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Cities Binging on Taxing Streaming Services Violate Federal Law

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Cities Binging on Taxing Streaming Services Violate Federal Law TAPPING THE NETFLIx BINGE: CITIES BINGING ON TAXING STREAMING SERVICES VIOLATE FEDERAL LAW Genna Autumn Conti* "Internetaccess drives innovation and the success of our economy. It is a gateway to knowledge, opportunity, and the rest of the world." TABLE OF CONTENTS I. INTRODUCTION...............................................1654 A. Overview ................................ ......... 1654 II. AN OVERVIEW OF THE HISTORY AND USAGE OF THE INTERNET ........ 1658 A. History of the Internet .................................. 1658 B. The Internet: Then and Now................ ......... 1660 III. THE INTERNET TAX FREEDOM ACT ............................. 1661 IV. CHICAGO'S AMUSEMENT TAX & PASADENA'S UTLITY TAX..............1664 A. Chicago'sAmusement Tax................... ........ 1664 1. Amusement Tax.............................1664 2. Amusement Tax Ruling No. 5........... ............. 1665 3. Comptroller's Authority ............................ 1667 B. Pasadena's Utility Tax ................................1668 V. LABELLV. CITYOFCHICAGO: THE ARGUMENTS MADE BYTHE USERS OF ONLINE STREAMING SERVICES IN CHICAGO IN RESPONSE TO THE EXPANSION OF CHICAGO'S NINE PERCENT AMUSEMENT TAX......1670 A. Background........................................1670 B. The Original Complaint ......................... 1670 1. Counts I, II and III: "The City of Chicago Comptroller has exceeded his authority by adopting Amusement Tax Ruling [No.] 5 and by extending the City's Amusement Tax to Internet-based streaming" ........... 1670 * J.D., 2017, Rutgers Law School; B.M., 2014, The College of New Jersey. I would like to thank my advisor, Professor Amy Soled, for her guidance, insight, and endless support throughout the development of this Note. I would also like to thank my family and friends for their contributions and support. 1. Press Release, Beth Breeding, Comm. Dir. for Representative Bob Goodlatte, House Passes Permanent Internet Tax Freedom Act (June 9, 2015), http:// goodlatte.house.gov/news/documentsingle.aspx?DocumentID-356. 1653 1654 RUTGERS UNIVERSITY LAW REVIEW [Vol. 69:1653 2. "Count IV[:] Amusement Tax Ruling [No.] 5's tax on streaming services violates the Internet Tax Freedom Act, 47 U.S.C. § 151 note (2015) ."............ ..... 1672 C. The First Amended Complaint ............. ......... 1672 1. "Count V: Amusement Tax Ruling [No.] 5's tax on streaming services violates the Uniformity Clause of the Illinois Constitution, Article IX, Section 2." ................. 1672 2. "Count VI[:] Amusement Tax Ruling [No.] 5's tax on streaming services violates the Commerce Clause of the United States Constitution, Article I, Section 8, Clause 3." ....................................... ... 1673 D. City of Chicago'sMotion to Dismiss............ ..... 1674 E. Second Amended Complaint ........................ 1675 1. "Count VII: Amusement Tax Ruling [No.] 5's tax on streaming services exceeds the City's authority under the Illinois Constitution. ........................... 1676 VI. CHICAGO's EXPANSION OF THE NINE PERCENT AMUSEMENT TAX GOES Too FAR: THE COURT IN LABELL V. CITY OF CHICAGO SHOULD HOLD THE TAX INVALID.. ................................. 1676 A. Analysis of "Count IV. Amusement Tax Ruling [No.] 5's tax on streaming services violates the Internet Tax Freedom Act, 47 U.S.C. § 151 (2015)." ........................... 1677 B. Analysis of "Count VI Amusement Tax Ruling [No.] 5's tax on streaming services violates the Commerce Clause of the United States Constitution, Article I, Section 8, Clause 3."....................................1678 VII. ADDITIONAL CONSTITUTIONAL ARGUMENTS....... ................ 1686 A. General Principles ............................... 1686 B. As Applied to Chicago's Amusement Tax and Pasadena's Utility Tax ........................................ 1687 VIII. POLICY CONSIDERATIONS TO KEEP THE INTERNET TAX FREE ....... 1689 A. Policy Reasons in Favor of Not Circumventing ITFA...........1689 B. Rebutting Arguments in Favor of Taxing the Internet..........1693 IX. CONCLUSION .......................................... ..... 1695 I. INTRODUCTION A. Overview On October 21, 1998, President Bill Clinton signed the Internet Tax Freedom Act ("ITFA"), part of the Omnibus Consolidated and 2017] TAPPING THE NETFLIX BINGE 1655 Emergency Supplemental Appropriations Act.2 Originally, Congress discussed several bills.3 These bills shared a common purpose: to "regulate state and local taxation of the Internet."4 Although the bills all had the same intention, they differed in the following respects: (1) when the moratorium would expire; (2) which portions of the Internet could and could not be taxed; (3) which taxes would be permissible and which taxes would be prohibited; (4) whether taxes on the Internet already in effect would be grandfathered into the bill; (5) "the focus of the consultative group or commission;" (6) who would serve as members of the committee; and (7) "what policy actions [would be] expected at the end of the moratorium."5 Eventually, Congress chose to enact ITFA.6 The primary purpose of enacting ITFA was to develop a uniform policy that would allow state and local governments to tax Internet access, while still allowing the Internet to develop and grow.7 As stated by Congressman Cox, who introduced ITFA, "[tihe Internet Tax Freedom Act is based on a simple principle: Information should not be 2. Internet Tax Freedom Act (ITFA), 47 U.S.C. § 151 (2012). ITFA is part of the Omnibus Consolidated and Emergency Supplemental Appropriations Act, 1999, which addresses various issues such as agriculture, AIDS, ocean mining, patents, and a moratorium on internet taxes. Omnibus Consolidated and Emergency Supplemental Appropriations Act (OCESAA), Pub. L. No. 105-277, 112 Stat. 2681 (1998); Kelly Phillips Erb, Will Congress Keep the Internet Tax Free?, FORBES (June 20, 2014, 10:18 AM), http://www.forbes.com/sites/kellyphillipserb/2014/06/20/will-congress-keep-the-internet- tax-freel. 3. The other bills were H.R. 1054 and S. 442, which were introduced in March 1997. NONNA A. NOTo, CONG. RESEARCH SERV., INTERNET TAx BILLS IN THE 105TH CONGRESS 85 (1998). In the spring of 1998, H.R. 3529 and H.R. 3849 were introduced in place of H.R. 1054 and S. 442. Id. 4. Id. 5. Id. at 86. There were four groups who debated the focus of the bills: (1) "the Internet business community;" (2) "the Clinton Administration;" (3) "state and local revenue officials;" and (4) "competing sectors of the economy subject to tax." Id. The Internet business community's concerns were that states would impose discriminatory taxes on the Internet, and the Internet would be subjected to multiple taxation. Id. The Clinton Administration was concerned with America's economic growth, promoting economic commerce in America, and international trade. Id. at 87. State and local revenue officials were apprehensive they would lose the authority to govern and regulate their own taxes. Id. Competing sectors of the economy subject to tax were worried they would lose revenue to business not subject to taxes over the Internet. Id. 6. See Internet Tax Freedom Act (IFTA), 47 U.S.C. § 151 (2012). 7. Timothy Fallaw, The Internet Tax Freedom Act: Necessary Protectionor Deferral of the Problem?, 7 J. INTELL. PROP. L. 161, 161 (1999). 1656 RUTGERS UNIVERSITY LAW REVIEW [Vol. 69:1653 taxed."8 Accordingly, ITFA prevented the Internet from being taxed by state and local governments during its formation period.9 ITFA fostered the growth of the Internet and helped it become a part of everyday life, allowing Americans to communicate globally and gain access to almost any good or service, including the "cloud"' 0 and streaming" services, from virtually anywhere, through the use of devices such as computers, phones and tablets. 12 ITFA's legislative history evidences Congress' intent for the Internet to remain tax-free. Congress expanded ITFA's end date multiple times, and attempted to make ITFA permanent through legislative proposals such as the Permanent Tax Freedom Act and the Internet Tax Freedom Forever Act.13 In December 2015, "the Senate appended the text of what had 8. H.R. REP. No. 105-570, pt. 1, at 29 (1998). 9. IFTA § 203(a) ("It is the sense of Congress that the President should seek bilateral, regional, and multilateral agreements to remove barriers to global electronic commerce."); Fallaw, supra note 7, at 161. 10. Cloud computing has in the past been defined as "a broad range of services that allow users to store their data and applications on remote computers." Elijah Yip & Martin E. Hsia, Confidentiality in the Cloud- The Ethics of Using Cloud Services in the Practiceof Law, 31 COMPUTER & INTERNET L. 1, 1-2 (2014). This means that information and applications stored on the cloud "can be accessed anywhere the user and an Internet connection including a home computer, work computer, laptop, smartphone, or tablet." Id. at 2. The National Institute of Standards and Technology ("NIST"), in an attempt to provide a consistent definition of "cloud computing," has drafted that "cloud computing" is "a model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or services provider interaction." JENNIFER JENSEN, PwC, How DOES ONE TAX THE CLOUD? 2 (2012), http://www.pwc.com/us/en/state-local-tax/assets/pwc-how-does-one-tax-the- cloud.pdf. According to NIST, the five main characteristics
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