On June 9, 2015, the City of Chicago (the “City”) released an expansive new ruling (“Ruling #12”) extending the scope of the City’s Personal Property Lease Transaction Tax (the “Lease Tax”). Ruling #12 addresses the application of the Lease Tax to so-called “nonpossessory computer leases” and significantly narrows the scope of the exemption otherwise available with respect to the receipt of price quotations and other information having a fleeting or transitory character. It also addresses certain sourcing and collection issues that have until now been left unaddressed, providing useful guideposts to determine when (and to what extent) a lease transaction should be sourced to the City. Ruling #12 will have a significant impact on Chicago-based providers and users of cloud computing and other computer-related services.
Under Chapter 3-32 of the Chicago Municipal Code (the “Ordinance”), the Lease Tax is imposed 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 outside of the City, at the rate of 9 percent of the lease or rental price. The term “lease” or “rental” specifically includes a “nonpossessory computer lease.” A “nonpossessory computer lease” means a 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 in accordance with the Ordinance, 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.
Taxation of Nonpossessory Computer Leases
Ruling #12 provides that a taxable “nonpossessory computer lease” includes charges (i) for legal research or similar online database services, (ii) to obtain consumer credit reports, (iii) to obtain 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 compiled, entered or stored on a provider’s computer, and (iv) for remote or hosted access to a provider’s computer or its software applications (commonly referred to as cloud computing, cloud services, hosted environment, “software as a service” (SaaS), “platform as a service” (PaaS) or “infrastructure as a service” (IaaS)). Notably, the City views charges for access from within the City to a provider’s computer or its server as taxable even though the computer or the server being accessed is located outside of the City. Prior to Ruling #12, the City had not expressly taxed cloud and similar services.
Charges for services, such as writing a report or creating a database, are considered nontaxable. Charges for the storage of information are not subject to tax if the storage provider’s computer is located outside of the City. Charges to access the previously stored data, however, may be taxable, if the stored data is accessed from a location within the City.
Scope of Exemption 11
Ruling #12 also clarifies the scope of Exemption 11. The ruling states that Exemption 11 applies when (i) the customer’s use or control of the provider’s computer is de minimis, and (ii) the related charge is predominantly for the information transferred, rather than the use or control of the computer. When the City Council originally amended the Ordinance to include Exemption 11, it stated that certain price quotation services and news services would qualify under Exemption 11, whereas legal research would not. According to the ruling, exempt use may be demonstrated either by (i) passive access to information or data, or (ii) access to material which is entirely proprietary in nature, such as copyrighted newspapers or magazines. While passive access to information (such as a one-way dissemination of a scrolling list of current stock prices) is exempt, charges for 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, will not be exempt. The City’s view of Exemption 11 as expressed in Ruling #12 is substantially narrower than the manner in which many taxpayers have been interpreting it.
Sourcing – Collection or Direct Payment
Prior to the publication of Ruling #12, the City had provided no guidance on how to collect or pay the Lease Tax in connection with computer or software leases where the lessee has users in multiple jurisdictions, both within and outside the City. In Ruling #12, the City provides a framework for how lessors and lessees should determine whether (and the extent to which) a transaction is taking place within the City and is subject to the Lease Tax. To determine the source of use in the case of a software or nonpossessory computer lease, the City will apply the principles set forth in the Mobile Telecommunications Sourcing Conformity Act. In general, this means that Lease Tax will apply to customers whose residential street or primary business address is in the City, as reflected by credit card billing address, billing zip code or other means of reliable information. These provisions are intended to reflect the user’s location of primary use.
Ruling #12 also makes clear that lessors are not required to collect Lease Tax from lessees if the lessor has no information that the lessee’s use will take place in Chicago. If the lessee is based in Chicago (i.e., has a Chicago billing address), but has users located both within and outside the City, Ruling #12 suggests that charges for any such use should be apportioned between users within and outside of the City (based on the principal office locations of the lessee’s individual users). Such apportionment should be based on actual data or estimates provided by the lessee. If the customer has a Chicago billing address but no detailed data as to the exact amount of actual usage within the City, the lessor should collect the Lease Tax as if the entire use takes place in the City. It is unclear whether a customer may be permitted to file a refund claim if it can demonstrate that some usage actually occurred outside of the City. Finally, Ruling #12 provides a safe harbor under which a lessor will not be required to collect Lease Tax from its lessee if (i) the lessee has ten or more employees or other individuals assigned an access code, seat license or other ability to use the lessor’s computer, and (ii) the lessee provides written confirmation to the lessor that it is registered with the City to self-assess Lease Tax.
Ruling #12 became effective as of July 1, 2015. In order to allow business sufficient time to make any required system changes, the ruling states that the City intends to limit the effect of the ruling to periods on or after September 1, 2015. Nevertheless, the ruling states that the September deferral does not release or otherwise affect the liability of any business that failed to comply with existing law before the date of the ruling. We understand that the City included this language so as not to waive any failure to comply with the positions described in Ruling #12 if the taxpayer’s failure to comply with the Ordinance was clear even before, or without the application of, the ruling.