Federal Court Rejects East St. Louis’ Attempt to Expand Tax to Streaming Services, as Many California Cities Also Are Trying

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An Illinois city’s attempt to expand existing utility taxes to cover streaming services is not legal and must be rejected, a federal court ruled October 13 in a decision that could impact similar efforts by several California cities.

The U.S. Seventh Circuit Court of Appeals’ decision in City of East St. Louis, Illinois, v. Netflix Inc., et al. is one of numerous cases across the country in which the courts overwhelmingly sided with taxpayers, yet several California cities continue to follow the path that has been rejected by the courts.

California cities that are working to expand the utility users taxes to streaming services without the legal authority to do so include Glendale, Hawthorne, Hayward, Hermosa Beach, Modesto, Pasadena, Redondo Beach, Sacramento, San Jose, San Leandro, Santa Ana, Santa Barbara, Santa Monica, Sebastopol, Sunnyvale, and Ventura.

These cities have been approached by a private-sector consulting firm, Avenu Insights & Analytics, that advises local elected officials to expand the definition of “utility” to include video streaming services, without voter approval. The company operates on a contingency basis, so it shares in the revenue from the improper tax hikes.

The Illinois case revolved around a state law that requires anyone who wants to provide cable or video service to obtain permission from state or local authorities and pay a fee as a condition of using public rights of way. Expanding upon this requirement, East St. Louis contended that all streaming depends on cables buried under streets or strung over them, and sued to compel each streaming service to pay the city 5 percent of all revenue it receives.

The city named Netflix, Disney, Apple, Hulu, Amazon, WarnerMedia, YouTube, Peacock TV, DIRECTV, DISH Network, CuriosityStream, and CBS Interactive as defendants in the suit.

“If the City is right, then The New York Times, CNN, Major League Baseball, and any other entity that transmits videos to paying customers likewise must pay fees to every municipality in Illinois,” the federal court wrote.

One issue in the case was whether cities can sue to force a company to become a “holder” of state authorization to provide services under the state’s Cable and Video Competition Law. The city asked the district court for a declaratory judgment whose practical effect would be to compel streaming companies to become “holders” and pay fees. A magistrate judge dismissed the complaint after concluding that only the attorney general of Illinois is authorized to sue an entity that needs, but does not possess, “holder” status.

The Court of Appeals wrote that “not a single judge in Illinois has ever held that municipalities can sue to force anyone to become a ‘holder,’ and the magistrate judge’s conclusion is hard to contest.”

The district court dismissed the city’s claims under Illinois law because the statute does not provide the city an express right of action, but the Court of Appeals opined, “We think it cleaner to reach the merits.”

“A decision on the merits will bring the dispute to a close. The statutory system applies to any ‘cable service or video service.’ … Defendants do not offer ‘cable service’ (the City acknowledges this much), and ‘video service’ … means video programming and subscriber interaction, if any, that is required for the selection or use of such video programming services, and that is provided through wireline facilities located at least in part in the public rights-of-way without regard to delivery technology, including Internet protocol technology.”

The definition of “video service” does not include any video programming provided by a commercial mobile service provider defined in subsection (d) of 47 U.S.C. 332 or any video programming provided solely as part of, and via, service that enables users to access content, information, electronic mail, or other services offered over the public Internet, the court wrote, noting that this definition remains in force through the end of 2023. A new definition replaces it on January 1, 2024, and the city does not deny that the new definition excludes the defendants’ streaming services.

The city argued that it is entitled to damages through December 2023, while the original definition lasts, but the Court of Appeals disagreed.

“East St. Louis did not cite, and we could not find, any decision of any state court in Illinois holding that the original definition of ‘video service’ includes over-the-top streaming services,” the court concluded.

The court also decided a dispute over jurisdiction. The city asserted jurisdiction based on diversity of citizenship, but the court ruled that federal courts have jurisdiction.