Cities, States Keep Piling on the Internet Taxes
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The City of Chicago has the dubious distinction of becoming the first jurisdiction to apply a sweeping tax to “cloud-based” services, ranging from streaming video to tax preparation.

Beginning Sept. 1, residents of the Windy City will be dunned a 9 percent levy on entertainment, online applications, and data processing services that depend on the computing, transmission, and storage  capabilities of the Internet and World Wide Web.

It’s the result of a Chicago Department of Finance decision to extend the city’s Amusement Tax and Personal Property Lease Transaction Tax to Internet downloads. The application of the Amusement Tax means that Chicagoans will be paying 9 percent more for streamed video and music services, such as those from Netflix, Hulu, Amazon, and Spotify, whether the purchase is in the form of a monthly subscription or a one-off order. In doing so, Chicago joins the Alabama Department of Revenue, which wants to apply the state’s 1980s-era tax on videocassette rentals to streaming video.

But Chicago went one better with its new reading of the Lease Transaction Tax. This will now cover any paid cloud-based application that provides information or processing services, such as TurboTax’s web-based tax preparation application, as well as database search services such as Lexis-Nexis, Ancestry.com, and Realtor.com, just to name three.

The “cloud tax” represents yet another government money grab from Internet users. Sales taxes already are applied to nontangible digital purchases such as software, movies, music, and games that consumers then permanently store on their own media. Then there are the numerous taxes, surcharges, and fees states and cities heap on the broadband wireless phone and cable services that serve as Internet connections. On wireless service alone, these charges averaged 17 percent, according to a 2014 report from the Tax Foundation.

And it’s not stopping. Prince George’s County, Maryland, recently raised taxes on landline and wireless phone services as part of an overall local tax increase. Meanwhile, Congress is debating once again whether to create a legal framework that would let states collect sales tax from online retailers outside their borders.

It’s no surprise to see jurisdictions targeting cloud-based services. Enough consumers have turned to streaming for entertainment that it’s been dubbed the latest “game-changer” in tech circles. Even the Federal Communications Commission is trying to figure out a way to regulate it. In the past three years, the percentage of viewers watching live television has fallen from 89 percent to 80 percent, while Internet streaming has increased from 4 to 11 percent, according to research by Nielsen Co. and broadcasters. The same research found that over that same three-year period, per-week streaming grew from four hours and 13 minutes to four hours and 17 minutes in a growing market. No doubt governments covet these dollars.

Sadly, it seems that streaming services see taxation as inevitable, “Jurisdictions around the world, including the U.S., are trying to figure out ways to tax online services,” a Netflix representative told The Verge, an online site covering technology, entertainment and science.

Chicago consumers should not despair yet. The law firm Reed Smith LLP, quoted by CBS Chicago, believes the tax may violate the Federal Telecommunications Act and the Internet Tax Freedom Act, which, as one of the few consumer-friendly tax laws pertaining to the web, prohibits taxation of Internet access.

Legal questions aside, taxing the Internet is just bad policy. Tax a commodity and people will use less of it. Adding a tax to web-based applications means decreasing utility for users and increasing barriers to success for entrepreneurs who seek to build innovative cloud-based services. Lawmakers in states and communities all say they want to foster digital inclusion and stimulate a robust information-based economy. Rampant taxation is no way to do it.

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