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)