On June 9, 2015, the City of Chicago's Department of Finance issued two rulings with potential tax implications for web-based entertainment and information sources (specifically in the form of searchable databases). These rulings, titled Amusement Tax Ruling #5 ("Ruling #5") and Personal Property Lease Transaction Ruling #12 ("Ruling #12"), clarify the types of web-based or activity in the "Cloud" that fall within the city's Amusement Tax and Personal Property Lease Transaction Tax, respectively. As a result of two rulings, Chicago will attempt to tax the activities taking place in the Cloud more directly and comprehensibly than almost any other U.S. jurisdiction.
Ruling #5: The Amusement Tax
Ruling #5 articulates the types of web-based entertainment services that fall within the City of Chicago's Amusement Tax. Generally, the Amusement Tax covers "any exhibition, performance, presentation or show for entertainment purposes … any entertainment or recreational activity offered for public participation or on a membership or other basis … or any paid television programming." Chi. Mun. Code § 4-156-010.
As it applies to the Amusement Tax, Ruling #5 states: "The amusement tax applies to charges paid for the privilege to witness, view or participate in an amusement. This includes … charges paid for the privilege to witness, view or participate in amusements that are delivered electronically." City of Chicago, Department of Finance, Amusement Tax Ruling #5 (June 9, 2015), at 3. The ruling goes on to list some of the services to which the Amusement Tax applies. These services include electronically delivered television shows, movies, videos, music, and video games. The tax will also apply to satellite TV delivered to customers located in Chicago, and it will be imposed at a rate of 9 percent of the subscription charge for the service in question.
Ruling #5 states, however, that the tax will not apply to the aforementioned services when they are permanently downloaded by a customer. As such, the focus of the expansion of the Amusement Tax appears to be on electronic services that are streamed by the customer or temporarily downloaded, as long as those activities are done at a location in Chicago. As Ruling #5 elaborates: "The amusement tax does not apply to sales of shows, movies, videos, music, or games (normally accomplished by a 'permanent' download). It applies only to rentals (normally accomplished by streaming or a 'temporary' download). The charges paid for such rentals may be subscription fees, per-event fees or otherwise." Id.
The Amusement Tax ruling specifically taxes charges paid for the privilege of the following amusements delivered to a patron in the city: (i) "watching electronically delivered television shows, movies, or videos"; (ii) "listening to electronically delivered music"; and (iii) "participating in games, on-line or otherwise." As a consequence, streaming a movie, listening to streaming music, or playing a game on a smartphone or tablet will now trigger a 9 percent tax on the subscription charge for those services if those activities are done at a location in Chicago. Furthermore, the ruling addresses "bundled" transactions, by providing that "unless it is clearly proven that at least 50% of the price" is not for the amusement, the entire charge, except for any separately stated non-amusement charges, is subject to the Amusement Tax. The ruling does not differentiate between news, current events, sports, movies, music, or other types of television programming. As a consequence, a bar or restaurant that charges patrons for access to television programming of any sort, plus other goods and services (e.g., a bar that imposes an admission charge for a pay-per-view event that includes food and beverages) may have to ensure compliance with the bundling rules.
Ruling #12: The Personal Property Lease Transaction Tax
Ruling #12 further defines the scope of the Personal Property Lease Transaction Tax. The Personal Property Lease Transaction Tax imposes a tax upon "(1) the lease or rental in the city of personal property, or (2) the privilege of using in the city personal property that is leased or rented outside the city." Chi. Mun. Code § 3-32-030(A). The tax further states that the obligation to pay is on the lessee of the personal property. Id.
As it pertains to the Personal Property Lease Transaction Tax, Ruling #12 states: "The Chicago Personal Property Lease Transaction Tax applies to charges that are paid for the use of personal property, including charges paid pursuant to a non-possessory computer lease." City of Chicago, Department of Finance, Amusement Tax Ruling #12 (June 9, 2015), at 2. The ruling continues, noting, "[i]f a lessee pays a lessor primarily for the ability to use the provider's computer to input, modify, or retrieve data or information, the charge is primarily for the customer's use or control of the provider's computer and is taxable." Id.
Ruling #12 lists the following as examples of activities that are taxable: performing legal research or similar online database searches; obtaining consumer credit reports; obtaining real estate listings and prices, car prices, stock prices, economic statistics, weather statistics, job listings, resumes, company profiles, marketing data, "and similar information or data that has been compiled, entered and stored on the provider's computer." Id. at 3. Furthermore, Ruling #12 states that the tax encompasses transactions for nonpossessory computer leases when the purpose of the computer use is for a function such as word processing, calculations, data processing, tax preparation, spreadsheet preparation, presentation, "and other applications available to a customer through access to a provider's computer and its software." Id.
Ruling #12 also discusses the instances in which the Personal Property Lease Transaction Tax does not apply. Mainly, the ruling makes reference to Exemption 11 of the tax, which states that "the non-possessory lease of a computer in which the customer's use or control of the provider's computer is de minimis and the related charge is predominantly for information transferred to the customer rather than for the customer's use or control of the computer" falls outside the scope of covered activities. Chi. Mun. Code § 3-32-050. Ruling # 12 clarifies the scope of that exemption, stating that "exempt use may be demonstrated either (a) by access to information or data which is entirely passive (such as streaming data), without interactive use, or, in other cases, (b) by access to materials that are primarily proprietary, such as copyrighted newspapers, newsletters or magazines." Ruling #12, at 4.
Additionally, the ruling notes that "[e]ntertainment materials such as copyrighted books, musical and other sound recordings, [and] feature length and episodic films" are not "data or information" for purposes of a nonpossessory computer lease and therefore fall outside the scope of the Personal Property Lease Transaction Tax. Id. at 3. Information that is primarily proprietary, such as information that is accessible only through the purchase of a subscription, also falls outside the scope of the tax. As the ruling states, this material is exempt—even if a search function exists—because "the value of the search function is subordinate to the value of the information or data that the customer wishes to download or otherwise access." Id. at 4.
Both rulings state that in the situation where a charge is "bundled," i.e., a charge that includes both taxable and nontaxable or exempt elements, the Department of Finance will apply Personal Property Lease Transaction Tax Ruling #3, dated June 1, 2004 ("Ruling #3"). Ruling #3 states: "If the lessor fails to separate the lease or rental portion of the price from the non-lease or non-rental portion, 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." City of Chicago, Department of Finance, Personal Property Lease Transaction Tax Ruling #3 (June 1, 2004). In the context of Ruling #5, therefore, the entirety of a bundled charge is taxable if it is "primarily for the privilege to enter, to witness, to view or to participate in an amusement." Ruling #5, at 3–4. Alternatively, in the context of Ruling #12, "if a bundled charge is primarily for the customer's use or control of the provider's computer, then the entire charge is taxable." Ruling #12, at 5.
Sourcing and Nexus
Both taxes are imposed on the consumer. And whether a customer is within the city for the purpose of each tax is determined by the criteria laid out in the Mobile Telecommunications Sourcing Conformity Act. 35 ILCS 638. Namely, this means that "the … tax will apply to customers whose residential street address or primary business street address is in Chicago, as reflected by their credit card billing address, zip code or other reliable information." Ruling #12, at 5; Ruling #5, at 4.
One issue that remains unclear in the aftermath of these two rulings is the criteria for determining whether a provider of amusements or lessor of the computer in a possessory computer lease has a sufficient nexus with Chicago to require it to collect either the Amusement or Personal Property Lease Transaction Tax, respectively. This ambiguity creates the possibility that providers, specifically those lacking nexus, will register to collect the taxes out of pressure created by the Department of Finance's audits and assessments of customers located within Chicago.
Both Ruling #5 and Ruling #12 will be limited in effect to the period on and after September 1, 2015, in order for "affected businesses to make the required system changes." Ruling #5, at 4; Ruling #12, at 6.