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Labell v. City of Chicago

Court of Appeals of Illinois, First District, Fourth Division

September 30, 2019

MICHAEL LABELL, JARED LABELL, NATALIE BEZEK, EMILY ROSE, BRYANT JACKSON-GREEN, ZACK UREVIG, and FORREST JEHLIK, Plaintiffs-Appellants,
v.
THE CITY OF CHICAGO and ERIN KEANE, in herofficial capacity as Comptroller of the City of Chicago, Defendants-Appellees.

          Appeal from the Circuit Court of Cook County No. 15 CH 13399 Honorable Carl Anthony Walker, Judge Presiding.

          Attorneys for Appellant: Jeffrey M. Schwab and James J. McQuaid, of Liberty Justice Center, of Chicago, for appellants.

          Attorneys for Appellee: Edward N. Siskel, Corporation Counsel of the City of Chicago (Benna Ruth Solomon, Myriam Zreczny Kasper, and Suzanne M. Loose, of counsel), for appellee.

          REYES, JUSTICE delivered the judgment of the court, with opinion. Justices Lampkin and Burke concurred in the judgment and opinion.

          OPINION

          REYES, JUSTICE.

         ¶ 1 Defendant, the city of Chicago (City), imposes a nine percent amusement tax on charges paid for the privilege to enter, witness, view, or participate in certain activities within Chicago. In 2015, the City's comptroller issued Ruling 5, which provided guidance on the collection of the amusement tax as it pertained to amusements that are delivered electronically. Electronically Delivered Amusements Ruling 5 (eff. July 1, 2015) (Ruling 5). Ruling 5 stated that beginning July 1, 2015, charges paid for the privilege of watching electronically delivered television shows, movies, or videos would be subject to the amusement tax if the shows, movies, or videos are delivered to a patron in the City. Ruling 5 also clarified that the amusement tax would cover the privilege of listening to electronically delivered music and participating in games, online or otherwise, when delivered to a customer in the City. To determine the sourcing for the amusement tax, the City's department of finance indicated it would utilize the rules set forth in the Mobile Telecommunications Sourcing Conformity Act (MTSCA) (35 ILCS 638 (West 2014)), which meant that the amusement tax would apply to customers whose residential street address or primary business address was in Chicago, "as reflected by their credit card billing address, zip code, or other reliable information."

         ¶ 2 In November 2015, the City council amended the Chicago Municipal Code as it related to the amusement tax to include that in the case of amusements delivered electronically to mobile devices, such as in the case of video streaming, audio streaming, and on-line games, the rules set forth in the MTSCA may be utilized to determine which customers are subject to the tax. Chicago Municipal Code § 4-156-020(G1) (added Nov. 21, 2017).

         ¶ 3 Plaintiffs, Michael Labell, Jared Labell, Natalie Bezek, Emily Rose, Bryant Jackson-Green, Zach Urevig, and Forrest Jehlik (collectively plaintiffs) brought this suit in the circuit court of Cook County against defendants, the City and Erin Keane in her official capacity as comptroller. In their complaint, plaintiffs challenged the constitutionality of the City's amusement tax as it related to internet-based streaming services (streaming services tax) and sought declaratory and permanent injunctive relief.

         ¶ 4 Upon consideration of cross-motions for summary judgment, the circuit court upheld the constitutionality of the streaming services tax. On appeal, plaintiffs contend the City's application of the amusement tax on streaming services exceeds the City's constitutional and statutory authority. Specifically, the tax on streaming services (1) exceeds the City's authority to tax under the Illinois Constitution art. VII, § 6, because the City imposes the tax based on a customer's billing address, not whether the customer is using the amusement within Chicago; (2) violates the uniformity clause of the Illinois Constitution of 1970; and (3) discriminates against electronic commerce in violation of the federal Internet Tax Freedom Act (ITFA) (47 U.S.C. § 151 (note)). For the reasons that follow, we affirm the judgment of the circuit court.

         ¶ 5 BACKGROUND

         ¶ 6 Plaintiffs are residents of Chicago and subscribers to various services that provide media delivered electronically, including Netflix, Hulu, Spotify, and Amazon Prime. Netflix is a provider of on-demand internet streaming media, which allows subscribers to watch video content online, and of a flat-rate video-by-mail service which allows subscribers to borrow DVD and Blue-ray video discs and return them in prepaid mailers. Hulu provides similar video-streaming services, but does not offer video-by-mail service. Spotify is a music streaming service which allows consumers to access a large library of recorded music for a subscription fee. Amazon Prime is a membership service that provides members with certain benefits provided by Amazon.com, including access to streaming movies, music, cloud storage, and the ability to borrow e-books.

         ¶ 7 Plaintiffs are mounting a facial challenge to the constitutionality of the amusement tax as it relates to streaming services; accordingly, a brief history of the amusement tax ordinance is warranted. In 1947 the City enacted an amusement tax ordinance which imposed a tax on organizers, sponsors and promoters of various enumerated spectator and participatory events. In 1980, the ordinance was amended to shift the tax from the providers to their patrons. Since then, the amusement tax ordinance has provided for a tax upon the patrons of amusements located within the City for the privilege of witnessing, viewing, or participating in such amusements.

         ¶ 8 The Chicago Municipal Code defines an amusement subject to the amusement tax to include three categories of activities:

"(1) any exhibition, performance, presentation or show for entertainment purposes, including, but not limited to, any theatrical, dramatic, musical or spectacular performance, promotional show, motion picture show, flower, poultry or animal show, animal act, circus, rodeo, athletic contest, sport, game or similar exhibition such as boxing, wrestling, skating, dancing, swimming, racing, or riding on animals or vehicles, baseball, basketball, softball, football, tennis, golf, hockey, track and field games, bowling or billiard or pool games;
(2) any entertainment or recreational activity offered for public participation or on a membership or other basis including, but not limited to, carnivals, amusement park rides and games, bowling, billiards and pool games, dancing, tennis, racquetball, swimming, weightlifting, bodybuilding or similar activities; or
(3) any paid television programming, whether transmitted by wire, cable, fiber optics, laser, microwave, radio, satellite or similar means." Chicago Municipal Code § 4-156-010 (amended Nov. 21, 2017).

         The Chicago Municipal Code exempts "automatic amusement devices" from the amusement tax and instead subjects their operators to a $150 tax per year per device. Chicago Municipal Code § 4-156-160 (amended Mar. 13, 2013). The Chicago Municipal Code defines an "automatic amusement device" as "any machine, which, upon *** any *** payment method, may be operated by the public generally for use as a game, entertainment or amusement *** and includes but is not limited to such devices as jukeboxes, marble machines, pinball machines, movie and video booths or stands and all [similar] games, operations or transactions[.]" Chicago Municipal Code § 4-156-150 (amended Jul. 25, 2001).

         ¶ 9 The Chicago Municipal Code further exempts from the amusement tax "in person live theatrical, live musical or other live cultural performances that take place in any auditorium, theater or other space in the city whose maximum capacity, including all balconies and other sections, is not more than 1500 persons." Chicago Municipal Code § 4-156-010(D)(1) (amended Nov. 21, 2017).

         ¶ 10 On June 9, 2015, the City's department of finance issued Ruling 5, which defined the term "amusement" to include amusements that are delivered electronically to patrons in the City. According to the ruling, amusements delivered electronically include: the privilege of watching electronically delivered television shows, movies, or videos; the privilege of listening to electronically delivered music; and the privilege of participating in games, online or otherwise. The ruling made clear, however, that the amusement tax would not apply to rentals or temporary downloads. Ruling 5 also stated that providers who receive charges for electronically delivered amusements are considered owners or operators and therefore are required to collect the City's amusement tax from their customers. The ruling clarified that the amusement tax applies to any customer of an amusement delivered electronically whose residential street address or primary business street address is in Chicago, as reflected by his or her credit card billing address, zip code, or other reliable information as set forth in the MTSCA (35 ILCS 638/1 et seq. (West 2014)).

         ¶ 11 Thereafter, the city council, as part of the City's revenue ordinance for 2016, amended the Chicago Municipal Code as it relates to the amusement tax. That amendment provided:

"In the case of amusements that are delivered electronically to mobile devices, as in the case of video streaming, audio streaming and on-line games, the rules set forth in the Illinois Mobile Telecommunications Sourcing Conformity Act, 35 ILCS 638, as amended, may be utilized for the purpose of determining which customers and charges are subject to the tax imposed by this chapter. If those rules indicate that the tax applies, it shall be presumed that the tax does apply unless the contrary is established by books, records or other documentary evidence." Chicago Municipal Code § 4-156-020(G1) (amended Nov. 21, 2017).

         ¶ 12 Plaintiffs filed suit against defendants on September 9, 2015. The plaintiffs' operative second amended complaint challenged the application of the amusement tax to streaming services because: (1) streaming services are outside the scope of the City's amusement tax ordinance; (2) the City taxes streaming services differently than it taxes equivalent in-person amusements in violation of the Illinois Constitution's uniformity clause; (3) applying the tax to streaming services imposes a discriminatory tax on electronic commerce in violation of the ITFA; and (4) the City is taxing activity outside its borders in violation of the U.S. Constitution's commerce clause. Plaintiffs requested a declaratory judgment and a permanent injunction.

         ¶ 13 After conducting discovery, plaintiffs and the City filed cross-motions for summary judgment. When the matter was fully briefed and argued, the circuit court accepted the City's arguments that the amusement tax on amusements delivered electronically did not violate the state or federal constitution. The circuit court further found that Ruling 5 was not an unauthorized expansion of the City's home rule authority nor did it violate the ITFA. The circuit court thus granted summary judgment in favor of the City and denied plaintiffs' motion for summary judgment. This appeal followed.

         ¶ 14 ANALYSIS

         ¶ 15 On appeal, plaintiffs set forth three arguments regarding the facial constitutionality of the City's application of its amusement tax on streaming services. First, plaintiffs contend that the streaming services tax exceeds the City's home rule authority because the tax effectively taxes activities that occur outside Chicago. Second, plaintiffs maintain that the tax on streaming services violates the uniformity clause of the Illinois Constitution of 1970. Third, plaintiffs assert the tax discriminates against electronic commerce in violation of the federal ITFA. Plaintiffs maintain that because the City's tax on streaming services exceeds its constitutional and statutory authority this court ...


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