On October 28, 2015, the City Council of the City of Chicago (the City) approved a comprehensive budget package for the 2016 fiscal year known as the Revenue Ordinance for Fiscal Year 2016 (the Revenue Ordinance). In addition to imposing the largest property tax increase in City history, the Revenue Ordinance amends the City’s Personal Property Lease Transaction Tax (the Lease Tax) to provide for a reduced rate of tax on certain leases and a limited exemption for certain “small new businesses.”
The Lease Tax is imposed upon the lease or rental in the City of personal property or the privilege of using personal property in the City that is leased outside of the City, at the rate of nine percent of the lease or rental price. The term “lease” or “rental” specifically includes a “nonpossessory computer lease.” A “nonpossessory computer lease” means 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 intervention (other than de minimis intervention) of personnel acting on behalf of the provider.” In the case of a nonpossessory computer lease, the location of the terminal or other device by which a user accesses the provider’s computer is deemed to be the place of lease or rental for purposes of the Lease Tax.
The Lease Tax does not apply to a “nonpossessory computer lease” 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 such as the nonpossessory lease of a computer to receive either current price quotations or other information having a fleeting or transitory character. This exemption is referred to as “Exemption 11.”
Although the Lease Tax is imposed on the lessee, the lessor is required to collect the tax from the lessee at the time of each lease or rental payment and to remit the tax to the City, and the lessor can be held liable for the failure to properly collect or remit the tax. The lessee is also liable to self-assess and remit Lease Tax if the lessor does not collect it.
Issuance of Ruling #12
On June 9, 2015, the City released a new ruling (Ruling #12) which sought to clarify that a “nonpossessory computer lease” includes cloud computing transactions and narrow the scope of Exemption 11 by stating that Exemption 11 would only apply to charges for passive access to information such as a one-way dissemination of a scrolling list of current stock prices without the ability to perform searches or interact with a website, even if most or all of the information received is fleeting or transitory in nature. For more detail on Ruling #12, see our prior Tax Update dated July 9, 2015.
Ruling #12 has met resistance from the taxpayer and business community; many claim that the City has exceeded its authority by expanding the scope of the Lease Tax. In addition, concerns have been expressed about the complexity of the positions set forth in the ruling and their potential to adversely impact the Chicago startup and tech community. In an attempt to address these concerns, the City announced in late August that the effective date of Ruling #12 was being pushed back from September 1, 2015 to January 1, 2016, and that the City was considering making certain amendments to the Lease Tax Ordinance prior to the new effective date for Ruling #12.
Changes to the Lease Tax Ordinance
On October 28, 2015, the City Council approved the Revenue Ordinance, which included two important changes to the Lease Tax. Effective January 1, 2016:
- A “nonpossessory computer lease” that 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 supplied by the customer” will be subject to tax at a rate of 5.25 percent rather than the general rate of nine percent. If the customer is accessing someone else’s data, the tax rate will remain at nine percent.
- “Nonpossessory computer leases” in which the lessor or lessee is a “small new business” will be exempt. For this purpose, the term “small new business” includes a business that holds a valid and current business license issued by the City or other jurisdiction, has been in operation for less than 60 months and during the most recent full calendar year prior to the annual tax year for which the exemption is sought, had under $25 million of “gross receipts or sales,” as defined for federal income tax purposes.
- For purposes of calculating the 60-month limitation, the City treats the business as being part of any unitary business group in which it is included for Illinois income tax purposes and any businesses for which the business in question may be treated as a successor under Illinois law.
- For purposes of calculating the $25 million limitation, gross receipts or sales will be combined if they are received by members of a single unitary business group (as defined for Illinois income tax purposes).
The amendments enacted by the Revenue Ordinance are set to take effect as of January 1, 2016, the same date on which Ruling #12 is effective. These changes, together with the positions set forth in Ruling #12, will continue to create complexity for taxpayers in their ability to comply with their Lease Tax obligations.