On August 7, the Chicago Department of Finance delayed the effective date of the imposition of the Personal Property Lease Transaction Tax (the Lease Tax) on cloud computing services from September 1, 2015, to January 1, 2016. However, the Department did not delay the effective date of the imposition of the Amusement Tax on streaming services. Chicago will seek to impose the Amusement Tax on streaming services beginning September 1, 2015.
Background
In addition to Chicago’s state-administered sales tax (the 9.25% Retailers’ Occupation Tax (ROT)), Chicago imposes several other taxes, including the Lease Tax and the Amusement Tax. The ROT applies to sales of canned software, but not digital goods.
June 2015 Rulings
On June 9, the Chicago Department of Finance released Personal Property Lease Transaction Tax Ruling No. 12, which concluded that the Chicago Lease Tax applied to cloud services. On the same day, the City also issued Amusement Tax Ruling No. 5, which concluded that online gaming, streaming audio and streaming video services were subject to the Chicago Amusement Tax. Both rulings were prospective and scheduled to take effect on September 1, 2015.
Lease Tax
The Lease Tax is a 9% tax imposed on lease or rental of personal property. § 3-32-030.B. The Lease Tax, which must be collected by the lessor of the property, is not limited to tangible personal property, but also applies to certain intangible personal property.. § 3-32-030.A. Historically, the tax has been applied to rentals of time-sharing on a computer, rented computers, leased software and nonpossessory computer leases.
The imposition of tax on nonpossessory leases has opened the door to Chicago contemplating imposing the tax on cloud services. A Chicago ordinance defines a “nonpossessory computer lease” to mean:
a “nonpossessory lease in which the customer obtains access to the provider’s computer and uses the computer and its software to input, modify or retrieve data or information, in each case without the intervention (other than de minimis intervention) of personnel acting on behalf of the provider.”
§ 3-32-020(I).
The June 2015 Lease Tax Ruling expanded the scope of the tax by stating for the very first time that taxable nonpossessory computer leases include cloud computing, cloud services, hosted environments, software as a service and infrastructure as a service where the user has a Chicago address. Personal Property Lease Transaction Tax Ruling No. 12, City of Chicago Dep’t of Fin. (Jun. 9, 2015).
Amusement Tax
The Chicago Amusement Tax is a 9% tax on admission fees or other charges paid for the privilege to enter, to witness, to view or to participate in an “amusement” within the city. § 4-156-020.A. The tax is imposed on the amusement patron, but must be collected by the owner, manager or operator of the amusement. § 4-156-030.A. Historically, the Amusement Tax has applied to movie theaters, sporting events, cable television and mobile television. § 4-156-010.
The June 2015 Amusement Tax Ruling expands the scope of the tax to apply to amusements that are “delivered electronically.” Chicago intends to impose the 9% tax on streaming video, streaming music, online gaming and movie rentals. Amusement Tax Ruling, City of Chicago Dep’t of Fin. (Jun. 9, 2015). The tax does not apply to permanent downloads. The Amusement Tax Ruling will take effect on September 1, 2015.
Chicago Delays Effective Date of Lease Tax Ruling but Not Amusement Tax Ruling
On Friday, the Chicago Department of Finance noted on its website that it extended the effective date of the Lease Tax Ruling to January 1, 2016, to “allow businesses additional time to have questions answered and to make any necessary changes to their billing systems or other procedures.” The Department of Finance announced it would consider amending the ordinances “to address some of the concerns that have been raised by various Chicago businesses about the effect of the lease tax on their operations. Any such changes would require City Council approval and would likely coincide with the new effective date of the ruling.” Finally, the Department of Finance is considering issuing an information bulletin to further guide the public.
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Sutherland Observation
The Lease Tax and the Amusement Tax have been subject to numerous legal challenges since their enactment. In Communications & Cable of Chicago, Inc. v. City of Chicago, cable companies unsuccessfully challenged the Amusement Tax’s expansion to paid television. Since 2009, the Lease Tax has been the subject of litigation by rental car companies in Hertz Corp. v. City of Chicago; the case is currently pending before the Appellate Court of Illinois. Businesses are expected to challenge the expansion of both taxes. Taxpayers may assert that the taxes violate the Illinois Uniformity Clause, the Illinois Constitution, or that Chicago may not tax transactions or events occurring outside of Chicago.
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Sutherland will continue to follow developments with the Chicago Department of Finance’s expansion of its Lease Tax and Amusement Tax.
