The cloud tax is based on the idea that companies that use cloud services essentially rent access to a cloud provider`s hardware and software. The tax applies to Chicago-based organizations that rent cloud services elsewhere. The Chicago tax was first introduced in 2015 and calculated at 5.25%. In 2019, it was raised to 7.25% and is expected to bring in $17 million. In the background, the Chicago Personal Property Lease Transaction Tax (“Transaction Tax”) is levied on: (1) the rental or rental of personal property in the city, or (2) the privilege of using personal property rented or leased outside the city in the city. [1] A “lease” or “lease” is defined as including a “dispossessed lease”. [2] Currently, the rate varies depending on the type of transaction: 9% on receipts or rental fees or 7.25% on rental fees without a computer owner to enter, modify or retrieve data or information provided by the customer. [3] From 1 January 2021, however, the transaction tax will apply at a flat rate of 9%, regardless of the type of rental or rent. While the gradual rate hike isn`t surprising given the city`s projected $1.2 billion variance in the fiscal 2021 budget, caused in part by the COVID-19 pandemic, it signals a change in the special treatment that has always been given to cloud software products. [4] For example, in June 2015, when the Chicago Department of Finance (“Department”) issued Tax Ruling No.
12 (“Ruling No. 12), which stated that `dispossessed computer leasing` includes `cloud computing, cloud services, hosted environment, software as a service, platform as a service and infrastructure as a service`, the Regulation did not contain a separate tariff for the rental of unowned computers. [5] As a result, in October 2015, City Council amended the Ordinance to include a lower transaction tax rate of 5.25% for “the rental of a non-possessable computer” effective January 1, 2016. While the city has tried to generate tax revenue, the lower rate for renting non-possible computers has been gradually increased, initially to 7.25% on January 1, 2020, and now to 9% on January 1, 2021. In December 2019, the Illinois Department of Revenue issued a General Information Letter (GIL) ST 19-0021-GIL dealing specifically with the collection of the Illinois Retailer Occupancy Tax (ROT) or Service Occupancy Tax (SOT) on computer software and related services sold by companies in the financial services sector. The guidelines were requested by a financial services company that sells communications software and related banking and investment management services to retail and business clients. Organizations that are subject to the lease tax and have experienced significant employee displacement may find it beneficial to identify employees and other users who no longer use Chicago`s taxed services in order to adjust their tax liability downwards on that basis, as Permitted by Judgment No. 12.
In summary, Chicago`s rental tax applies to sales to customers renting properties in the city, including data stored and retrieved online. However, if the data is provided by the customer and not by the supplier, the rental fee will be taxed at a lower rate. Chapters 3 through 32 of the Chicago City Code, or the lease tax as it was originally called, went into effect in 1974. It was renamed in 1992, as we know it today, chicago Personal Property Lease Transaction Tax. Since the introduction of this tax, Chicago has always applied it to the time rented for the use of computers. But as we know, technological advances have made it difficult to define exactly what it means to use a computer. For clarity, Chicago added a new term “non-possessory computer lease” in 1994, which includes all payments for “access to and use of a vendor`s computer and software to enter, modify, or retrieve data or information.” While not specifically addressed in the GIL, financial services companies with Nexus in Chicago that buy or sell software may also need to register and transfer local taxes. Chicago`s Personal Property Rental Transaction Tax applies to businesses or individuals who are either landlords or tenants of personal property used in the city. Subscription fees for accessing software over the Internet (commonly referred to as software as a service or SaaS) and certain cloud-based services are subject to rental tax as “undeveloped computer leases” when accessed from terminals in the city. In addition, software license agreements that meet the five state exemption criteria listed above are subject to inheritance tax when used in the city.
On August 31, 2020, Chicago Mayor Lori Lightfoot expressed interest in increasing the tax rate on leases of non-possessable computers subject to the Chicago Personal Property Lease Transaction Tax (“Rental Tax”). Chicago taxes virtually all software-as-a-service (“SaaS”) and cloud computing services physically provided to Chicago users. To do this, it considers these agreements as “non-possessable computer leases”. See City of Chicago, Personal Property Lease Transaction Tax Ruling No. 12 (June 9, 2015). Due to the historical lack of guidance on the applicability of the transaction tax to cloud computing and software, the Chicago Department often attempts to apply the transaction tax to software before 2016, applying the higher 9% rate that applies to the rental of tangible personal property. [4] If a taxpayer significantly underpays their transaction tax, which means that the tax paid was less than 75% of the tax owing, or if no tax return (Form 7550) was filed for that period, the Chicago Department may estimate the unpaid transaction tax for a maximum period of six years from the end of that year. [5] The Chicago Rental Tax applies to businesses or individuals who have a lease or rent personal property used in the city. Judgment No. 12 allows providers to allocate taxable rent on the basis of “actual data or estimates of the customer”.
Companies whose workforce has been moved from a Chicago site may want to update their supplier with the actual location of the portion of their workforce that no longer accesses the Chicago supplier`s software or computer to reduce the tax currently owed and mitigate the impact of a future wage increase. The implementation of the apportionment of judgment no. 12, the Chicago Department of Finance has a model affidavit for sharing the use of leases of non-proprietary computers to reflect changes in the number of Chicago and non-Chicago users in order to calculate the “Chicago usage percentage” that should be applied to the tax. In a previous article, I explained the basics of the Chicago Personal Property Lease Transaction Tax, including the tax`s applicability to personal tangible property and software, potentially applicable exemptions, and exclusions from tax and collection issues. .