A Dark Cloud over Chicago

New City of Chicago Rulings Expand Taxation of Electronic Commerce and Cloud Computing

In two recently released rulings, the City of Chicago discussed how the Chicago Lease Transaction Tax and the Chicago Amusement Tax would apply to activities such as cloud computing or electronically delivered amusements. 

The first ruling, (Ruling #12) extends the scope of the City’s Personal Property Lease Transaction Tax (the Lease Tax) to various business services including cloud computing. This new ruling will have a significant impact on Chicago-based providers and users of cloud computing and other computer-related services.

Prior to the new ruling, the City had not expressly taxed cloud and similar services although it was typically a target under audit. Specifically, Ruling #12 enumerates specific categories of nonpossessory computer lease charges that are to be included in the taxable base and taxed at the 9% City of Chicago Personal Property Lease Transaction Tax rate. These include charges incurred:

• To perform legal research or similar online database services;
• To obtain consumer credit reports;
• To obtain 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 compiled, entered or stored on a provider’s computer; and
• To perform functions such as word processing, calculations, data processing, tax preparation, spreadsheet preparation or other applications using a provider’s remote or hosted computear or its software applications including cloud computing, cloud services, and/or a hosted environment, software as a service (SaaS), platform as a service (PaaS) or infrastructure as a service (IaaS).

Separately stated charges for information storage are generally not subject to tax if the storage provider’s computer is located outside of the City. Charges to access the previously stored data may be taxable, however if the stored data is accessed from a location within the City (e.g., a terminal or other device). Charges for services, such as writing a report or creating a database, are considered nontaxable charges, even if the report or database is accessed electronically.

In the second ruling (Ruling #5) the City explains that charges for amusements delivered electronically are subject to the City of Chicago Amusement Tax. Specifically, Ruling #5 states that charges for the privilege of watching electronically delivered television, charges for the privilege of listening to electronically downloaded music, and charges for electronically downloaded games are subject to the 9% City of Chicago Amusement Tax. 

Sourcing - Collection vs. Direct Pay

Prior to the publication of these rulings, the City had provided no formal guidance on how to collect or pay the Lease Tax in connection with computer or software leases where the lessee has users both within and outside the City. These new rulings provide a framework for how lessors and lessees should determine whether a transaction is taking place within the City and is subject to the Lease Tax. These provisions are intended to reflect the user’s location of primary use such as the primary business billing address, billing zip code or other means of reliable information.

For the Lease Tax, if the lessee is based in Chicago (i.e., has a Chicago billing address), but has users located both within and outside the City, charges for any such use can be apportioned between users within and outside of the City (based on the principal office locations of the lessee’s individual users). Any such apportionment should be documented based on actual data provided by the lessee. Alternatively, a lessee may also take responsibility for remitting the tax directly to the City. Ruling #12 allows a lessee with ten or more employees/individuals assigned an access code, seat license or other ability to use the lessor’s computer, to provide written confirmation to the lessor that it is registered with the City to self-assess the Lease Tax.

If the customer has a Chicago billing address but no detailed data is provided as to the exact amount of actual usage within the City, the lessor should collect the Lease Tax on the entire transaction.

Effective Date

These rulings became effective as of July 1, 2015. However, in order to allow businesses adequate time to make any required system changes, the City, as a result of pressure from the local business community, has indicated its intent to defer the effect of the rulings to periods on or after September 1, 2015 for the Amusement tax (Ruling #5) and January 1, 2016 for the Personal Property Lease Transaction tax (Ruling #12). It should be noted, however, the rulings state that the deferral does not release or otherwise affect the liability of any business that failed to comply with existing law before the date of the rulings.

These rulings have created some controversy within the Chicago tech community, as well as larger companies with a heavier presence in the City. It is not likely, however, that the City will change its focus on expansion of the tax base, given the poor financial situation in Chicago.