Chicago's New Lease Tax Applies to Personal Property and The Cloud - The Tax Includes "Non-Pos

Publish date: 2024-06-03

HIGHLIGHTS:

The Chicago Department of Finance (the "Department") issued Lease Transaction Tax Ruling No. 12 with respect to application of Chicago's Personal Property Lease Transaction Tax (the "lease tax") to non-possessory computer leases.1 The lease tax, issued on June 9, 2015, is imposed at a Nine percent rate. The lease tax applies to fees which are paid for the use of personal property, including charges paid pursuant to a "non-possessory computer lease," unless the fees are exempt below so-known as Exemption 11.

The term "non-possessory computer lease" method a non-possessory lease by which the customer obtains get entry to to the provider's computer primarily for the ability to use the provider's computer and its software to enter, regulate or retrieve information or information, in every case with out the intervention (rather than de minimis intervention) of body of workers acting on behalf of the supplier. In such occasions, the fee is basically for the customer's use or control of the supplier's computer and is topic to the lease tax.

Broad Expansion of the Lease Tax

The ruling supplies examples of transactions which can be topic to the lease tax on the fees incurred:

  • to carry out criminal analysis or equivalent online database searches (see Meites v. City of Chicago, 184 Ill. App. 3d 887 (1989))
  • to download client credit reports (see Personal Property Lease Transaction Tax Ruling #9 (June 1, 2004))
  • to download real property listings and costs, automobile prices, stock prices, economic statistics, climate statistics, task listings, resumes, corporate profiles, client profiles, marketing data, and similar knowledge or data that has been compiled, entered and stored on the supplier's computer2
  • to carry out functions equivalent to word processing, calculations, data processing, tax preparation, spreadsheet preparation, presentations and other packages available to a buyer via get admission to to a provider's computer and its device. These closing examples are every so often referred to as cloud computing, cloud services, hosted atmosphere, device as a provider, platform as a provider, or infrastructure as a provider3

    • While the examples in items a. and b. don't seem to be new, the growth of the lease tax is reflected in pieces c. and d. and the Department's statements in the ones items. Items c. and d. constitute a vast enlargement from the idea that developed from taxing agreements for time-sharing on mainframe computer systems, and that has only been litigated one time in the Meites case greater than 25 years in the past, involving legal research in the town of Chicago on terminals supplied by way of the felony search provider. The Meites case predated the Internet in most cases and the super expansion of Internet networks that now deliver such a lot of of the products and services this ruling now seeks to matter to the lease tax. This ruling represents additional evolution of the city's method to fail to remember contract phrases and recharacterize transactions to are compatible its tax code definitions.

    What Entity Performs the Collection?

    As a technical matter, the lease tax is imposed on the consumer and it sort of feels cheap to think that as the Department begins to audit and assess consumers situated with the city of Chicago, consumers will most probably call for that providers collect the lease tax as expanded by way of the ruling. However, it will have to be emphasized that the ruling largely avoids the factor of whether or not the "lessor" of the computer in the non-possessory computer lease has sufficient nexus with the town of Chicago to require them to collect the lease tax. Nevertheless, it's expected that suppliers will most likely really feel the need to sign in and acquire the taxes, regardless of lacking nexus, and in spite of the fact that the provider would appear to have robust arguments towards the Department's expansive interpretation of its taxing ordinances beneath the Federal Telecommunications Act, the Internet Tax Freedom Act, and federal and Illinois constitutional limitations on taxation. As a normal subject, the Department has indicated that the lease tax will observe to shoppers whose residential boulevard deal with or primary side road deal with is in Chicago, as reflected by way of their bank card billing deal with, zip code or different reliable data.4

    Effective Date Has Some Flexibility

    Even even though the ruling has a July 1, 2015 effective date, the Department has indicated that it's going to restrict the impact of the ruling to sessions on or after Sept. 1, 2015, to allow affected businesses time to make the required machine changes.(*11*) Despite this apparent September deferral, it is unclear whether this deferral supplies coverage in opposition to lease tax collection liability until after the Sept. 1, 2015 date.

    An Unfavorable Ruling Can Be Appealed

    What is clear is that the city of Chicago has mounting fiscal pressures using this sort of tax policy. Further, the town has its own tax hearings place of business, a bevy of its personal litigators, and both taxpayers and the town can enchantment from an negative ruling. With the city's passion on antisocial taxes at 12 percent a yr, and conventional unagreed audit penalty of 25 p.c, this unparalleled taxation of the "cloud" thru enlargement of the lease tax cannot merely be unnoticed by way of the ones affected.

     

    Notes

    1 City of Chicago, Department of Finance, Personal Property Tax Ruling #12 (June 9, 2015).

    2 Id. at ¶ 6.c.

    3 Id. at ¶ 6.d.

    4 Id. at ¶ 16.

    (*11*) Id. at ¶ 21.

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