Chicagoans, there’s a new tax in town. The tax affects cloud usage and delivery, impacting the city of Chicago businesses and consumers that rely on cloud-based and streaming services. Therefore, you are possibly subject to the tax if you pay a fee to perform calculations, data processing, tax preparation, spreadsheet preparation, word processing, presentations and other applications via access to a provider’s computer and its software.
Additionally, if you obtain information, such as consumer credit reports, real estate listings, car prices, stock prices, economic statistics, weather statistics, job listings, resumes, company profiles, consumer profiles, marketing data, and similar information that has been compiled, entered and stored on a provider’s computer, you’ll probably be affected. In other words, the tax potentially affects many of the uses of your computer or mobile device (Netflix, Spotify, Amazon, Salesforce, LexisNexis, Office 365 just to name a few).
The tax—technically a clarification that Chicago’s 1994 nonpossessory computer lease tax applies to cloud software and services—was announced in June 2015. The negative response from the business community ultimately resulted in a lower tax rate for certain transactions (from 9.0% to 5.25%) and an exemption for startups (see below). The changes were announced in November 2015, and were effective January 1, 2016.
Who is subject to the tax?
The tax is triggered when a customer located in the city of Chicago makes remote use of a provider's computer or software, even if that computer or software is located outside of Chicago. There are three classes of exempt customers, which are (a) governmental bodies, (b) charitable, educational, and religious organizations, and (c) insurance companies. There is also a short list of narrowly defined categories of transactions that are exempt from the tax.
How much is the tax?
The tax is computed as a percentage of the lease payments. There are two rates. If the lease is 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 provider, such as database search products, the rate of tax is 9.0% of the lease or rental price. If the lease is 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, the rate is 5.25% of the lease or rental price. As a result, the lower rate applies to "cloud" products such as Platform as a Service (PaaS), Infrastructure as a Service (IaaS) and Software as a Service (SaaS). Because lease payments trigger the tax, if the use is free, there is no tax imposed.
Are charges for data storage on a computer subject to tax?
Charges for storage of information on a provider's computer are not subject to lease tax provided the charges are solely for storage. However, if, at a later date, the customer is charged for accessing the stored information from a terminal or device located in Chicago, the access charge would be taxable.
Who is responsible for paying the tax?
The tax is imposed on the customer, but the provider is required to collect it. However, if the provider does not collect the tax, the customer is still liable to pay it directly to the City using a tax form available on the City’s website. The City does not require providers to collect the tax unless they have nexus—a sufficient number of contacts with Chicago.
What if only part of my use is in Chicago?
Often, a customer has some individuals who use the provider's computer from terminals or devices located in Chicago, and some individuals who use the provider's computer from terminals or devices located outside of Chicago. If the provider’s charge covers both Chicago use and non-Chicago use, the charge is apportioned. The City says that it will accept any reasonable basis for apportioning Chicago and non-Chicago use, provided the calculations are supported by books and records. When using mobile devices, an individual may sometimes be located within Chicago when accessing the provider’s computer, and at other times may be outside of Chicago. If the individual is assigned an access code to use the provider's computer, all of that individual's use will be presumed to take place at the individual's principal office location.
My company is a small business. Is it exempt from tax?
The exemption applies only to a "small new business." The City defines that as a business that meets all three of the following characteristics:
1. The business holds a valid and current business license issued by the City or another jurisdiction.
2. The business had under $25 million in gross receipts or sales (as the term "gross receipts or sales" is defined for federal income tax purposes) during the most recent full calendar year prior to the tax year for which the exemption is sought.
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3. The business has been in operation for fewer than 60 months. (Time in operation is deemed to have begun during the first calendar month in which the business first received any gross receipts or sales.)
There are special rules for unitary business groups and for any business that is substantially similar or a predecessor to the one seeking the exemption.
A small new business that is the lessor of a nonpossessory computer lease is not required to collect tax on its lease charges. A small new business that is the lessee of a nonpossessory computer lease is not required to pay tax; however, to document its exemption, the business must provide a lessee's lease tax exemption certificate to the lessor.
In the past, my company was exempt from tax because of the de minimus exemption. Why doesn’t this exemption still apply?
An exemption is available for a “nonpossessory computer lease in which the customer’s use or control of the computer is de minimis and the related charge is predominantly for information transferred” (Exemption 11). In its November bulletin, the City changed its interpretation of that exemption.
Now, de minimus means that the receipt and any usage of information must both be delivered passively (that is, with a minimum of search or other functionality, such as a stock ticker) and be fleeting or transitory. The charge is predominantly for the information transferred if it is for access to materials that are primarily proprietary, such as copyrighted newspapers, newsletters or magazines, and are obtained by a search that merely locates the information that the customer wishes to download or access. The Ruling states: "As a general rule, this means that a subscription to an interactive web site will be subject to the lease tax, and will not be exempt,” and provides the example of a legal research database as “a clear example of a product not covered by Exemption 11.”
My company may be subject to the tax. What are my next steps?
KRD professionals are available to assist clients in determining whether they are required to collect or pay the tax. For more information on the November 2015 Information Bulletin – Nonpossessory Computer Leases from the City of Chicago website visit: http://www.cityofchicago.org/city/en/depts/fin/supp_info/revenue/tax_list/personal_propertyleasetransactiontax.html