text: It’s on. Subscribers to popular streaming services, including XBox Live and Spotify, have filed a lawsuit that claims the city of Chicago’s controversial tax policy on digital entertainment is illegal. 
   
   The challenge to the tax policy, filed last week in Cook County state court, is important because it could help define the power of cities and states to tax parts of the internet economy. 
   
   The controversy turns on Chicago’s recent decision to extend its existing 9% “Amusement” levy, which applies to events like shows and baseball games, to a wide range of online services. 
   
   In their court challenge, a group of Chicago residents claim the city comptroller’s decision to apply the Amusement tax to streaming service amounted to a new tax that could only have been imposed by a vote of city officials. They claim they are being harmed since the tax makes them pay more for Amazon Prime (AMZN), Netflix (NFLX), Hulu, Xbox Live (MSFT) and Spotify. 
   
   In a claim that may have national significance, the lawsuit also says the Chicago streaming tax violates the federal Internet Tax Freedom Act, which forbids states and cities from imposing discriminatory internet-only taxes. Specifically, the Chicago subscribers claim the tax is illegal because it treats streaming differently from DVD-by-mail services and also imposes a higher rate than various live forms of entertainment. 
   
   The city says it will fight the lawsuit vigorously, according to the Chicago Tribune, which also reports the so-called “Netflix tax” is expected to bring in $12 million annually, and that it is part of a larger attempt by Mayor Rahm Emmanuel to use new fees to close a budget hole. 
   
   The lawsuit, which you can read for yourself below, also comes as more states and cities are looking to tax the cloud to make up for a decline in sales tax revenue. That decline has come about in part because consumers are acquiring a wide variety of goods and services, including media, online rather than in stores. 
   
   While cloud taxes offer the promise of new money for local governments, they are also proving to be a major headache for many businesses, which are unclear of when and how to collect the tax. The confusion could produce additional court challenges, in part because the taxes often affect cloud-based businesses outside of the city or state in question. 
   
   While the Supreme Court requires a “physical nexus” for a local tax to be valid, city and state governments appear to taking a more aggressive approach when it comes to defining that nexus. According to Rebecca Newton-Clarke, a tax expert with Thomson Reuters, the governments are likely to continue pushing the definition of nexus in the absence of further clarification from the Supreme Court. 
   
   In the meantime, consumers in more places are likely to face new fees on their favorite streaming entertainment. 
   
   Chicago Tax Complaint 
   
   If want to learn more about taxes and tech, here is a recent clip of Senator Charles Schumer talking about fixing the tax code: 
   
   Subscribe to Data Sheet, Fortune’s daily newsletter on the business of technology. ||||| Streaming-media customers in Chicago filed a lawsuit last week that could have major implications for how cities and states tax Internet services. 
   
   The lawsuit, filed Sept. 9 in the Circuit Court of Cook County, Illinois, alleges that Chicago's new tax on Internet streaming companies like Netflix and Spotify violated city policy and unfairly punishes them for being customers of those sites. But it also argues that Chicago lacks the authority to tax Internet services at all, a charge that could turn this lawsuit into a national issue. 
   
   Chicago's comptroller on June 9 extended an existing 9-percent tax on "amusement" activities, like sporting events, to streaming services, but postponed implementation of the tax until Jan. 1 to help companies prepare for it. 
   
   The plaintiffs argued in their lawsuit that Chicago's "amusement" tax did not "authorize a tax on video services streamed from the Internet, which may be provided anywhere, to customers with residency or billing address in the City of Chicago who might use those services, partially or entirely, outside of the City." 
   
   There is also the question of whether Chicago's tax comports with the Internet Tax Freedom Act. That law, amended in 2014 to ban "discriminatory" online taxes, could prevent Chicago from taxing Netflix's streaming service but not its original video-by-mail service. 
   
   "The Amusement Tax," according to the lawsuit, "also unlawfully discriminates against electronic commerce because it imposes a higher tax rate on theatrical, musical, and cultural performances that are delivered through an online streaming service than it imposes on those same performances if they are consumed in person." 
   
   If the Illinois state court agrees with the plaintiffs, it could set a major precedent for local taxation of Internet companies. 
   
   The lawsuit's other major charge is that the city illegally implemented the tax through a decision of its Finance Department instead of submitting the policy change to a city council vote. "The Municipal Code," the lawsuit said, "does not ... authorize the Comptroller to impose new taxes that the City Council has not authorized through a city ordinance." 
   
   The lawsuit also suggested that the new streaming tax "injures the Plaintiffs because their costs for these services have increased, or will imminently increase, by 9 percent." 
   
   Among the plaintiffs are subscribers to Netflix, Amazon Prime, Spotify, Xbox Live, and Hulu. The lawsuit alleged that most of these customers were harmed simply by having to pay a higher subscription cost. In the case of the Amazon Prime subscribers—whose subscriptions cover not only streaming media but also faster shipping and other perks—the complaint went further: 
   
   [T]hey must pay the tax on Internet-based video and music services portion of the price of their membership, but if Amazon does not separate the price of these services from its non-taxable services, then they must paid the Amusement Tax on the full price of their Amazon Prime membership, either of which will increase the cost of subscribing to Amazon Prime 
   
   The lawsuit also took special note of Xbox Live, which provides access to services related to gaming, communication, cloud storage, and broadcasting, none of which, it said, fit within the language of the "amusement" tax. 
   
   H/T Fortune | Photo via Philip Taylor/Flickr (CC BY 2.0) ||||| Chicago's move to extend its taxing power to Internet streaming services like Netflix and Spotify has been challenged in court by a group that argues the city didn't have the authority to create what amounts to new taxes. 
   
   In a lawsuit filed this week in Cook County Circuit Court, the nonprofit Liberty Justice Center says the city Finance Department's rulings in June extending two taxes were illegal. 
   
   The department posted letters online announcing that the city was extending the 9 percent amusement tax to include paid subscriptions for streamed digital music, rental movies, TV shows and games, and also extending the personal property lease transaction tax to professional services like electronic property databases used by real estate agents. 
   
   The ruling applied the new standards to subscribers with Chicago addresses, and city officials said they expected the changes to bring in about $12 million annually in the latest example of Mayor Rahm Emanuel boosting various smaller fees and fines to try to help close the city's gaping budget hole. 
   
   The lawsuit argues that aldermen should have gotten to vote on the changes. 
   
   "The Comptroller has exceeded his authority under the ordinance by issuing a rule that imposes a new tax that the City Council did not authorize in enacting the Amusement Tax," the suit reads. 
   
   "No aldermen voted on this tax. It never went before the Chicago City Council, which makes the so-called 'Netflix tax' an illegal tax," Jeffrey Schwab, an attorney with the Liberty Justice Center, said in a news release Thursday. "If the city wants to tax Internet-based streaming media services, then it should put the measure through the political process, and let Chicagoans have their voices heard through the democratic process." 
   
   The suit also argues that the levies violate the federal Internet Freedom Tax Act because they tax some Internet-based streaming media at a higher rate than similar services not delivered via the Internet. 
   
   The city's Law Department released a statement saying it intends to vigorously fight the lawsuit. 
   
   "The City has not yet seen the complaint, but we are confident that the ruling is a valid application of the existing Amusement Tax," department spokesman John Holden said in an emailed statement. 
   
   Emanuel has turned repeatedly to increasing smaller taxes and fees to help fill the city's coffers. 
   
   In May he introduced a plan to require off-site parking companies at Chicago's airports to share their revenue with the city in exchange for pickup privileges at O'Hare and Midway airports. 
   
   The mayor also has raised fees for parking at downtown garages and cable TV and telephone line 911 service taxes, among others. 
   
   jebyrne@tribpub.com 
   
   Twitter @_johnbyrne
target: – Angry streaming customers in Chicago are fighting back against the so-called "Netflix tax," filing a lawsuit against the city last Wednesday that could have national implications, the Daily Dot reports. The plaintiffs—including Netflix, Hulu, and Spotify customers—allege the 9% tax on streaming services (an extension of Chicago's amusement tax) announced in June violates the Internet Tax Freedom Act, which outlaws discrimination against Internet businesses. According to Fortune, the lawsuit claims streaming customers now face a higher tax rate than if they were watching a DVD, going to the theater, or attending a concert. If the suit succeeds, it could hamper local governments' ability to tax Internet services at a time when increased online commerce is shrinking tax revenues around the country. The lawsuit also alleges the streaming tax is essentially a new one, not an extension of the amusement tax as Chicago's city comptroller claimed. New taxes, unlike changes to existing taxes, require a vote of city officials. "If the city wants to tax Internet-based streaming media services, then it should put the measure through the political process and let Chicagoans have their voices heard through the democratic process," an attorney for the plaintiffs says in a press release. The Chicago Tribune reports the city has vowed to fight the lawsuit. The "Netflix tax," part of Mayor Rahm Emanuel's plan to make up the city's budget gap through new fees, is set to go into effect in January.