Starting Sept. 1, Chicago residents will be paying 9% more for everything from Netflix to income tax filing as city officials impose a recently reinterpreted entertainment/use tax on almost every online subscription content provider, even those peddling adult entertainment.

The Chicago Tribune reports the city’s Finance Department has vastly broadened the reach of Chicago’s amusement and personal property lease transaction taxes to apply the 9% tax to virtually any content that a customer borrows, leases, or subscribes to that is not purchased outright. Buying a CD on Amazon.com would not be subject to the tax but a Spotify subscription allowing you to listen to that same CD as long as your subscription is maintained will be taxed. Buying a digital copy of a movie will not be taxed, but watching it through a subscription service like Apple TV, Amazon, or Netflix will be.

Although some are dubbing it the “Netflix Tax,” it will also apply to cloud storage, paid television programming — including satellite, cable, telephone, and online-delivered content, financial and investment services, and almost anything else accessed online with a paid subscription. Even paying to host a website (or having someone manage it for you) will be subject to the tax.

The expanded tax is part of Mayor Rahm Emanuel’s strategy to deal with Chicago’s huge budget shortfall with fees, fines, and broadening taxes. The city predicts the expanded tax will capture up to $12 million a year from Chicago residents and businesses.

“In an environment in which technologies and emerging industries evolve quickly, the City periodically issues rulings that clarify the application of existing laws to these technologies and industries,” mayoral spokeswoman Elizabeth Langsdorf said in a statement issued Wednesday. “These two rulings are consistent with the City’s current tax laws and are not an expansion of the laws. These ensure that city taxation is uniformly and fairly applied and that businesses are given clear guidance on the applicability of the City’s tax laws to their operations, and they clarify that the amusement tax and personal property lease tax apply to digital services.”

Chicago residents have paid the amusement tax on movie tickets, local concerts and sports events since at least 1998. The city collects 5% on live theatrical, musical, and other live cultural performances held in an auditorium, theater, or other space whose maximum capacity (including balconies) is more than 750 persons. A 9% tax applies on all other events, but no tax is collected on religious, charitable, and not-for-profit organizations holding events for fund-raising purposes as long as they limit them to two events per year.

A Netflix spokeswoman confirmed that the company will pass the additional cost to subscribers but said no other details were available.

Critics of the tax contend it will be very easy to avoid through the use of payment services like PayPal, which allow customers to specify an out-of-state address — any out-of-state address, valid or not — in the payment details box, allowing residents to avoid the tax. Others are adding the addresses of out-of-state relatives to their credit cards and will use those addresses when placing orders for online content.

“Since they are not mailing you anything, it doesn’t really matter what address you use, as long as it is outside of the city of Chicago,” one anonymous commenter noted.

Wynne

That is exactly what Michael Wynne, a partner and attorney in the Chicago office of the law firm Reed Smith, predicted would happen, noting Chicago is already replete with high taxes and fees and adding more of them would encourage tax dodging. He assumed businesses will also actively avoid the tax, either by moving their offices out of the Chicago city limits or more likely renting a post office box in the suburbs and using it as a billing address.

“Let’s say I sign up for streaming business data in the city but I have offices throughout the country,” Wynne told the newspaper. “I will definitely make sure my billing goes through a different office.”

Wynne believes many Chicago residents may not understand the 9% tax will apply to a lot more than just Netflix. He called the expansion staggering in its breadth in his analysis, excerpted below.

The Unamusing Amusement Tax: It Could Apply to Almost Anything

The Amusement Tax ruling will extend the tax to streaming services for music, movies, games, and the like, as well as satellite TV delivered to a customer located in Chicago. However, the ruling does not impose the Amusement Tax on the same content when it is permanently downloaded by a consumer. The Lease Transaction Tax ruling extends the tax to the online procurement of real estate listings, car prices, stock prices, economic statistics, and “similar information or data that has been compiled, entered and stored on the provider’s computer.” In addition, under the ruling, the Lease Transaction Tax will apply to the online procurement of “word processing, calculations, data processing, tax preparation” and “other applications available to a customer through access to a provider’s computer and its software.” In the ruling, the Department expressly notes that these “examples are sometimes referred to as cloud computing, cloud services, hosted environment, software as a service, platform as a service, or infrastructure as a service.”

The Amusement Tax is imposed on patrons of every amusement within the city. “Amusement” is broadly defined, and it includes “any entertainment or recreational activity offered for public participation or on a membership or other basis,” and “any paid television programming, whether transmitted by wire, cable, fiber optics, laser, microwave, radio, satellite or similar means.”

The Amusement Tax ruling specifically taxes charges paid for the privilege of the following amusements delivered to a patron in the city: (1) “watching electronically delivered television shows, movies, or videos”; (2) “listening to electronically delivered music”; and (3) “participating in games, on-line or otherwise.” As a consequence, streaming a movie, listening to streaming music, or playing a game on a smartphone or tablet will now trigger a 9% tax on the subscription charge for those services if those activities are done at a location in Chicago. Furthermore, the ruling addresses “bundled” transactions, by providing that “unless it is clearly proven that at least 50% of the price” is not for the amusement, the entire charge, except for any separately stated non-amusement charges, is subject to the Amusement Tax. That suggests great care must be paid to invoicing services when including any item that might be construed to be an amusement. The ruling does not differentiate between news, current events, sports, movies, music or other types of television programming. As a consequence, an establishment that charges patrons for access to television programming of any sort, plus other goods and services (e.g., a bar that imposes an admission charge for a pay-per-view event that includes food and beverages) may have to navigate the bundling rules.

The Computer Lease Tax Ruling = 9% on Everything You Borrow, Subscribe, Rent, Lease, or Pay-Per-View Online

Rep. Bob Goodlatte (R-Va.) introduced H.R. 235: the Permanent Internet Tax Freedom Act, which passed in the House of Representatives on June 9th and is heading to the Senate.

The ruling provides examples of when the tax applies, such as when performing legal research or similar on-line database searches, to obtain consumer credit reports, or “real estate listings and prices, car prices, stock prices, economic statistics, weather statistics, job listings, resumes, company profiles, consumer profiles, marketing data, and similar information or data that has been compiled, entered and stored on the provider’s computer.” In the ruling, the Department specifically identifies taxable leases of personal property to include “cloud computing, cloud services, hosted environment, software as a service, platform as a service, or infrastructure as a service.” This is quite an expansion for a concept evolved from taxing agreements for time-sharing on mainframe computers, and that has only been judicially tested once, involving legal research in the city on terminals provided by the legal search provider, in days that preceded the creation of the World Wide Web, and the expansion of fiber-optic networks that made possible the Internet networks relied on to deliver many of the services the ruling now targets. See, Meites v. City of Chicago, 184 Ill. App. 3d 887 (1989). The rulings represent a further evolution of the city’s approach under the Lease Transaction Tax to disregard contract terms and recharacterize transactions to fit its tax code definitions; it is doubtful that any consumer or provider of subscription Internet streaming services thinks they are contracting to lease tangible personal property.

Wynne says Chicago officials have expanded the scope of its tax ordinances to their absolute limit, if not further. He also fears Chicago could give other cities and states ideas for new taxes.

“If any state or local governments were wondering how to tax transactions occurring in the Cloud when legislative authority for such taxation is absent, the Department has just sketched a roadmap,” he wrote.

Wynne believes the time to stop these kinds of taxes is now, before they have a chance to spread, or worse, start being collected.

He writes there are strong arguments that Chicago’s creative reinterpretation of its 9% tax is illegal, running afoul of the Federal Telecommunications Act, the Internet Tax Freedom Act, and federal and Illinois constitutional limits on taxation. But while the rulings are likely to be challenged in court, Chicago officials still expect providers to start handing over the 9% tax proceeds beginning this fall. Those that don’t will run into Chicago’s tax penalty buzzsaw – 12% interest on delinquent taxes, a 25% penalty, and a lengthy bureaucratic process (bring your attorney) dealing with the city’s administrative hearings office.

Sprint’s all-new “All-In” wireless plan was supposed to simplify wireless pricing for consumers by bundling a leased phone, unlimited voice, data, and texting for a flat $80 a month, but customers slogging through the fine print discovered speed throttling and roaming punishments were silent passengers along for the ride:

To improve data experience for the majority of users, throughput may be limited, varied or reduced on the network. Streaming video speeds will be limited to 600Kbps at all times, which may impact quality. Sprint may terminate service if off-network roaming usage in a month exceeds: (1) 800 min. or a majority of min.; or (2) 100MB or a majority of KB. Prohibited network use rules apply—see sprint.com/termsandconditions.

Although many smaller wireless carriers also have limits on off-network roaming usage, none have proposed to permanently throttle web videos to a frustratingly slow 600kbps. At those speeds, Sprint customers could expect buffering delays or degraded HD video.

Many customers contemplating switching to the All-In plan considered the speed throttle a deal-breaker and let Sprint know through its social media accounts. Even websites friendly to Sprint were very critical of the plan:

Sprint 4G Rollout Updates:

We just aren’t seeing the new and innovative thing with All In. You already have plans that price out the same way as All In (some even less expensive). It appears as a marketing gimmick that is disguising a desperate move to limit streaming. This is not popular with your current customers and your new customers are likely going to hate you for it. After they find out.
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Marcelo, it’s really bad that David Beckham touts unlimited movie watching and you reference unlimited watching videos in your Press Release. 600kbps video streaming can hardly run any YouTube or Netflix streaming. It will buffer significantly even with the lowest resolution settings. 600kbps is insufficient for most moderate quality video streaming on a smartphone screen.

Claure

Sprint CEO Marcelo Claure got the message and announced late yesterday the video speed throttle was gone, but general network management would remain.

“At Sprint, we strive to provide customers a great experience when using our network,” said Sprint CEO Marcelo Claure. “We heard you loud and clear, and we are removing the 600 kbps limitation on streaming video. During certain times, like other wireless carriers, we might have to manage the network in order to reduce congestion and provide a better customer experience for the majority of our customers.”

Claure has been hinting the days of unlimited data from Sprint may be coming to an end sometime in the near future. Sprint is among the last carriers that offer a truly unlimited experience, and some customers have used Sprint as a home broadband replacement and have created congestion issues as they consume hundreds of gigabytes of wireless data, which can slow Sprint’s network to a crawl in some areas. T-Mobile experienced similar issues and recently updated their terms and conditions to apply a speed throttle after 21GB of usage during a billing cycle.

Unlimited 4G LTE customers who use more than 21 GB of data in a bill cycle will have their data usage de-prioritized compared to other customers for that bill cycle at locations and times when competing network demands occur, resulting in relatively slower speeds. See t-mobile.com/OpenInternet for details.

Customers report in high volume areas speeds drop well below 1Mbps if they are temporarily sentenced to “speed jail.”

Many of those attempting to use a wireless carrier as their primary home broadband connection do not do so because of convenience or selfishness. Often, they have no other choice because they are bypassed by cable operators and not served by DSL. But it does not take too many customers to start creating problems for wireless carriers if a nearby cell tower becomes congested. Online video is probably the most bandwidth intensive application for wireless companies, especially HD video streaming. The growth of video traffic also raises questions about whether AT&T and Verizon’s efforts to move rural customers to an all-wireless phone and data platform will work well for the companies or customers.

Frontier Communications scored dead last in a nationwide survey of websites run by 262 companies — ranked for their usability, helpfulness, and competence.

The “2015 Web Experience Ratings,” conducted by the Temkin Group, a customer experience research and consulting firm, looked at how customers feel about companies based on experiences visiting their websites. The firm wanted to know whether customers would forgive a company if its website proved less than satisfactory. The answer appears to be no, and phone and cable companies were the most likely to experience the wrath of dissatisfied customers.

“It’s ironic that many of the cable companies that provide Internet service earned such poor ratings,” Bruce Temkin, managing partner of Temkin Group, said.

Most household name cable companies did especially poor in the survey. Time Warner Cable, Comcast and CenturyLink all tied at 252nd place (out of 262 firms). But special hatred was reserved for the website run by Frontier Communications, repeatedly called “incompetent” by consumers, especially after the phone company disabled most of the website’s self-service functions in late April. A well-placed source inside Frontier told Stop the Cap! the company could not manage to get its website ordering functions working properly and simply decided to give up, forcing customers to call instead.

Only 29% of consumers were willing to forgive a telecommunications company for a lousy web experience, according to the findings. Other website disasters were run by: Cox Communications, Charter Communications, Spirit Airlines, Blue Shield of CA, and Haier.

Which websites do consumers love the most? Temkin says USAA (a bank) and Amazon.com have traded the #1 and #2 spots for the last five years.

West coast Internet users, particularly those around San Francisco and Sacramento, experienced major disruptions to the Internet last evening into this morning, affecting everything from cable television and phone service to popular online destinations including Amazon.com (and websites hosted by its AWS data service), Tinder, and Netflix.

The range of disruptions led to early media speculation a “coordinated attack” on the Internet was underway on the west coast, but a statement from the Sacramento field office of the Federal Bureau of Investigation this morning clarified it was investigating only a single case of alleged intentional vandalism in the San Francisco area today.

The FBI suspects someone climbed down a manhole in Livermore early this morning and intentionally cut a high traffic fiber line owned by Level 3 and Zayo. This is not the first case of suspected vandalism. At least 10 other fiber line cuts in Fremont, Berkeley, San Jose, Alamo, and Walnut Creek have occurred in the Bay Area over the last year.

[flv]http://www.phillipdampier.com/video/USA Today FBI investigating 11 attacks on San Francisco-area Internet lines 7-1-15.flv[/flv]

USA Today reports the FBI is now investigating the 11th intentional fiber cut in the San Francisco Bay area in 12 months. (1:18)

The hardest hit ISP was Wave Broadband in West Sacramento, Calif. The fiber outage wiped out cable, phone and broadband service for customers across Sacramento, Rocklin, and surrounding communities including Dixon.

A broader issue yesterday evening also affected customers beyond northern California. Amazon.com and websites using its AWS platform suddenly stopped responding between 5:24pm-6:10pm PT last night. But that issue was later determined to be an unrelated “route leak” from Axcelx, a data center provider in Boston.

Thousand Eyes reports that problem “affected a wide range of services including consumer internet sites like Yelp, Netflix and Match; SaaS services such as HipChat and Jobvite; and financial firms such as Experian and Zions Bank.”

Any report of fiber vandalism concerns security experts, who suggest terrorists could target the highly visible data cables and create massive telecommunications disruptions in the United States.

“When it’s situations that are scattered all in one geography, that raises the possibility that they are testing out capabilities, response times and impact,” JJ Thompson, CEO of Rook Security, told USA Today. “That is a security person’s nightmare.”

[flv]http://www.phillipdampier.com/video/KCRA Sacramento Wave Broadband service restored after deliberate act 7-1-15.mp4[/flv]

KCRA in Sacramento said the telecommunications outages in Sacramento were frustrating for businesses, residents, and local government — all affected by the fiber cut in San Francisco. (2:20)

Fiber cables are also often readily identifiable by their bright orange insulation as well as from warning signs alerting construction crews and others to their presence underground.

DownDetector clearly identifies the impact of the fiber outage affecting Wave Broadband in the Sacramento area.

“There are flags and signs indicating to somebody who wants to do damage: This is where it is folks,” said Richard Doherty, research director of The Envisioneering Group, a technology assessment and market research firm. “You often have fiber from several companies sometimes going down the same street or the same trench. One attacker can dig one hole and wipe out service from three companies.”

The FBI is asking for the public’s help in identifying the vandal in the Bay Area. In addition to this morning’s attack, anyone who may have seen anything suspicious in these earlier attacks should contact them at 415-553-7400.

• July 6, 2014, 9:44 p.m. near 7^th and Grayson St. in Berkeley
• July 6, 2014, 11:39 p.m. near Niles Canyon Blvd. and Mission Blvd. in Fremont
• July 7, 2014, 12:24 a.m. near Jones Road and Iron Horse Trail in Walnut Creek
• July 7, 2014, 12:51 a.m. near Niles Canyon Blvd. and Alameda Creek in Fremont
• July 7, 2014, 2:13 a.m. near Stockton Ave. and University Ave. in San Jose
• February 24, 2014, 11:30 p.m. near Niles Canyon Blvd. and Mission Blvd. in Fremont
• February 24, 2014, 11:30 p.m. near Niles Canyon Blvd. and Alameda Creek in Fremont
• June 8, 2015, 11:00 p.m. near Danville Blvd. and Rudgear Road in Alamo
• June 8, 2015, 11:40 p.m. near Overacker Ave and Mowry Ave in Fremont
• June 9, 2015, 1:38 p.m. near Jones Road and Parkside Dr. in Walnut Creek

[flv]http://www.phillipdampier.com/video/KXTV Sacramento FBI Sacramento area internet outage result of vandalism 7-1-15.flv[/flv]

KXTV in Sacramento reports the fiber cuts have immediate security and public safety implications for public officials. But network planners say no fiber cut should have disrupted so many customers and suggest better planning could have spared many from the service outage. (2:23)

A panel electromechanical switch similar to those in use in New York until the 1970s. They were installed in the 1920s.

As late as the 1970s, New York Telephone (today Verizon) was still maintaining electromechanical panel switches in its telephone exchanges that were developed in the middle of World War I and installed in Manhattan between 1922-1930. Reliance on infrastructure 40-50 years old is nothing new for telephone companies across North America. A Verizon technician in New York City is just as likely to descend into tunnels constructed well before they were born as is a Bell technician in Toronto.

Slightly marring last week’s ambitious announcement Bell (Canada) was going to commence an upgrade to fiber to the home service across the Greater Toronto Area came word from a frank Bell technician in attendance who predicted Bell’s plans were likely to run into problems as workers deal with aging copper infrastructure originally installed by their fathers and grandfathers decades earlier.

The technician said some of the underground conduits he was working in just weeks earlier in Toronto’s downtown core were “easily 60-70 years old” and the existing optical fiber cables running through some of them were installed in the mid-1980s.

At least that conduit contained fiber. In many other cities, copper infrastructure from the 1960s-1980s is still in service, performing unevenly in some cases and not much at all in others.

Earlier this year, several hundred Verizon customers were without telephone service for weeks because of water intrusion into copper telephone cables, possibly amplified by the corrosive road salt dumped on New York streets to combat a severe winter. Verizon’s copper was down and out while its fiber optic network was unaffected. On the west coast, AT&T deals with similar outages caused by flooding. If that doesn’t affect service, copper theft might.

Fiber optic cable

Telephone companies fight to get their money’s worth from infrastructure, no matter how old it is. Western Electric first envisioned the panel switches used in New York City telephone exchanges until the end of the Carter Administration back in 1916. It was all a part of AT&T’s revolutionary plan to move to subscriber-dialed calls, ending an era of asking an operator to connect you to another customer.

AT&T engineer W.G. Blauvelt wrote the plan that moved New York to fully automatic dialing. By 1930, every telephone exchange in Manhattan was served by a panel switch that allowed customers to dial numbers by themselves. But Blauvelt could not have envisioned that equipment would still be in use fifty years later.

As demand for telephones grew, the phone company did not expand its network of panel switches, which were huge – occupying entire buildings – loud, and very costly to maintain. It did not replace them either. Instead, newer exchanges got the latest equipment, starting with more modern Crossbar #1 switches in 1938. In the 1950s, Crossbar #5 arrived and it became a hit worldwide. Crossbar #5 switches usually stood alone or worked alongside older switching equipment in fast growing exchanges. It occupied less space, worked well without obsessive maintenance, and was reliable.

It was not until the 1970s that the Bell System decided to completely scrap their electromechanical switches in favor of newer electronic technology. The advantages were obvious — the newer equipment occupied a fraction of the space and had considerably more capacity than older switches. That became critical in New York starting in the late 1960s when customer demand for additional phone lines exploded. New York Telephone simply could not keep up with and waiting lists often grew to weeks as technicians looked for spare capacity. The Bell System’s answer to this growth was a new generation of electronic switches.

The #1 ESS was an analog electronic switch first introduced in New Jersey in 1965. Although it worked fine in smaller and medium-sized communities, the switch’s software bugs were notorious when traffic on the exchange reached peak loads. It was clear to New York Telephone the #1 ESS was not ready for Manhattan until the bugs were squashed.

Bell companies, along with some independent phone companies that depended on the same equipment, moved cautiously to begin upgrades. It would take North American phone companies until August 2001 to retire what was reportedly the last electromechanical switch, serving the small community of Nantes, Quebec.

A notorious 1975 fire destroyed a phone exchange serving lower Manhattan. That was one way to guarantee an upgrade from New York Telephone.

On rare occasions, phone companies didn’t have much of a choice. The most notorious example of this was the Feb. 27, 1975 fire in the telephone exchange located at 204 Second Avenue and East 13th Street in New York. The five alarm fire destroyed the switching equipment and knocked out telephone service for 173,000 customers before 700 firefighters from 72 fire units managed to put the fire out more than 16 hours later. That fire is still memorialized today by New York firefighters because it injured nearly 300 of them. But the fire’s legacy continued for decades as long-term health effects, including cancer, from the toxic smoke would haunt those who fought it.

The New York Telephone building still stands and today also houses a street level Verizon Wireless retail store.

New York Telephone engineers initially rescued a decommissioned #1 Crossbar switch waiting to be melted down for scrap. It came from the West 18th Street office and was cleaned and repaired and put into emergency service until a #1 ESS switch originally destined for another central office was diverted. This part of Manhattan got its upgrade earlier for all the wrong reasons.

Throughout the Bell System in the 1970s and 80s, older switches were gradually replaced in favor of all electronic switches, especially the #5 ESS, introduced in 1982 and still widely in service today, serving about 50% of all landlines in the United States. Canadian telephone companies often favored telephone switches manufactured by Northern Telecom (Nortel), based in Mississauga, Ontario. They generally worked equally well as the American counterpart and are also in service in parts of the United States.

The legacy of more than 100 years of telephone service has made running old and new technology side by side nothing unusual for telephone companies. It has worked for them before, as has their belief in incremental upgrades. So Bell’s announcement it would completely blanket Toronto with all-fiber service is a departure from standard practice.

For Bell in Toronto, the gigabit upgrade will begin by pushing fiber cables through existing conduits that are also home to copper and fiber wiring still in service. If a conduit is blocked or lacks enough room to get new fiber cables through, the Bell technician predicted delays. It is very likely that sometime after fiber service is up and running, copper wire decommissioning will begin in Toronto. Whether those cables remain dormant underground and on phone poles for cost reasons or torn out and sold for scrap will largely depend on scrap copper prices, Bell’s budget, and possible regulator intervention.

But Bell’s upgrade will clearly be as important, if not more so, than the retirement of mechanical phone switches a few decades earlier. For the same reasons — decreased maintenance costs, increased capacity, better reliability, and the possibility to market new services for revenue generation make fiber just as good of an investment for Bell as electronic switches were in the 1970s and 1980s.

[flv]http://www.phillipdampier.com/video/ATT Reconnecting 170000 Phone Customers in NYC After a Major Fire 1975.mp4[/flv]

AT&T produced this documentary in the mid-1970s about how New York Telephone recovered from a fire that destroyed a phone exchange in lower Manhattan and wiped out service for 173,000 customers in 1975. The phone company managed to get service restored after an unprecedented three weeks. It gives viewers a look at the enormous size of old electromechanical switching equipment and masses of phone wiring. (22:40)