Illinois: Entertainment Software Association challenges amusement tax

Almost two years ago, the Chicago Department of Revenue issued an Amusement Tax Ruling #5 effective Sept. 1, 2015, that imposed an amusement tax “upon the patrons of every amusement within the city.” The rate of the tax is 9 percent, unless the amusement is held in an auditorium with a maximum capacity of more than 75 people, in which case it is 5 percent. At the time, we noted that Chicago anticipated collecting $12 million in additional revenue, and would use consumers’ addresses when determining whether to levy the tax or not.

By definition, an amusement consists of any of the following:

• “Any exhibition, performance, presentation or show for entertainment purposes, including, but not limited to, any theatrical, dramatic, musical or spectacular performance,” or the like.
• “Any entertainment or recreational activity offered for public participation or on a membership or other basis including, but not limited to, carnivals,” or the like.
• “Any paid television programming, whether transmitted by wire, cable, fibex optics, laser, microwave, radio, satellite or similar means.”

The ruling provides that the amusement tax does not apply to sales of shows, movies, videos, music or video games that are transferred to the customer by disc or permanently downloaded from the Internet; but it does apply to “…rentals (normally accomplished by streaming or a 'temporary' download)."

It is largely this exemption provision that is the subject of a new lawsuit that the Entertainment Software Association (ESA) filed against the city of Chicago, and related parties, earlier this month. In its complaint, ESA describes itself as an association comprised of members that publish video games, operate online games and game networks, and provide other entertainment such as movies, audio and video streaming services to customers located in Chicago and throughout the world.

In its press release describing the suit, the group denounced the “discriminatory tax” as one that “makes Chicagoans’ lives more expensive, just because they live in the 21st century and choose to play video games online.” 

Additionally, the ruling forces Chicago residents to pay the 9 percent tax when streaming and subscription services, such as memberships to online game communities, subscriptions to specific online games, and subscriptions to game libraries, but not “when games or content are obtained from a store in downtown Chicago. The city’s Amusement Tax hurts ordinary Chicagoans by forcing gamers to pay for their elected officials’ budget mistakes, literally.”

According to the ESA, this is especially onerous in light of how video games have evolved into a mass medium:

• More than 150 million Americans play video games, and 65 percent of American households are home to at least one person who plays video games regularly, or at least three hours per week. 
• The average gamer is 35 years old and 72 percent are age 18 or older. Women age 18 and older represent a significantly greater portion of the video game-playing population (31 percent) than boys under age 18 (18 percent).
• Most parents (71 percent) say video games are a positive part of their child’s life. Most parents (67 percent) also play video games with their child at least once weekly and 94 percent say they pay attention to the video games played by their child.
• In 2016, the industry sold over 24.5 billion games and generated more than $34.4 billion in revenue. Total game sales included purchases of digital content such as online subscriptions, downloadable content, mobile applications, and social networking games. Computer and video game companies provide jobs to more than 220,000 people in 50 states.

Among other things, ESA’s complaint alleges that the amusement tax violates the Internet Tax Freedom Act (ITFA) because it applies to:

• Charges for online amusements and not to charges for certain offline amusements occurring inside the City of Chicago.
• Charges for online amusements occurring outside the city of Chicago and not to charges for offline amusements occurring outside the city of Chicago. This, ESA argues, result in an unlawful discriminatory tax on electronic commerce.

As for the amusement tax’s damage, ESA contends that it is “real, immediate and direct. Affected ESA members are in an untenable position as a result of Amusement Tax Ruling #5; they are required to either collect illegal taxes from their customers and suffer financial losses or face assessment of taxes by the City. Moreover, they must incur substantial costs to comply.”

More specifically, in order to comply, affected ESA members must “incur substantial costs to dramatically change their normal business practices related to transactions with customers with Chicago billing addresses, including modifying their computer systems and invoicing procedures, preparing and filing Amusement Tax returns and maintaining documentary proof of taxable and nontaxable transactions.”

The complaint seeks a court declaration that the tax is illegally discriminatory, and a permanent injunction restraining Chicago from applying it to charges for online amusements.  

Prior litigation

In September of 2015, the Liberty Justice Center sued the city of Chicago for the same tax ruling.  Representing six Chicago residents who subscribe to services subject to the tax, like Netflix, Spotify and XBox Live, the center asked the Cook County Circuit Court to strike it down.

Its perspective was a little different from ESA’s; the center claimed that there is no authorization in the City code for a tax on Internet-based streaming media services.  It also alleged a violation of the ITFA, but because the amusement tax “discriminates against online entertainment by taxing tickets for certain live theatrical and musical performances at a lower rate than it would tax access to those same performances if they were streamed online.”