Chicago Ruling Applies Personal Property Lease Tax to Cloud Services

The City of Chicago has released guidance which clarifies the application of the “nonpossessory computer lease” portion of the City’s Personal Property Lease Transaction Tax.

By Jeff Glickman, SALT partner

Since 1974, the City of Chicago (the “City”) has imposed a Personal Property Lease Transaction Tax (“Lease Tax”) at the rate of 9 percent on the lease of personal property in the City. [1] In 1994, the Lease Tax was amended to add the term “nonpossessory computer lease,” which applies when “the customer obtains access to the provider’s computer and uses the computer and its software to input, modify or retrieve data or information, in each case without the intervention (other than de minimis intervention) of personnel acting on behalf of the provider.” [2]

On June 9, 2015, the City issued Personal Property Lease Transaction Tax Ruling #12 (the “Ruling”), effective on Jan. 1, 2016, which clarifies the application of the “nonpossessory computer lease” portion of the Lease Tax to transactions such as (i) performing legal research or similar online database searches, (ii) obtaining certain information (e.g., real estate listings, stock prices, job listings, etc.) that has been compiled, entered and stored on the provider’s computer, and (iii) performing functions such as word processing, calculations, tax preparation, spreadsheet preparation and other applications available to a customer through access to a provider’s computer and its software. [3] The ruling notes that the examples in the last category 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 Ruling also addresses sourcing for purposes of the Lease Tax’s application to nonpossessory computer leases. Generally, the Lease Tax will apply if “the location of the terminal or other device by which a user accesses the computer” is in the City. For this purpose, the City will utilize the rules found in the state’s Mobile Telecommunications Sourcing Conformity Act, which means that the Lease Tax will apply to customers whose residential street address or primary business street address is in the City (as may be reflected on certain reliable information such as credit card billing address). In cases where a customer has users located both within and outside the City, the charges should be apportioned.

The Lease Tax has a variety of exemptions, such as for securities trading, accessing of one’s own financial accounts, information storage, re-leases and for de minimis uses where the charge is predominantly for the receipt of information having a fleeting or transitory nature.

One additional exemption was added as part of the City’s budget approval on Oct. 28, 2015. That exemption applies when the lessor or lessee of a nonpossessory computer lease is a “small new business” which is a business that (i) holds a valid current business license issued by the City or another jurisdiction, (ii) had under $25 million in sales or gross receipts (as such term is defined for federal income tax purposes) during the most recent full calendar year prior to the annual tax year for which such exemption is sought and (iii) has been in operation for fewer than 60 months. The $25 million limit is calculated using the combined gross receipts or sales of the members of the taxpayer’s unitary group, as defined for Illinois income tax purposes.

The 60-month period is deemed to have begun during the first calendar month in which the business seeking exemption first received gross receipts or sales. For purposes of calculating the 60-month period, time in operation will include any earlier time during which a business was in operation if (i) the business (whether or not currently in existence) is or would have been a member of the same unitary business group as the business seeking exemption, (ii) the liabilities of the business would be liabilities of the business seeking exemption under Illinois successor liability rules and (iii) the business is reasonably determined by the comptroller to be substantially similar or a predecessor to the business seeking exemption, based on factors including, but not limited to, common ownership, management, employees, assets, line of business and location.

Finally, the budget package also included a provision that reduces the 9 percent Lease Tax rate to 5.25 percent for nonpossessory computer leases primarily for the purpose of allowing the customer to use the provider’s computer and software to input, modify or retrieve data or information that is supplied by the customer. In general, this means that the lower rate will typically apply more to “cloud” based transactions as opposed to “database” transactions, since in database transactions the information is supplied by the provider.

We expect more guidance and information to be provided by the City, particularly with regard to sourcing, apportionment and exemption forms. In the meantime, taxpayers should review the information referenced in this article and speak to an advisor regarding potential Lease Tax compliance obligations. The Aprio SALT team is very experienced with regard to taxes imposed on cloud transactions and can assist taxpayers in addressing taxability and procedural issues related to compliance with these taxes. In addition, we will continue to monitor developments with regard to the Lease Tax and other similar taxes on cloud transactions, and we will include those in future issues of the Aprio SALT Newsletter.

Contact Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the January 2016 SALT Newsletter. To view the newsletter, click here.

[1] Municipal Code of Chicago, section 3-32-030(A) and (B). For general information about the Lease Tax, including tax rulings and informational bulletins, click here.

[2] Municipal Code of Chicago, section 3-32-020(I).

[3] The Ruling originally was to take effect on Sept. 1, 2015, but, due to concerns voiced by the business community, the Ruling effective date was pushed back to Jan. 1, 2016. However, said effective date is intended to apply only to those portions of the Ruling that represent changes to the City’s prior official interpretation of the Lease Tax and not to restatements of existing law (i.e., the application of the Lease Tax to performing legal research or similar online database searches). Nonetheless, in light of general confusion and lack of awareness of the Lease Tax, the City has made a voluntary disclosure process available to all taxpayers. For more information about the Ruling, the City published an information bulletin in November 2015 which includes information about sourcing, apportionment, exemptions, voluntary disclosures and an FAQ section at the end.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding this matter.