Sovos Compliance has been closely watching recent developments in the City of Chicago as it relates to the issuance of new guidance defining the proper scope of both their Personal Property Lease Transaction Tax as well as their Amusement Tax. Key rulings interpreting both taxes were scheduled to take effect on September 1, 2015. However, with respect to the Personal Property Lease Transaction tax, the effective date of the ruling has now been extended to January 1, 2016. By way of background, Chicago imposes a Personal Property Lease Transaction Tax, at the special rate of 9%, on the lease or rental of personal property, including a non-possessory lease or rental, that is leased or used in the city. The term “lease or rental” is defined as “any transfer of the possession or use of personal property, but not title or ownership, to a user for consideration.” The term includes a “non-possessory” lease, which is defined as a transaction whereby the use of personal property is provided but not possession, such as would be the case with respect to leased time on a computer. Tax Ruling # 12 (issued on June 9, 2015) specifies that the 9% tax applies to the following types of transactions:
- Performing legal research or similar on-line 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, consumer profiles, marketing data, and similar information or data that has been compiled, entered and stored on the provider’s computer
- Performing functions such as word processing, calculations, data processing, tax preparation, spreadsheet preparation, presentations and other applications available to a customer through access to a provider’s computer and its software
The Ruling specifically points out that the provisions in the last bullet point above are intended to provide clear instruction that the 9% rate applies to those transactions referred to as cloud computing, cloud services, hosted environment, software as a service (SaaS), platform as a service, or infrastructure as a service. The sourcing rules discussed in Ruling #12 also specify that that Chicago tax applies when the location of the terminal or other device by which the user accesses the computer is within Chicago. Likewise, the Ruling specifies that if the user utilizes the provider’s information from points within Chicago and from points outside Chicago, the charge should be apportioned. While this ruling has a stated effective date of July 1, 2015 the specific language therein indicated that in order to allow affected businesses sufficient time to make required system changes, the City of Chicago Department of Finance was limiting the effect of this ruling to periods on and after September 1, 2015. However, with this announcement, the City published a note further extending this change from September 1, 2015 to January 1, 2016. During this time, the City may consider possible changes to the underlying ordinances so as to further clarify the application of the tax. Of course, any such changes would have to be approved by the Chicago City Counsel. The Department of Finance may also consider publishing an Information Bulletin to address questions posted to the Department resulting from the publication of Ruling #12. In the course of our research at Sovos Compliance, it was our understanding that the City of Chicago Department of Finance had interpreted the scope of the personal property lease transaction tax as applying to cloud computing. However, the proper tax treatment of database access also presented a challenging interpretive issue. The line between what constitutes “database access” versus what constitutes “cloud computing” is without question somewhat thin, and Ruling # 12 spends a great deal of time on this subject. While we had understood that some Departmental personnel had indicated that database access to be taxable, the available published guidance was not particularly clear. The issue was to some extent discussed in Thomas R. Meites et al. vs. The City Of Chicago et al., 540 NE2d 973 (1989) and Tax Ruling #5. The language of the Meites decision was, to a very large extent, a product of the technology that existed at the time. During that time, database access often involved the utilization of a dedicated computer owned by the database provider, but placed at the customers location. Ruling# 12 is explicit in specifying that database access, including access to a legal research database, as well as other subscriptions to an interactive website are taxable. The taxable result holds even if most or all of the information is fleeting or transitory and also applies regardless of the location of the server that stores the information. For example, access to a remote website that provides financial information would generally be considered taxable. However, the Ruling also provides that subscription fees to access information that is proprietary to the provider (e.g. newspaper or magazine articles) are not taxable. In that case, Chicago interprets the true object of the transaction to be the non-taxable provision of information or data as opposed to the non-possessory lease of a computer. Drawing the line between what constitutes proprietary and non-proprietary information will undoubtedly be challenging. For example, the facts contained in this article are derived entirely from public sources but have been arranged to serve an informational objective, so would such an article be considered proprietary? Sovos will strive to obtain additional guidance, published or otherwise, to provide clarity to this issue. At Sovos Compliance, providing our clients with a tax calculation engine based upon the most accurate and up-to-date product taxability matrix is one of our highest priorities. We monitor the legislative, regulatory and legal landscape every day for changes just like this one, so our clients can more effectively apply resources to meeting more pressing business objectives.
