Tech companies oppose Chicago tax on "cloud" services

The high-tech industry is considering a legal challenge of Chicago's recent move to tax streaming services from providers including Netflix (NFLX), with the city's policy one that experts say could set a national precedent.

Chicago officials overstepped their legal authority when they opted to impose a "cloud tax," attorney Stephen Kranz, a partner at Washington, D.C.-based McDermott Will & Emery, said. His clients, whom he declined to name, haven't decided on the next step, with a conference call on the issue scheduled for this week.

"It's possible that companies may wait until they have a tax bill from the city and then challenge the tax bill," said Kranz, who works as outside counsel on state tax and unclaimed property matters for industry groups Entertainment Software Association, the National Retail Federation and CompTIA. "Consideration will [also] be given as to whether a preemptive suit can be brought to challenge the city's position."

The Chicago Department of Finance addressed the issue of taxing streaming and cloud services in two ways. As of July 1, city residents who pay for services from companies including Netflix, Spotify and Xbox Live are subject to a 9 percent amusement tax. In a separate ruling , the department found the city's personal property lease transaction tax applies to situations where a lessor pays a lessee "primarily for the ability to use the provider's computer to input, modify or retrieve data or information."

The city imposed the taxes without going through a legislative body such as a city council and "there's no basis in the law for the department to do that," Kranz said. A spokeswoman for Chicago Mayor Rahm Emanuel disputes Kranz's argument, saying the rulings are consistent with Chicago ordinances and the city's home-rule authority.

Netflix, whose video-streaming service had 60 million members in the latest quarter, and Amazon (AMZN), one of the major players in cloud-computing services, did not respond to emails seeking comment. A Netflix spokesperson told The Verge the company was preparing to collect the fee from Chicago residents.

Tax experts say other tax officials are closely watching the city's actions.

"Some states are still cash-strapped and this [Chicago's taxation of online entertainment] is one way to do it," David Sawyer, a writer for Tax Analysts, said.

Tax policies on cloud computing and streaming video vary.

About 10 states have laws on the books, either imposing or exempting the taxes, with administrators in another 15 or so states enacting such levies in recent years, with some of those decisions then overruled by state lawmakers, Kranz said. "It is a bit of a mess out there -- the rules for vendors and consumers of cloud services and streaming services are not clear."

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