In an interesting procedural case, and important decision for online intermediaries, the Seventh Circuit Court of Appeals held that the City of Chicago may not require Internet intermediaries to collect and remit the City’s amusement tax on the difference between the original ticket price and resale price of tickets sold online. City of Chicago, Illinois v. StubHub!, Inc., Dkt. No. 09-3432 (7th Cir. Nov. 23, 2011); City of Chicago, Illinois v. eBay, Inc., Dkt. No. 10-1144 (7th Cir. Nov. 23, 2011).
Beginning in 1991, Illinois authorized ticket brokers to resell their tickets at a premium price, provided the broker registered with the State and collected local taxes. The City of Chicago took advantage of this opportunity to tax the incremental price of resold tickets until Illinois amended its ticket scalping laws in 2005. Following the 2005 amendments, an “Internet auction listing service” was relieved of the mandatory collection of local taxes, provided it met certain registration requirements and published a written notice on its website “inform[ing] the ticket reseller of the ticket reseller’s potential legal obligation to pay any applicable local amusement tax.” 720 ILCS 375/1.5(c).
In 2006, the City of Chicago amended its amusement tax ordinance to require “resellers” and “reseller’s agents” to collect and remit its amusement tax. The City’s amended definition was broad enough to capture “Internet auction listing services” and obligate them to collect and remit the City’s amusement tax. Shortly thereafter, the City of Chicago filed suit against StubHub! alleging that it was liable for collecting the City’s amusement tax. StubHub! removed the action to federal district court based on diversity jurisdiction. Because the City—not the taxpayer—brought the suit, the Tax Injunction Act did not bar federal court jurisdiction. The district court dismissed the case, stating that the City lacked the authority to impose the tax under the Illinois home rule.
On appeal to the Seventh Circuit, the court consolidated Chicago’s parallel suits against StubHub! and eBay after both district court judges rejected the contention the two intermediaries were obligated to collect the amusement tax. Recognizing that resolution of the disputes hinged on unanswered questions of state law, the court certified questions to the Illinois Supreme Court to determine whether municipalities may require electronic intermediaries to collect and remit amusement taxes on resold tickets. The Illinois Supreme Court responded in the negative, stating that Illinois law does not allow Chicago to collect its tax from the auction sites. Chicago v. StubHub!, Inc., 2011 IL 111127 (Oct. 6, 2011). Interestingly, the court noted that Chicago was free to define terms within its municipal code so as to include Internet auction listing services within its definition of “reseller’s agents.” But the Illinois Supreme Court declared that the City overstepped its home rule authority by attempting to impose an obligation that the state had clearly relieved under the statute in 2005. Consistent with the Illinois Supreme Court’s answer, the Seventh Circuit held that the City was not allowed to collect its tax from the auction sites.
The decision serves as an important reminder to localities that their own ordinances may not contradict state policy goals.