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Chicago Mayor Rahm Emanuel has proposed a new revenue ordinance detailing changes to Personal Property Lease Transaction Tax Ruling #12 regarding Chicago’s taxation of cloud services. Per the ordinance’s proposal, in the case of a nonpossessory lease of a computer primarily for the purpose of allowing the customer to use the provider’s computer and software to input, modify or retrieve data or information that is supplied by the customer, a reduced tax rate of 5.25% would apply to the lease or rental price.  The ordinance also proposes a small business exemption. A “small new business” would be exempt from paying the tax if it has a valid and current business license, under $25 million in gross annual sales and has been operating for less than 60 months since its first sale. New small businesses that are lessors will also not be required to collect the tax from its customers.  We’ll continue to monitor the situation. There are still a number of open issues and the City Council has not yet approved the changes. For our previous news item on the Chicago cloud tax, visit Chicago Issues Rulings on Amusement Tax and Personal Property Lease Transaction Tax. (2016 Revenue Ordinance)

(10/26/2015)

On June 15, 2015, Representative Jason Chaffetz (R-UT) introduced the Remote Transactions Parity Act (RTPA) of 2015 in the U.S. House of Representatives. The bill – similar to the Marketplace Fairness Act (MFA) of 2015 – pertains to sales and use taxcollection obligations for remote sellers, but the RTPA contains some differences and several additional provisions. Unlike the MFA’s $1 million small seller exception, the RTPA’s small seller exception is as follows: first year: $10 million; second year: $5 million; third year: $1 million. The exception goes away in the fourth year. Furthermore, under the RTPA sellers utilizing an electronic marketplace are not considered small sellers and are not entitled to the exception, no matter the year. Under the RTPA, sellers would not be audited by states where they don’t have a physical presence. There would be a three year statute of limitations for assessments on remote sellers. The bill would enable remote sellers to refund over-collected tax to customers. The RTPA also specifies that a state would not be authorized to impose a sales and use tax collection requirement on remote sellers until it has certified multiple software providers that are certified in all states seeking to impose authorization requirements. The RTPA would also allow customers to pursue refunds of over-collected tax from remote sellers. However, RTPA does not preempt states from imposing sales and use taxes on remote sellers that do not have physical presence under this definition. It merely authorizes states to impose sales and use tax on remote sellers without a physical presence. Under the RTPA, if a seller has nexus under existing law, including Quill v. North Dakota, then the state may still impose a sales and use tax collection requirement.  The bill is assigned to the Judiciary Committee just like the MFA.  On July 1, 2015 it was referred to the Subcommittee on Regulatory Reform, Commercial And Antitrust Law. (H.R. 2775, the Remote Transactions Parity Act of 2015)

 

UPDATE: This bill failed to pass during the 114th Congressional Session running from January 3, 2015 to January 3, 2017.  Therefore, this bill has died and would need to be reintroduced to be considered and voted on.

(09/08/2015)

On July 15, 2015, the Cook County, Illinois Board passed a sales tax rate increase that will bring the total Cook County sales rate to 10.25%. The rate increase goes into effect on January 1, 2016.Board President Preckwinkle proposed and the Board passed the rate increase in advance of the county budget presentation due to the advance lead time required by the Illinois Department of Revenue to administer the rate increase.  Per President Preckwinkle, if the full amount is not needed once the State finalizes its budget and decisions are made concerning the county’s pension proposal, the rate increase may be rescinded in full or part. (Meeting Detail, Cook County Board of Commissioners, July 16, 2015)

(07/28/2015)

The Chicago Department of Finance has issued rulings regarding the city's Amusement Tax and the Personal Property Lease Transaction Tax that clarify when electronically delivered amusements or services will be subject to the Amusement Tax or Transaction Tax. Personal Property Lease Transaction Tax Ruling #12is a new ruling that supplements existing Ruling #5 which was issued in 2013.  Ruling #5, as well as the predecessor Ruling #9, explained the tax as it applied to Non-Possessory Computer Leases as well as to software transactions that qualified as exempt under Illinois law.  In both of these cases, Chicago has taken the position that the Transaction Tax applies.   Non-possessory computer leases include time-sharing.  New Ruling #12 states that legal research databases, databases that provide credit reports, programs that involve compiled information, such as real estate prices, stock prices, economic statistics, or weather statistics, and programs that perform functions such as data processing or tax preparation, will be subject to the Transaction Tax. The ruling also explains which services are not subject to the Transaction Tax. If a customer pays a provider to write a report that is accessed electronically, no tax applies. Charges for storage of information on a server are exempt unless the storage location is in Chicago.  There is an exemption for the passive receipt of proprietary information where the intent is to just receive the information and not search capabilities.  Sales of entertainment materialsare not taxed under the Transaction Tax but rather under the Amusement Tax. The ruling states that a "true object" test will apply to whether a transaction is taxable. The ruling also states that if a customer enters into a transaction subject to the Transaction Tax but uses the service within and without Chicago, the tax should be apportioned. Although Chicago has taken the position that certain uses of remotely accessed computers are taxable, this is not new.   They are taken a more aggressive and direct position by clearly stating that cloud computing is included in their definition of a non-possessory computer lease.  Discussions are being held with the City to gain clarity on the issue and there may be changes to the ruling. We’ll continue to monitor the situation.

 

The Chicago Amusement Tax is a tax imposed on 1) any exhibition, performance, presentation or show for entertainment purposes; 2) any entertainment or recreational activity offered for public participation or on a membership or other basis; or 3) any paid television programming regardless of the means transmitted.  Amusement Tax Ruling #5 was issued to further explain and clarify the taxability of amusements subject to the tax.  The Ruling details that charges paid for the privilege of enjoyingor participating in electronically delivered television shows, movies, videos, music, or games are subject to taxwhen the delivery occurs to a customer located within the City of Chicago.This will be determined based on the primary address of the customer as reflected by their credit card billing address or other reliable information.   However, the actual purchase of these items is not subject to taxas these are considered sales and outside the scope of the tax.  Only rentals or non-permanent use of items are subject to the Amusement Tax. If a taxable amusement is bundled with a non-taxable item or service, the entire price will be subject to the Amusement Tax unless the provider can prove that more than 50% of the charge is for the non-taxable component.  The tax is imposed on the customer but the owner or operator has an obligation to collect the tax if they have nexus in the City.

 

Both rulings are effective July 1, 2015 but they will not be implemented until September 1, 2015, to give taxpayers time to make required system changes. Both rulings state that the issue of nexus is beyond the scope of the rulings. (Personal Property Lease Transaction Tax Ruling #12; Amusement Tax Ruling #5)

 

UPDATE: The Chicago Department of Finance has changed the effective date of Personal Property Lease Transaction Tax Ruling #12 from September 1, 2015 to January 1, 2016. The Department notes that the extension will allow businesses additional time to have questions answered and to make any necessary changes to their billing systems or other procedures. The City will use the additional time to consider possible ordinance changes to address concerns that have been raised by Chicago businesses about the effect of the lease tax on their operations. Any changes would require City Council approval and would likely coincide with the new effective date of the ruling. The Department may provide further guidance as to specific questions that have been asked since the publication of the ruling. (Note, Chicago Department of Finance, August 10, 2015)

(08/21/2015)

A car dealership was entitled to a use tax credit against the Illinois sales tax it owed on retail sales of cars that it had made available under a loaner car program. A repair shop paid the dealership for the use of loaner cars by the repair shop’s customers.In Illinois, a lessor that incurs a sales tax liability on the sale of a formerly leased item can take a credit against that tax for use tax paid on the purchase of that item. The Illinois Department of Revenue has historically taken the position that cars used in circumstances similar to the loaner program are leased cars that qualify for the use tax credit. However, in this case, the department denied the use tax credit for the car dealership’s sales. The dealership showed that it was leasing cars in the loaner car program. The department argued that the dealership did not lease the cars because the dealership did not charge the repair shop’s customers for use of the cars, but it did not provide authority supporting its position. As a result, the dealership was entitled to the use tax credit. (Administrative Hearing Decision No. UT 14-03, Illinois Department of Revenue, August 25, 2014, released November 2014)

(05/14/2015)

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