Illinois bill would expand Chicago’s ‘Netflix tax’ statewide

Lawmakers in the Illinois House are weighing a bill that would tax streaming and satellite service users “for the privilege to witness, view, or otherwise enjoy the entertainment.”

Illinoisans who stream movies on Netflix, watch satellite TV or listen to music on smart speakers may need to pay a state tax to enjoy them.

House Bill 3359 would create the “Video Service Tax Modernization Act” and “Entertainment Tax Fairness Act,” which would impose new taxes on satellite and video streaming service providers and subscribers. Users of those services would pay a 1 percent tax “for the privilege to witness, view, or otherwise enjoy the entertainment,” while companies would pay a 5 percent tax on their gross revenues.

Consumers could bear the brunt of both new taxes, as companies pass along the tax costs by charging higher prices.

Chicago currently stretches the definition of its 9 percent citywide “amusement tax” to include online streaming services such as Netflix and Spotify, as well as Playstation rentals.

The legality of Chicago’s “Netflix tax” is dubious. The Liberty Justice Center, the Illinois Policy Institute’s litigation partner, sued the city on behalf of streaming service customers in 2015, after the expansion of the tax to online services went into effect. The city tax was previously applied only to ticketed live entertainment performances and events.

The Center argued expanding the tax to online services violates the 1998 Internet Tax Freedom Act, a federal law. The Act prohibits taxes that discriminate against electronic commerce levied by any government body, including state governments, suggesting Illinois could expose itself to similar legal risks should HB 3359 become law.

A circuit court judge ruled in the city’s favor in May 2018, upholding the expansion of the amusement tax, and the Liberty Justice Center is currently appealing the case before the 1st District Appellate Court.

The new taxes included in HB 3359 are only the latest in a string of proposed tax hikes by state leaders. Gov. J.B. Pritzker’s proposed budget for fiscal year 2020 includes a range of new and increased taxes and fees totaling $4.5 billion. The budget includes the first statewide plastic bag tax and a new tax on e-cigarettes, as well as tax hikes on cigarettes, video gambling and Medicare providers.

State lawmakers are also proposing to double the state’s gas tax, which would bring Illinois’ gas tax to second-highest from 10th-highest in the nation.

Illinois’ overall tax burden currently ranks highest in the nation, according to one analysis. Despite the state’s host of high taxes, Illinois’ inability to control its spending has resulted in $134 billion in government worker pension debt and a nearly $8 billion backlog of unpaid bills.

On March 26, state Sen. Dan McConchie, R-Hawthorn Woods, introduced a constitutional amendment that would require a supermajority vote in both chambers to raise taxes – a measure that would encourage lawmakers to explore needed structural reforms before asking more of overburdened taxpayers.

Absent serious pension reform, HB 3359 – like each tax increase before it – will fail to revive the state’s dismal fiscal condition.

HB 3359 is currently in the Sales, Amusement & Other Taxes Subcommittee and is on the calendar for a March 28 hearing.