The Cloudy Truth About Net Neutrality

16 Jul 2015 by Shay Moser

 

If you haven’t heard about Chicago’s new 9% tax on streaming and cloud services, perhaps you’ve heard a thing or two about net neutrality.

“Net neutrality is defined as ‘the idea, principle or requirement that Internet service providers should or must treat all Internet data as the same regardless of its kind, source or destination.” –Merriam-Webster

“[The cloud tax] feels like a sneaky stab against net neutrality on the down low,” says Howard M. Cohen, a 30-year executive veteran of the IT industry, “kind of like charging large people for the excess air they breathe.”

As we reported in May, the Net Neutrality Order from the Federal Communications Commission (FCC) reclassifies Internet Service Providers (ISPs) as utilities similar to phone companies. As such, they cannot block, throttle or prioritize content in exchange for payments, making the Internet a level playing field, free and open to startups and enterprises alike.

The FCC’s rules only affect companies that provide retail access to the Internet. Other facets of the Internet, like network providers and Web applications, are not affected. The Net Neutrality Order even comes with an extra document debunking myths from classifying broadband as a Title II regulated telecommunications service. According to the document, “The order doesn’t impose new taxes or fees or otherwise increase prices.”

The Windy City's turbulent cloud tax

But Chicago’s Department of Finance clarified two existing tax laws around amusement — one for consumer services and one for businesses — that apply to online services paid for by people and businesses in the city. Even though the cloud tax is adapted particularly to subscription entertainment services, such as Netflix and Spotify, it may also apply to cloud service providers, from infrastructure to cloud apps.

“By reclassifying Internet services as common carrier telecommunications services, states that tax the tangible property and equipment of public utilities and regulated telecommunications services can now tax the property of broadband service providers,” according to Steve Pociask, president of the American Consumer Institute Center for Citizen Research, in a March Forbes article.

It’s understandable Chicago wants to capture missed revenue from the disruption of more brick-and-mortar stores moving to a digital, subscription-based economy. Mayor Rahm Emanuel has been trying to balance the budget without the challenges of new legislation. Levying online services through historical taxes is estimated to bring the city about $12 million a year — though lawmakers argue the costs to implement, collect and maintain cloud taxes will ultimately outweigh the benefits.

“Chicago is trading short-term gain for long-term pain,” says Cohen, a regular contributor to IT industry publications like MSPmentor. “The FCC could almost justify this were the services using airwaves. But the infrastructure is neither owned nor maintained by the city, so this is a service use tax, pure and simple. It will be managed within the billing and auditing process with no technical component whatsoever. Most municipalities don’t try to charge taxes on the use of services.”

Insight Vice President and Chief Cloud Architect Jeromy Siebenaler says it’s unclear how Chicago’s cloud tax will apply to other forms of entertainment. Would Facebook or Instagram now be in scope of existing laws Chicago is applying? Can, or should, these laws be applicable tax-wise at a city level?  Would Netflix be responsible for paying varying city taxes across the nation if this tax holds up? Could this tax be stretched to local Chicago cloud providers? “The intricacies around digital properties will make enforcement of the tax tough,” he says. “If a business in Chicago offers a streaming TV, movie or digital music service, for example, would they be taxed twice — as a provider and as a user?”

Cloud questions hanging over Chicago

There are many more problems and complexities to the cloud tax. How will service providers identify who owes the tax and collect it from them, especially for businesses with multiple locations? What about users who avoid geographic restrictions? Despite bringing a fairer tax system for Chicago’s brick-and-mortar stores, the burden on retailers and consumers is unfair. Does it clear the way for other cloud taxes in the future?

“The cloud tax puts us in a tough position,” says Lynn Willden, senior vice president tax and treasurer for Insight. “We have to follow Chicago’s tax law and collect this tax from our Chicago-based clients who use cloud services in the city. However, given uncertainty and questions of legality around the new cloud tax, I understand why clients would not want to pay the tax when it impacts their business negatively.”

As confusion and aggravation spread over Chicago’s cloud tax, the city is considering excusing startups from having to pay it. One reason is the impact could deter businesses, making other data center locations more attractive. Siebenaler believes incentivizing cloud providers to locate their businesses in Chicago would help. Cohen feels the city should have consulted the community in the first place.

Although people and companies won’t be held accountable for paying the cloud tax until Sept. 1, it looks like a stormy road ahead for Chicago.