StubHub Does Not Have to Collect Chicago Amusement Tax

Originally Published on forbes.com on October 15th,2011

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There are a host of local taxes on particular items and services.  Trading them in cyberspace creates issues. Orange County in Florida is on the verge of a major settlement with Expedia on its hotel room tax.  The settlement is being hung up on issues of transparency as this story  in the Orlando Sentinel relates.  Hotel rooms are not the only locally taxed service traded on the internet.  There is an active market inevent tickets.  One of the major players in that industry is StubHub, which had a dispute with the City of Chicago.

When the state of Illinois repealed its 1923 Ticket Scalping Act to allow brokers who met certain requirements to sell tickets at above face value, the City of Chicago amended its “amusement tax” to also apply to the premium that intermediaries charged.  It is essentially the same dispute that Orange County has with Expedia.  Orange County wants its room tax based on what Expedia collects from the customer not what it sends to the operator.  The case City of Chicago v Stubhub was recently decided by the Illinois Supreme Court.

Of course, it is even more complicated than that.  Stubhub does notbuy and sell tickets, it operates an on-line marketplace:

StubHub, Inc., registered as an internet auction listing service in compliance with the Act. StubHub describes itself as “the world’s largest online ticket marketplace” and operates a website or “platform” where users can buy and sell tickets to various events around the country. All users must register by providing personal information on the website. A user who wants to sell a ticket may list it on the website by submitting information about the event—the venue, date, time, and location of the ticket—as well as choosing a method and period for the sale, through a series of interactive prompts on the site. A user who wants to buy a ticket may then search for it on the site by the event, the date, or the venue. A prospective buyer and a prospective seller can communicate with each other only via the website. Once they have agreed upon a price, Stubhub processes the sale, charging the buyer a service fee of 10% of that price, and the seller a 15% fee. Pursuant to the Act, StubHub informs its sellers of their tax obligations.

In 2006, Chicago again amended its amusement tax to require that the tax not only be paid by resellers, but also by reseller’s agents.  When the City contacted StubHub about its potential obligations under the ordinance, StubHub was not responsive.  So the City went to court:

In 2007, the City sent a letter to StubHub stating that it might be deemed a reseller’s agent under the ordinance, and might be required to collect and remit the amusement tax on behalf of its users. The letter requested information and documents with respect to StubHub’s “facilitation” of ticket resales to entertainment events located in Chicago since January 1, 2000. StubHub declined to provide any of the information, and in 2008, the City filed a four-count complaint against StubHub. The City alleged that StubHub was a reseller’s agent under the ordinance because it “resold and/or facilitated the resale” of tickets. Accordingly, the City claimed, StubHub had a joint and several duty to collect and remit the amusement tax on thousands of ticket resales from 2000 to the present. The City sought a declaration that StubHub was required to do so; a writ of mandamus ordering StubHub to produce records and submit to an audit; fines for StubHub’s violation of the ordinance in refusing to comply with the City’s request to produce records; and a monetary judgment in the amount of the tax revenues plus interest and penalties.

There is some interesting lawyerly stuff.  StubHub gets to move the case to federal court on diversity grounds, but the federal court would use Illinois law to determine it, but the Supreme Court of Illinois has not ruled on the issues involved.  So the federal court sends the case to the Illinois Supreme Court.  I’m glad I didn’t go to law school, until I start reading stuff like that.  Then I’m really glad I didn’t go to law school.

StubHub contends that in order to comply with the City’s ordinance, it would have to alter its business model, fashioning features on its website through which it could verify at least the face value of the ticket. However, under its current user agreement, and consistent with the Auction License Act (see 225 ILCS 407/10-27 (a)(1) (West 2010)), StubHub does not examine the tickets that its users list for resale. StubHub also notes that if other municipalities followed the City’s lead and required internet auctioneers to collect and remit amusement taxes, there could potentially be a patchwork of local regulations. The legislature considered such burdens, and chose not to impose them, preferring instead a more comprehensive and uniform approach across the State. We conclude that the State has a greater interest than any municipality in regulating this emerging business model and protecting consumers.

The statutory scheme, and the debates which produced the Act, evince an intent by the legislature to allow internet auction listing services to opt out of any obligation regarding local tax collection. That is a policy decision this court is ill-advised to ignore. The City’s ordinance—specifically the imposition of a joint and several duty on internet auction listing services to collect and remit its amusement tax (Chicago Municipal Code § 4-156-020(A)) and the requirement that internet auction listing services are primarily responsible for collecting and remitting this tax (Chicago Municipal Code § 4-156-030(F))—does not pertain to its own government and affairs. The City has overstepped its home rule authority.

So Chicago can still charge the amusement tax on the premium that the seller gets over face value of the ticket, but they cannot make StubHub responsible for collecting it.  Good luck collecting it some other way.  This case does not prevent other cities, states and counties from taking this approach.  It turns on the extent of home rule allowed in the Illinois Constitution.  The answer might be different in another state.