Apple settles ‘Netflix tax’ lawsuit in Chicago after judge throws out case

Apple has settled its lawsuit against the city of Chicago over its ‘Netflix tax’ after a judge dismissed the case.

The first-of-its-kind measure was introduced by the city in 2015. It levied a 9% surcharge on users of streaming service by extending Chicago’s tax on tickets for recreational activities to “amusements that are delivered electronically.” The tax was explicitly set up to compensate for the revenue lost from traditional physical retail outlets which have seen their businesses impacted by the rise of ecommerce and the services-based economy.

As one of the companies whose services were impacted, Apple launched a lawsuit in 2018 which alleged violations of the commerce and due process clauses of the Constitution. It also argued that the ‘Netflix tax’ was in violation of the federal Internet Tax Freedom Act, which prohibits jurisdictions from imposing discriminatory taxes on electronic commerce. It branded the measure as “an illegal tax,” and said that if it “does not collect the tax from its customers, it will directly be liable for a tax that the City of Chicago has no power to impose or authority to enforce.”

Countries in Europe such as Denmark, Switzerland and Portugal have introduced levies on video streaming services, but these have targeted operational income as opposed to making consumers pay more. 

Bloomberg last year reported that the tax generated US$30 million for Chicago in the year ending June 30th, 2021.

Apple was not alone in raising legal challenges, with Sony Interactive Entertainment, the Entertainment Software Association (ESA), and a group representing Netflix, Hulu and Spotify all launching their own lawsuits. The latter suit caused the Apple case to be put on hold for two years, with the city winning that case as an appeals court found no violation of the Internet Tax Freedom Act. 

Following that judgement, Apple amended its lawsuit but Cook County Circuit Court Judge Daniel Duffy dismissed the case last week with terms not disclosed.

Apple has not refiled its complaint, despite the judge never addressing its merits.

While this would appear to be a loss for Apple and streamers more broadly, the fact that the judge did not make a ruling means that other cities cannot use this as precedent that the programme is legal. As such, any other city in the US that seeks to implement a similar levy would likely face similar backlash from streaming operators who will already have the experience of dealing with this in Chicago.