ESA Sues Chicago To Overturn Online Tax

The Entertainment Software Association is taking the city of Chicago to court, in hopes of overturning the legislation of applying Chicago's amusement tax to online goods and services.

Chicago's amusement tax applies to shows and services provided within the city, such as movie theaters, live concerts, and subscription TV. However in the past two years or so, the amusement tax had been expanded and applied to goods and services provided online. Residents of Chicago were then subject to an extra 9% charge on things such as World of Warcraft subscriptions, Xbox Live, Netflix and even Cloud services.

The formal complaint, filed on June 5th, 2017, alleges that the amusement tax is violating the Internet Tax Freedom Act. While entertainment bought on physical mediums (games, DVDs, books) are exempt, but the same goods purchased or delivered digitally online are taxed, the lawsuit deems the amusement tax as an "unlawful discriminatory tax on electronic commerce".

By its terms, the Amusement Tax ordinance and Amusement Tax Ruling #5 exclude from the tax charges for games, movies, music and videos purchased on physical media, and amusements provided using "automatic amusement machines".

This lawsuit challenges the Amusement Tax ordinance and the interpretative ruling on the grounds that, as applied, they violate the Internet Tax Freedom Act, because it interprets the Chicago Amusement tax as:

(1) Applying to the charges for online amusements and not to charges for certain offline amusements occurring inside the City of Chicago;

And (2) as applying to charges for online amusements occurring outside the City of Chicago and not to charges for offline amusements occurring outside the City of Chicago, resulting in an unlawful discriminatory tax on electronic commerce.

The document also alleges that ESA members have been negatively impacted by having to "collect an illegal 9% tax on their product offerings". They claim that there have been financial losses due to lost potential sales and incurred administrative costs in managing the tax. ESA president and CEO Michael D. Gallagher, doesn't plan to go down without a fight.

"This discriminatory tax makes Chicagoans' lives more expensive, just because they live in the 21st century and choose to play video games online.

As one of the most innovative and rapidly growing industries in Illinois, we are proud to take this fight to court and stand up for consumers. Chicago's tax bureaucrats are out of line in extending their reach beyond legal limits imposed by federal law. We intend to remedy that situation."

While the outcome of the lawsuit has yet to be determined anytime soon, a judgement ruling in ESA's favour will hopefully set a precedent, and work to deter possible taxes like this in the near future.