Apple loses bid to cancel Chicago’s one-time ‘Netflix tax’ (1)

Bloomberg Tax

An Illinois trial court judge has rejected Apple Inc’s latest attempt to get rid of Chicago’s ‘Netflix tax’, but left the door open for the tech giant to file an amended lawsuit .

Cook County Circuit Court Judge Dan Duffy granted Chicago’s motion to dismiss lawsuit opposing amusement tax Decision No. 5, a 2015 revenue scheme imposing a 9% tax on streaming entertainment services. Duffy wrote that Apple is not required to present evidence at this stage of the litigation, “but it must plead facts” sufficient to set forth a cause of action upon which relief may be awarded.

In short ordered Published on Friday, Duffy dismissed Apple’s complaint without prejudice, but granted the iPhone maker and streaming entertainment service producer the opportunity to file a second amended complaint within 35 days.

Stephen Kranz, Apple’s attorney in the case and tax partner for McDermott Will & Emery LLP, declined to comment on the court order. Kristen Cabanban, spokeswoman for Chicago’s legal department, said the city had no comment on the decision.

Apple’s lawsuit was originally filed in 2018 and alleges violations of the federal Internet Tax Freedom Act and the Commerce and Due Process Clauses of the US Constitution. The challenge was suspended for more than two years, while the courts in Illinois dealt with a related lawsuit titled Label v. Chicago, contributed by Netflix Inc., Hulu LLC and Spotify users. Chicago survived the challenge, winning the trial court and appeals court decisions. In March 2020, the Illinois Supreme Court declined to consider a September 2019 appeal decision who found nothing inappropriate in Chicago’s tax program.

In its amended lawsuit filed a year ago, Apple argued that the Label The case was a ‘face challenge’ to Chicago’s streaming entertainment tax program as it sought to challenge the tax as it was applied to Apple’s particular menu of electronically delivered entertainment . In this regard, the complaint alleged Label affected customers of entirely different companies and services and had no bearing on Apple’s particular services and customers.

Duffy concluded that Apple’s complaint was insufficient to challenge “as applied” Decision No. 5 of the grounds cited,” Duffy wrote. “Allegations about Apple’s electronic offerings, for example, are completely generic.”

David Hughes, a state and local tax partner for HMB’s Chicago legal counsel, said he found the court’s decision surprising because Apple had previously amended its complaint and tax matters are rarely dismissed for lack of sufficient filing. At the same time, Hughes noted that the court showed flexibility for Apple to make a fuller presentation.

“Although the judge recognized that Apple was not required to present all of its evidence in the complaint, he found that their allegations were too generic to support a cause of action,” Hughes said in a message sent by email. “And it came after Apple amended its complaint last year to add more facts about its video streaming, news and other electronic services. The judge, however, gave Apple more time to amend its complaint. (again), suggesting that the judge thinks Apple might be able to sufficiently argue its case with more facts.

The case is Apple, Inc. vs. Chicago, Ill. Cir. Ct., n° 2018 L 050514, order 11/03/22