customers alike is a confusing hodgepodge. If taxes like Chicago's become widespread, it could become a persistent problem for services like the newly launched Apple Music, which hope to tempt listeners away from ad-supported services like Spotify’s free tier. It would also mean further monitoring on where media is being consumed, which would mean the experience of using a VPN to watch a US-only video might be a harbinger of things to come. In the meantime, the law world is struggling to piece through what the old laws will really mean for the cloud. "There's no question that the city needs revenue and I can see where things are escaping the old tax base," says Wynne, "I think the objectionable part is that, instead of drafting new laws for that, we're simply stretching the old laws to fit."

 

[Archer]

Good luck with that, Chicago.

 

[OctoMan]

Because if their ridiculous taxes didn't fix their economy before, this sure will.

 

[daveo42]

 

[The Llama]

I don't mind taxes and all but this seems so vague and hard to enforce.

 

[HammerOfThor]

Oh I'm sure startups can't wait to start moving into this city now.

 

[TheAbsolution]

Fuck that.

 

[Palmer_v1]

So Chicago residents start registering their accounts with addresses in other locations, right?

 

[backflip10019]

Ha, this is perfect.

 

[Erheller]

Thanks to Illinois we now get taxed in Steam and Amazon, too. It's bullshit.

 

[entremet]

Yay more taxes.

My fear is copycats.

Middle class being destroyed.

 

[glow]

Nice. Fired 1200 CPS employees, raised my property taxes by over 13% this year and now they want to charge me tax on my Netflix and iCloud? Why don't we be smart and push the new proposal for the income tax on wealthier residents? It'd save us a ton but I doubt Rahm would ever go for it.

 

[ISWThunder]

Calm down folks. We all know that the best way to stimulate the economy and tax revenue is for people to have less expendable income. Once the government has this extra money, they can fix all of the other problems quickly.

 

[mercenar1e]

lets tax everything.

 

[Guevara]

Eh, so many our products are digital now, and their delivery is digital.

Seems to me otherwise it's the same idea as adding tax to the purchase or rental of a physical book or a DVD. But then I forgot how anti-tax the internet generation is .

 

[terrisus]

 

[SliceSabre]

Cloud tax sounds painful.

 

[styl3s]

So Chicago residents start registering their accounts with addresses in other locations, right?

I totally didn't do this with the e-shop to avoid digital tax.

 

[DonasaurusRex]

uhhh thats not smart

 

[RiZ III]

Surprised they haven't started taxing emails.

 

[bigkrev]

ut while the law may seem onerous, it's also a response to an increasingly difficult reality for cash-strapped cities, particularly as online services start to take a bite out of the businesses in the urban center. 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. 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. By 2015, the people of Chicago are being entertained by corporations outside of the reach of the city government, leaving it scrambling to make up the difference. Facing a severe budget shortfall, it's easy to see how a city might look toward online services to fill the gap.

This is something every state has to address soon. If the money isn't coming in from Sales Tax, it has to come in from somewhere.

 

[Dennis]

They can find my money at the end of the rainbow.

 

[Hilbert]

Eh, as cloud services become larger and larger parts of our lives, and starts to replace previously taxed items....

I can't be mad. In fact it sounds inevitable.

 

[Ferrio]

This is something every state has to address soon. If the money isn't coming in from Sales Tax, it has to come in from somewhere.

Regressive taxes are bullshit.

 

[ElectricBlanketFire]

I'd love to move out of this state.

 

[Patryn]

The biggest effect at the moment I can see is that Chicago just hung a sign saying any Cloud Provider service is not welcome.

Any server farm will undoubtedly immediately relocate.

 

[deltatheta]

Is there a reason to target a tax so specifically? Why can't they just tax cloud services as a regular service, or extend whatever video rental taxes they have to cover video streaming?

I think we get into trouble when we write laws to specific technologies instead of general principles.

 

[billeh]

The biggest effect at the moment I can see is that Chicago just hung a sign saying any Cloud Provider service is not welcome.

Any server farm will undoubtedly immediately relocate.

Exactly. The surrounding area will benefit largely since there are a number of datacenters on the city's edge that won't be affected by this law (Elk Grove Village comes to mind).

 

[Marauder Shields]

Everyone supports more taxes unless it effects them.

 

[Firelord Chargrilled]

Wtf !! This could bankrupt Microsoft

 

[RiccochetJ]

Makes sense. I'll be interested in seeing how other municipalities, counties and states address this shift.

 

[Guevara]

Surprised they haven't started taxing emails.

Taxing email would be great! Imagine a $.01/email tax:

• Spam suddenly has a real cost for the sender! AND to pay the tax you would create a paper trail back to the sender. Win/Win.
• Junk mail even from reputable services now has a cost, just like a paper mass mailing
• Businesses would discover maybe they shouldn't cc:ALL on every email, perhaps they would be a little more judicious with email in general
• And yet for any individual person, it wouldn't cost much. I'm sure most people don't even send 1000 personal emails a year, which would only be $10

The problem with email now is that it is "free", and no one values a free service.

 

[billeh]

Everyone supports more taxes unless it effects them.

It's different when this is announced the same day they laid off 1400 public school employees. Burning the candle at both ends.

Taxing email would be great! Imagine a $.01/email tax:

• Spam suddenly has a real cost for the sender! AND to pay the tax you would create a paper trail back to the sender. Win/Win.
• Junk mail even from reputable services now has a cost, just like a paper mass mailing
• Businesses would discover maybe they shouldn't cc:ALL on every email, perhaps they would be a little more judicious with email in general
• And yet for any individual person, it wouldn't cost much. I'm sure most people don't even send 1000 personal emails a year, which would only be $10

The problem with email now is that it is "free", and no one values a free service.

Whoa there, Comcast .. Let's not get carried away.

 

[Brakke]

"electronically delivered amusements" sounds like your shitty garage band from middle school

v nice

 

[DiddyBop]

Well done lol

 

[Ivan Amiibo]

Thanks to Illinois we now get taxed in Steam and Amazon, too. It's bullshit.

those are actually not bullshit at all

 

[Bry0]

those are actually not bullshit at all

True, but it certainly sucks after i was accustomed to not having to pay taxes on online purchases.

 

[terrisus]

Revision:

 

[gogosox82]

Can't say I didn't see this coming when we started getting taxed for Steam and Amazon purchases a few months back. I guess I just don't understand why they are using old laws to tax cloud services that actually don't really apply to cloud services. They should really try and pass a law taxing cloud services but I guess that would be extremely unpopular as most taxes are especially when they a) are applied to the internet and b) regressive.

 

[zychi]

Gotta fill Rahm's corporate buddies pockets somehow. Nevermind using the taxes they already have, the parking meter money on things that actually matter.

 

[Arthrus]

People aren't already taxed for the online services they pay for? Why wouldn't you be? I don't see why taxes for a Netflix subscription would somehow be different than taxes for a gym membership.

 

[GungHo]

"Electronic amusement tax" sounds like they're going to ask me to pay for Funny or Die.

 

[speculawyer]

Very creative usage.

 

[UrAvgGuy]

The fuck is this nonsense.

 

[Skellig Gra]

It was bound to happen eventually.

 

[terrisus]

People aren't already taxed for the online services they pay for? Why wouldn't you be? I don't see why taxes for a Netflix subscription would somehow be different than taxes for a gym membership.

Because:

True, but it certainly sucks after i was accustomed to not having to pay taxes on online purchases.

People don't like paying more than they previously did.

Otherwise, there really is no difference/no reason.

 

[Earthstrike]

Everyone supports more taxes unless it effects them.

People support progressive taxation. This is regressive taxation.

 

[BamfMeat]

Can someone clue me in on this part -

If Netflix doesn't have servers there in Chicago, right - how can Chicago get taxes from them? I mean, sure, you can say "hey, you now have to pay us taxes". But how can they enforce that? Are they going to go to NetflixCentral and go in and be all "Give us the money or we'll....." well, I mean really, what can they do? Cut off everyones internet? Force internet providers to wall off Netflix? What options does Chicago have to actually enforce this?

 

[terrisus]

Can someone clue me in on this part -

If Netflix doesn't have servers there in Chicago, right - how can Chicago get taxes from them? I mean, sure, you can say "hey, you now have to pay us taxes". But how can they enforce that? Are they going to go to NetflixCentral and go in and be all "Give us the money or we'll....." well, I mean really, what can they do? Cut off everyones internet? Force internet providers to wall off Netflix? What options does Chicago have to actually enforce this?

Can the US and state governments tax products that are made in other countries and are then sent here?

 

[SyNapSe]

That seems almost impossible to apply. The definition of "cloud" service has become pretty nebulous. I see all sorts of things referred to as cloud and they're really just hosted solutions or web apps.

The country simply needs to pass a basic internet sales tax and give brick and mortars a fair shot again.