Chicago Can’t Force On-Line Auctioneers to Charge You an Amusement Tax, But that Doesn’t Mean You Don’t Have to Pay It!

The City of Chicago sued StubHub, Inc. to collect amusement taxes for ticket auctions StubHub hosted for events located in Chicago. It all started with Chicago attempting to enforce the Ticket Scalping Act, which a long, long time ago (1923 to be exact) prohibited tickets to events from being sold anywhere but the venue’s box office. The Act was broadened in 1935 to allow tickets to be sold away from venue box offices, but the tickets could be sold for no more than face value. The Act remained this way until 1991 when the Illinois State legislature added an exception for ticket brokers–resellers could sell tickets at above face value if they registered with the State and, of course, paid all applicable state and local taxes.

In 1995, Chicago started requiring resellers to collect an “amusement tax” not only for the face value of the tickets they sold but for the “portion of the ticket price that exceeds the amount that the reseller paid for the tickets.”

In 2002, after tickets started showing up for sale at on-line auction sites like StubHub, the State legislature replaced the Ticket Scalping Act with the Ticket Sale and Resale Act, which required auction sites to either collect taxes associated with the sale or inform resellers of their obligation to pay any applicable taxes.

In 2006, Chicago amended its tax code so that not only resellers but “reseller’s agents” were required to collect and pay amusement tax for the charges they made to customers.

In 2007, Chicago notified StubHub that it believed StubHub had the duty to collect and remit the amusement tax on thousands of ticket resales from 2000 through 2007. Chicago initiated a lawsuit in the Circuit Court of Cook County requesting an order requiring StubHub to produce records and submit to an audit, fining StubHub for failing to comply with the City tax code and a judgment in the amount of the unpaid tax revenues for the 2000-2007 time period plus interest.

StubHub removed the lawsuit to the United States District Court for the Northern District of Illinois and filed a motion to dismiss. The District Court dismissed the case ruling that Illinois law did not allow Chicago to impose amusement taxes on internet sites.

Chicago appealed the case to the Seventh Circuit Court of Appeals which determined that Illinois law did allow Chicago to impose amusement taxes on internet sites. But the Seventh Circuit felt that there were so many underlying questions that had not previously been addressed by Illinois courts, they were better served to let the Illinois Supreme Court decide the issues.

The Illinois Supreme Court found that Chicago was within its right to determine that StubHub was a “reseller’s agent.”

The next issue was for the Supreme Court to decide whether Chicago had the power to impose an obligation on an internet company to collect and remit amusement taxes even if it was a “reseller’s agent.” The Court decided the issue was governed by home rule. The concept of home rule is based upon a preference for local solutions to local problems–but the powers of local governments extend only to matters “pertaining to” their affairs, and not those of the State.

The Supreme Court looked to the Auction License Act of 2002 which provides that the State is to regulate internet auctioneers. It found that the Ticket Sale and Resale Act is consistent with the aims of the Auction License Act. The Ticket Sale and Resale Act specifically gives auctioneers the choice of collecting and remitting any applicable taxes or notifying resellers of their liability to pay the taxes. Auctioneers also have the duty to maintain records of sales and to turn over pertinent records to local tax officials if they relate to a criminal investigation.

The Supreme Court concluded that Chicago’s ordinance did not pertain to its own government affairs and that Chicago had overstepped its home rule authority.

City of Chicago v. StubHub, Inc., Docket No. 111127 (Oct. 6, 2011)

So, what’s the lesson here? If you use StubHub or any other on-line auction site to sell tickets (or any other goods for that matter) that does not collect all applicable taxes at the time of the sale and you thereafter fail to remit any applicable federal, state or local taxes the taxman might just come knocking on your door.