The New Chicago ‘Cloud Tax’ – What it Means for Providers and Users

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Welcome to Chicago; where even the cloud gets taxed.

This particular topic has been a hotbed of discussion around my hometown – Chicago. Today, there are a lot of providers, colocations, and data center facilities in and around the city. Many of these data centers are delivering content-related services to businesses and a number of users both locally, and throughout the world.

So, when the Chicago Department of Finance issued a modification to an existing ‘Amusement Tax’ – people were certainly surprised to see a new application to the digital world. A recent DataCenterKnowledge article points out that this means the 9 percent tax now applies to services like Netflix streaming. Here’s the interesting part – although this tax applies to subscription services like Netflix, it may also apply to cloud-service providers, from infrastructure to cloud apps.

So – an organization which hosts some type of content-based streaming service in Chicago may very well be taxed twice; as a user and as a provider.

Before we go into how this really impacts the user and a Chicago-based provider; let’s understand this “new” tax a bit better. First of all, this isn’t a new tax. Rather, it’s a different interpretation around an existing ‘Amusement Tax.’ Forbes recently pointed out how Chicago already imposes an amusement tax “upon the patrons of every amusement within the city.” That now specifically includes “any paid television programming, whether transmitted by wire, cable, fibex optics, laser, microwave, radio, satellite or similar means.”

The language can get a bit confusing – but feel free to read the entire document here. Basically, this tax applies to physical as well as electronic forms of amusement. For example, concerts, sporting events, and now electronically delivered content.

So what does this mean to providers and the user?

  • A new challenge for startups. If you’re a startup in Chicago and you’re aiming to stream new kinds of content – you might just have a new cost to worry about. This is a very real challenge for new or small organizations running on tight budgets. Plus, it leaves them vulnerable to larger organizations who can handle the tax a bit better.
  • Higher costs for providers. For some smaller content and streaming service providers – the cost may have to be passed to the user. And, in some of those situations – a user that receives streamed content for re-distribution may actually be taxed twice. So who picks up the extra tab? Unfortunately, this may impact the pricing model around some content delivery services.
  • Higher costs to users based in Chicago. Netflix has already publicly confirmed that it will build the cloud tax into subscription costs for users in Chicago. Unfortunately there will be other instances where costs will simply have to be pushed down to the user.
  • What’s next? There have been conversations around implementing this tax at a state level – to at least lessen the confusion. However, many are still very wary of this ‘Cloud Tax’ as it could hinder competition and prevent innovation in the Chicago cloud space. Why place your data center, streaming service, or new cloud content delivery platform in a city that’ll tax you for it?

Let’s be honest, there has already been a movement towards taxing cloud-based services. For example, back in February, ecommerce giant Amazon started collecting tax for all sales in Illinois. This movement to treat online and brick-and-mortar retailers equally has picked up pace in other states as well.

The reality here is that the way we process and consume content is going to continue to evolve rapidly. The digitization of the user and the modern industry has created an unprecedented level of data. The future of content delivery will revolve around providers; and, new forms of entertainment streamed from cloud services may very well have new fees imposed around them.

Most of all – there will be new areas where providers and organizations can truly expand their business. And spending is clearly showing this trend. Global spending on IaaS is expected to reach almost US$16.5 billion in 2015, an increase of 32.8 percent from 2014, with a compound annual growth rate (CAGR) from 2014 to 2019 forecast at 29.1 percent, according to Gartner’s latest forecast. So, if big cities are looking to impress and become homes to data center shops, content delivery platforms, and new types of cloud business opportunities – they should be conscious of how they create fees and taxes around their services.

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