Chicago extends voluntary disclosure program for cloud tax
- Jun 2, 2016 | Gail Cole
Last year, the City of Chicago clarified its Personal Property Lease Transaction Tax, restating the law and explaining how it applies to certain cloud computing services. Shortly afterward, it created a voluntary disclosure program to help taxpayers comply with the changes and limit their liability. Now that program has been extended: taxpayers who have not been paying the lease tax on taxable transactions have until July 1, 2016 to apply to participate in the limited voluntary disclosure program.
The lease tax is not new. First enacted in 1974, it was retitled the Chicago Personal Property Lease Transaction Tax in 1992 and took its current form in 1994, when certain nonpossessory computer leases were added to the list of taxable and exempt leases. Since 2004, the Chicago Department of Finance has issued twelve rulings to clarify and amend the lease tax — most recently Ruling #12, effective July 1, 2015.
Transaction tax is by nature organic: as situations, goods and services change, so too must the law. With Ruling #12, the Chicago Department of Finance clarified how the lease tax applies to certain technologies that didn’t exist two decades ago, such as Infrastructure as a Service (IaaS), Platform as a Service (PaaS) and Software as a Service (Saas), where customers pay for the right to use a shared infrastructure, platform and software. The ruling explains that usage of certain products must be “passive” in addition to “fleeting and transitory” in order to be exempt under Personal Property Lease Transaction Tax Exemption 11. This is a new interpretation of the law.
Ruling 12 also restates existing law to underscore that the lease tax applies to “charges incurred … to perform legal research or similar on-line database searches” but not to charges a customer pays to a provider for the service of writing a report.
The department notes in an information bulletin that many businesses have long applied the Personal Property Lease Transaction Tax to IaaS, PaaS, SaaS and other digital uses. However, many businesses have not. According to the department, “Other companies, particularly early stage companies, may not have been aware of the scope of the Tax.” The lease tax has caused confusion for years: accountants and legal tax advisors have frequently sought guidance on how to apply the lease tax to “various products and situations that have developed since the tax was first enacted.”
Although intended to clarify tax policy, Ruling #12 also complicated its effective date (which impacts taxpayer liability). The information bulletin issued in November 2015 (see above link) sets the effective dates straight:
- Taxpayers are retroactively liable for the lease tax on “products that were clearly taxable before the issuance of the Ruling.” In other words, “To the extend that Ruling #12 simply restates existing law, that law applied before the effective date of the Ruling, and it would have continued to apply even if the Ruling had never been issued.”
- However, any changes in the Department’s official interpretation of the Lease Tax Ordinance “would be applied prospectively” to the effective date. The effective date was initially September 1, 2015, but was pushed back to January 1, 2016.
The Department of Finance is offering a limited-time voluntary disclosure program for transaction tax on nonpossessory computer leases. Taxpayers must apply to participate in the program by July 1, 2016. Those accepted into the program may benefit from the following terms:
- “As to charges for nonpossessory computer leases that qualified for Exemption 11 under the Department’s interpretation of the exemption before the issuance of Ruling #12, no liability for Tax, interest, or penalties based on those charges for any periods ending before January 1, 2016. Penalties will be waived for periods after January 1, 2016 and before July 1, 2016.
- As to charges for other nonpossessory computer leases (i.e., charges for nonpossessory computer leases that do not meet the requirements of paragraph 1 above), payment of Tax for the period of January 1, 2015 through December 31 (one year), and no liability for interest or penalties. Penalties will be waived for periods after January 1, 2016 and before July 1, 2016.”
Taxpayers with outstanding unpaid transaction lease tax who do not participate in the voluntary disclosure program may be held liable for years of tax, interest and penalties.
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