Chasing clouds: Chicago hits Netflix, Amazon with unprecedented digital tax

A general view of the city of Chicago. (Reuters / Jim Young)
​The Windy City of Chicago, Illinois is taking a bold new approach to taxation, hitting online streaming services like Netflix and Amazon Web Services with a 9 percent tax that goes into effect on Wednesday.

To enact the tax, officials expanded the definition of already-existing entertainment and property-lease taxes to encompass cloud-based services.

Cloud-based services are here to stay, but they have been eating up media market share at the expense of brick-and-mortar storefronts. Remember Blockbuster? They paid (past tense) various taxes to local authorities.

Services like Netflix, being located in the “cloud,” don’t play by the same rules. This is a good thing from a consumer standpoint. However, it’s a bad thing for local governments, who lost out on significant revenue when Blockbuster and friends became footnotes in history.

It would appear to be a difficult tax to effectively enforce, which is why Netflix is already making arrangements with Chicago authorities to automatically add the tax to the bills of the city’s subscribers.

Jurisdictions around the world, including the US, are trying to figure out ways to tax online services,” a Netflix representative told The Verge. “This is one approach.”

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If there was ever a city in desperate need for new revenue, it’s Chicago. The city abolished what was known as a “head tax” in 2014, which charged larger companies $4-per-employee every month. That fee was maligned for effectively being a tax on jobs, and led many large companies to move their offices outside the city limits.

That now-abolished tax brought in about $23 million a year. The city’s budget director said the full impact of that loss in revenue wouldn’t be felt until this year, according to the Chicago Tribune.

This sheds some light on why the city enacted such an unprecedented tax. However, Chicago’s financial problems won’t go away simply by replacing one tax with another.

Chicago has been in financial trouble for years now. The Democratic-controlled city government has been kicking the fiscal can down the road for years. Moody’s downgraded the city’s bond rating to junk status in May, and Chicago’s unfunded teacher pension liability has increased by $13 million dollars every day since 1996.

Chicago’s population has dropped dramatically from its peak of about 3.4 million people in 1950 to 2.7 million today, representing a 20 percent drop in residents. This flight has been attributed to reasons such as inefficient taxation and regulatory policies, with some even recommending the city file for bankruptcy.

It is likely that many more cash-starved cities will try to follow suit in an attempt to tap into this bountiful new revenue stream, but a much deeper dilemma will remain: how to replace bad governance with fiscal responsibility.