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New streaming tax hits consumers

News, 06 July 2015

CHICAGO: Consumers in Chicago who use Netflix, Amazon Web Services and other streaming or database platforms will now have to pay a "cloud tax" of 9% after city officials introduced new rules.

Faced with declining municipal revenue from traditional high street stores, Chicago has sought a new source of income by extending existing tax laws to encompass "electronically delivered amusements" and "non-possessory computer leases".

In effect, the tax targets streaming services and online databases within the city limits and has raised concerns about the impact on consumers and the extra complications that service providers could face, The Verge reported.

There are also worries that thousands of other jurisdictions could follow Chicago's lead, creating complexities around compliance and accounting practices.

For example, it raises the possibility of restrictive methods like IP tracking being used to identify and locate subscribers who fall under the new tax.

Netflix has confirmed that it is already making arrangements to add the tax to the cost charged to its customers in Chicago while other companies, such as Lexis-Nexis and Spotify, may follow suit.

Michael Wynne, a partner with law firm Reed Smith, said the new tax may violate the Federal Telecommunications Act and the Internet Tax Freedom Act 1998, although he recognised the financial pressures faced by the Chicago authorities.

"There's no question that the city needs revenue and I can see where things are escaping the old tax base," he said.

"I think the objectionable part is that, instead of drafting new laws for that, we're simply stretching the old laws to fit," he added.

The development, coming just before Independence Day, is a rare piece of bad news for Netflix which has been buoyed recently by a number of upbeat industry reports.

FBR Capital Markets recently predicted that Netflix's audience would soon surpass the total viewership of broadcast channels, such as NBC, ABC and CBS.

Separately, a study from consumer insights firm iModerate found that 40% of households now subscribe to a streaming service and that Netflix is by far their favourite choice.

Data sourced from The Verge, BRG, iModerate; additional content by Warc staff