The City of Chicago has extended its Personal Property Lease Transaction Tax to cloud computing services such as SaaS, PaaS and IaaS, applicable retroactively. Businesses selling these services may be held liable for this tax for a four-year lookback period.
Personal Property Lease Transaction Tax
Chicago’s Personal Property Lease Transaction Tax applies to the following:
- The lease or rental of personal property in the city of Chicago
- The privilege of using in Chicago personal property that is leased or rented outside of the city
The tax applies to both possessory and nonpossessory leases and the obligation to pay the tax falls upon the lessee of the personal property. As of January 1, 2015, the rate is 9% of receipts or charges for most transactions. However, effective January 1, 2016, a lower rate of 5.25% applies to “‘cloud’ products such as PaaS, IaaS and SaaS (where the nonpossessory 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 lower rate does not apply to “‘database’ products (where the nonpossessory 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).”
Under the ordinance, certain lessees are exempt from the tax and certain leases are exempt or eligible for deductions or credits. Exempt lessees include charitable organization and governmental bodies. Effective January 1, 2016, there is also an exemption for certain small new businesses, both providers and customers.
Twelve leases are either fully exempt or are subject to deductions and/or credits, including the one known as Exemption 11, originally adopted in 1995:
The 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 (e.g., the nonpossessory lease of a computer to receive current price quotations).
Exemption 11, amended
Technological advancements since the initial adoption of Exemption 11 have rendered its language outdated. While many businesses have been remitting the lease tax on cloud computing services such as PaaS, IaaS and SaaS, “other companies, particularly early stage companies, may not have been aware of the scope of the Tax.” Therefore on June 9, 2015, the Chicago Department of Finance issued Personal Property Lease Transaction Tax Ruling #12 to explain how the lease tax applies to numerous technologies that did not exist in 1995. Taxable transactions now explicitly include Platform as a Service (PaaS), Software as a Service (SaaS), Infrastructure as a Service (IaaS), and other technologies that allow customers to access software remotely.
The following transactions are subject to the lease tax under the new guidelines:
- “Obtaining consumer credit reports.
- Obtaining 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 or data that has been compiled, entered and stored on the provider’s computer.
- Performing functions such as word processing, calculations, data processing, tax preparation, spreadsheet preparation, presentations and other applications available to a customer through access to a provider’s computer and its software. These last examples are sometimes referred to as cloud computing, cloud services, hosted environment, software as a service, platform as a service, or infrastructure as a service [emphasis mine].
- Performing legal research or similar on-line database searches, including subscriptions to an interactive web site, even if most or all of the information available on the site is fleeting or transitory.”
To be exempt, accessed data must be “passive” in nature in addition to“fleeting and transitory.” To qualify for the exemption, transactions must have little or no interaction with the provider’s computer.
If charges for taxable and exempt transactions are bundled together, according to the ruling, “the entire price charged shall be deemed taxable, unless it is clearly proven that at least 50% of the price is not for the use of any personal property.”
The department limits the effect of this ruling to periods on and after the effective date. Originally September 1, 2015, the effective date was pushed back to January 1, 2016. However, businesses that failed to comply with the existing law before the effective date of this ruling may be held liable for four years of unpaid taxes.
Additional information about the personal property lease transaction tax is available on Information Bulletin, Nonpossessory Computer Leases.
If your company provides any form of cloud-based services to customers in the City of Chicago (including SaaS, IaaS and PaaS) or any other service that allows customers to access software remotely, it is at risk for this tax reporting obligation. The Chicago Department of Finance is offering a limited voluntary disclosure program that can limit unpaid taxes to January 1, 2016 instead of the normal four year lookback period, and reduce penalties for the period January 1, 2016 to July 1, 2016. Applicants must apply for this special program by July 1, 2016. After this program closes, taxpayers will be subject to the four year lookback period for unpaid taxes, plus interest and penalties!
Avalara’s Professional Services group offers a range of tax advisory services to Avalara customers, including assistance with tax registrations, nexus determination, back filing services and voluntary compliance services. This team consists of sales tax experts — including former state tax auditors, attorneys and accountants specializing in this area — who regularly assist Avalara customers in getting ‘tax ready’ and ‘tax compliant.’
Contact your Account Manager today about engaging Avalara’s Professional Services group to assist in this limited opportunity.