Controversy was sparked last week over whether state and local governments should be able to force Internet-based companies to collect taxes when a public advocacy group sued the city of Chicago and its comptroller in an attempt to strike down the city’s 9% “amusement tax” on the use of Netflix, Spotify, XBox Live, and other paid streaming media services.

MobileOn Sept. 9, the Liberty Justice Center filed the lawsuit on behalf of six Chicago residents who subscribe to such services. While Chicago has long imposed the amusement tax on the likes of movie and concert tickets, the city’s finance department widened the scope of the tax to include paid online rental services in a June 9 tax ruling.

Filed in Cook County Circuit Court, the suit alleges that taxing Chicago customers on their payments for the services violates the federal Internet Tax Freedom Act “because it 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,” according to a statement on the website of the center, a non-profit litigation group. In its lawsuit, the center notes that the law bars “discriminatory taxes on electronic commerce.”

Signed into law in 1998, renewed in 2014, and set to expire on Oct. 1, the Internet Tax Freedom Act also prohibits state and local governments from imposing their sales tax on the monthly payments that consumers make to their Internet service providers in exchange for access to the Internet.  (A measure that would make the act permanent has been passed by the House, and similar legislation has been introduced in the Senate.)

Up until now, the issue of taxing streaming video and audio has been much less controversial than that of the question of whether states should be able to force out-of-state, online retailers to collect sales taxes.

In their recent complaint against Chicago, however, the plaintiffs charged that the city’s amusement tax “unlawfully discriminates against electronic commerce because it imposes a higher tax rate on theatrical, musical, and cultural performances that are delivered through an online streaming service than it imposes on those same performances if they are consumed in person.”

The ruling exempts in-person theater, musical, or “other live cultural performances” from the tax if they take place in auditoriums, theaters, or other city spaces that have a maximum capacity of 750 people, the plaintiffs note.

The ruling also provides a reduced rate of 5% for such performances if the venue can house more than 750 persons. “However, electronically delivered audio or video of the same performances is taxed at nine percent,” according to the complaint.

“Thus, performances consumed in person are subject to an Amusement Tax of either 0% or 5%, depending on the capacity of the venue at which they are performed, but streaming audio or video of such performances is subject to an Amusement Tax of 9%,” the plaintiffs argue.

“In this way, the Amusement Tax,” they contend, “imposes an unlawful discriminatory tax on electronic commerce.”

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