The City of Chicago begins its 2026 fiscal year with a new budget containing several key tax changes (linked here), headlined by a new “Social Media Amusement Tax” (or “SMAT”). Here’s what you need to know to stay on top of your 2026 Chicago tax compliance obligations:
The Chicago Social Media Amusement Tax
A handful of U.S. jurisdictions have introduced the concept of a social media tax (e.g., California, Hawaii, Maryland, Minnesota, Washington, etc.) in recent years, but Chicago is the first to actually enact one. In this regard, beginning January 1, 2026, Chicago’s SMAT “is imposed on social media businesses that collect consumer data on more than 100,000 Chicago consumers in a calendar year ….” Rather than tax revenue directly, the “rate of the tax is $0.50 per the number of Chicago consumers per calendar month in excess of 100,000.” The SMAT is to be computed and paid on a monthly basis with a single annual tax return due on or before August 17th of this year covering the January 1, 2026 – June 30, 2026 periods.
Chicago’s SMAT ordinance casts a wide net to tax not only social media platforms but potentially other businesses and applications not commonly thought of as “social media.” As is common with Chicago ordinances, liability for the SMAT is determined through a series of definitions. “Social media” means “websites, applications, products, and internet platforms that allows consumers to view, share, and otherwise engage with images, videos, and audio presented in types and formats including, but not limited to, performances, promotions, memes, augmented reality, artificial intelligence, and live streams.” A “social media business” is “a for-profit entity that: (a) provides individuals with access to social media and (b) collects, maintains, uses, processes, sells, or shares consumer data, other than consumer contact information, in support of the entity’s business activities.” A taxable social media business comprises all “[b]usiness entities that are part of a controlled group of corporations as defined in Section 1563(a) of the Internal Revenue Code.” Intercompany data transfers are thus generally eliminated from the SMAT base.
Notwithstanding broad imposition, taxable “social media” does not extend to “any news-gathering organization,” including a “bona fide news website, application, or platform.” Additional exclusions include: “internet search providers”; “internet service providers”; “email services”; “streaming services”; “online video games”; “website where the content is not user generated but includes interactive functions”; “communication services”; “advertising networks”; “telecommunications carriers”; “broadband services”; “education or public safety” services; “teleconferencing or video-conferencing services”; “cloud computing services or other nonpossessory computer leasing services”; and “technical support” services. Many of activities specifically exempted from the SMAT are subject to other City taxes. For example, certain streaming and video games may be subject to the Chicago Amusement Tax, and certain cloud computing services may be subject to the Chicago Personal Property Lease Transaction Tax.
“Social media businesses” must report the SMAT based on data obtained from “Chicago consumers.” A “Chicago consumer” is a “Chicago resident who uses social media in the City accessed through an account registered with a social media business and whose consumer data is collected by the social media business, regardless of whether the individual is charged for establishing the account or accessing the media.” A “Chicago resident” is someone “who is in the City for other than a temporary or transitory purpose during the calendar year or who is domiciled in the City.” Taxable “consumer data” extracted from Chicago residents includes “any information that identifies, relates to, describes, is capable of being associated with, or could reasonably be linked with a consumer, whether directly submitted to the social media business by the consumer or derived from other sources.”
Taxable consumer data is sourced to the City by creating a “rebuttable presumption that a consumer whose information on record with or available to a social media business indicates a Chicago home address, a Chicago mailing address, or an internet protocol address or other consumer data on primary usage location connected with a Chicago location is a Chicago consumer …” The burden of proving “a consumer is not a Chicago consumer is on the social media business.” However, the social media business “may create reasonable categorization standards to use in analyzing consumer data to determine if a consumer is a Chicago consumer ….” However, as many current Chicago taxpayers can attest, the Chicago Department of Finance does not always agree with taxpayers on what is reasonable and practical from a business perspective.
Putting aside policy objections to the SMAT, several avenues for legal challenge exist. For instance, given the nature of social media business operations and the nebulous standards for sourcing, extraterritorial taxation is likely, which would violate not only the Due Process and Commerce Clauses of the U.S. Constitution, but also the home rule provisions of the Illinois Constitution. See, e.g., Hertz Corp. v. City of Chicago, 2017 IL 119945 (holding the Chicago Personal Property Lease Transaction Tax was unconstitutional extraterritorial taxation to the extent it reached non-Chicago residents with respect to certain short-term vehicle rentals). We are also exploring several other bases for taxpayers to challenge the SMAT.
Revenue generated from the tax is earmarked in support of “the City’s mental an behavior health operations and investments.” Upon enactment, the SMAT further solidifies Chicago as one of the most aggressive and complex taxing localities in the United States. Implementation of this new tax will surely generate practical enforcement challenges for the City in the years ahead. With these challenges, expect controversy from the ordinance’s overly broad reach, ambiguous definitions, and constitutionally suspect provisions.
Additional Chicago FY2026 Tax Changes
Additional noteworthy tax updates from the FY2026 budget are listed in a Department of Finance News Release (linked here) and include:
- No Employee Head Tax: Mayor Brandon Johnson’s proposed $33 per month per employee tax on businesses with 500 or more employees will not be enacted – for now. Dubbed a “job killer,” Chicago fully repealed its prior head tax regime in 2014.
- Personal Property Lease Transaction Tax Rate Increase: The tax rate will increase yet again, this time from 11% to 15%, effective January 1, 2026. The tax applies to certain software as a service (SaaS) and cloud computing services delivered to Chicago customers, among other things. The revised ordinance states the rate shall not be increased further before January 1, 2028.
- Sports Wagering Tax Expanded to Online Betting, Plus Rate Increase: Chicago’s Sports Wagering Tax is expanded to include “internet wagering” through “an online sports wagering operator.” The rate of the sports wagering tax on licensees also increases from 2% to 10.25% “of the adjusted gross sports wagering receipts from sports wagers that are placed within the City …” As noted in the News Release, the “tax is payable monthly by the primary sports licensee by the 15th day of the following month, with tax returns filed annually. The first tax return will cover the period January 1, 2026 – June 30, 2026, with the due date for filing being August 17, 2026.”
- Liquor Tax / Alcoholic Beverages Tax Purchased For Off-Premises Consumption: Effective March 1, 2026, a tax will be imposed on “the privilege of purchasing or using, in the City, alcoholic beverages purchased in a sale at retail for consumption off of the premises where such alcoholic beverages are sold.” The applicable tax rate is 1.5% of the purchase price, exclusive of any other state/local tax charged. Tax payments are due monthly with the first tax return due on or before August 17, 2026 covering the March 1, 2026 – June 30, 2026 periods.
- Restructure Ground Transportation Tax Congestion Zones: Congestion zone surcharges are restructured from applying to a single “downtown zone” to two separate and specifically defined congestion zones (“Congestion Zone One” and “Congestion Zone Two”). The practical effect will be to make transportation services more expensive for consumers. The current congestion zone surcharge rate remains unchanged for FY2026.
- Substantial Mooring Tax Rate Increase: Fees generated from mooring or docking a watercraft in a Chicago harbor, river, or other body of water within the City will be subject to an increased mooring tax rate of 23.5%. The rate was previously 7%.
- Checkout Bag Tax Increase: The “retail sale or use of a checkout bag in the City” will now be subject to a rate of fifteen cents (increased from ten cents) per bag.
- Video Gaming License Fees: Video gaming is now subject to City annual license fees of $500 per location and $1,000 per terminal.
FY2026 is sure to bring new challenges for Chicago taxpayers operating in a variety of industries and services. If you have any questions regarding your Chicago tax obligations, please contact the authors.
Authors: Ted Bots, Drew Hemmings, and Doug Wick
