Recently, the city of Chicago announced it would begin imposing a 9 percent tax on certain cloud computing services and electronically delivered amusement and entertainment services. There is some ambiguity about the issue of when the taxes may be effective because the city provided two effective dates – July 1, 2015, and Sept. 1, 2015. The city is expected to provide further guidance regarding the significance of these two dates. In the meantime, taxpayers may want to consider a conservative approach and remit taxes for transactions on or after July 1.
The tax for accessing a provider’s computer to use software to perform queries, research, data processing, or similar transactions (commonly referred to as cloud computing) was implemented by Personal Property Lease Transaction Tax Ruling No. 12. The tax on electronically delivered movies, games, and music was implemented by Amusement Tax Ruling No. 5. There have been reports of potential exemptions for small businesses or certain industries, but none have been provided so far.
Tax on Cloud Computing
Personal Property Lease Transaction Tax Ruling No. 12 imposes tax on transactions when a person accesses a provider or lessor’s computer and uses the computer and software to input, modify, or retrieve information or data without the intervention of the lessor. Following are examples of taxable cloud computing transactions:
- Charges for legal research or similar online database searches
- Charges to obtain credit reports
- Charges 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 or data that has been compiled, entered, and stored on the provider’s computer
- Charges to perform word processing, calculations, data processing, tax preparation, spreadsheet preparation, presentation development, and other applications available to a customer through access to a provider’s computer and its software
- Charges for cloud computing, cloud services, hosted environment, software as a service, platform as a service, or infrastructure as a service
Service charges paid to a provider to write a report or article that documents the ideas or opinions of the provider are not subject to the tax even if the report or article is accessed electronically. Service fees for storing a customer’s data or charges to create an electronically accessed database consisting solely of the customer’s data also are not subject to the tax.
Tax on Electronically Delivered Movies, Games, and Music
Amusement Tax Ruling No. 5 extends the amusement tax to electronically delivered entertainment and amusement items, such as:
- Electronically delivered television shows, movies, or videos, if the shows, movies, or videos are delivered to a customer in the city
- Electronically delivered music delivered to a customer in the city
- Games, online or otherwise, delivered to a customer in the city
The 9 percent tax extends to streaming music, movies, television shows, and online gaming services, but it applies only to rentals (normally accomplished by streaming or a temporary download). The charges paid for such rentals may be subscription fees, per-event fees, or otherwise. The tax does not extend to electronically delivered forms of entertainment that are permanently downloaded.
For sales of bundled services involving cloud computing or electronically delivered entertainment where some part of the charge is taxable and the remainder is nontaxable, only the taxable services will be subject to tax if the invoice is itemized. If the invoice is not itemized for the bundled transaction, the entire amount is taxable unless it is clearly proved that at least 50 percent of the cost is not for the use of any taxable property or services. The city follows sourcing rules established by the Illinois Mobile Telecommunications Sourcing Conformity Act. In effect, the tax will apply to customers whose primary or business address is in Chicago as reflected by their billing address or other reliable information.
As a result of the rulings, providers and consumers of potentially taxable cloud-based services and electronically delivered entertainment should take the following steps:
- Providers should determine if they have a sufficient presence in Chicago to require them to collect tax on receipts from cloud computing services and electronically delivered entertainment.
- Providers with sufficient presence in Chicago should determine for which items of cloud computing services or electronically delivered entertainment they must collect the tax.
- Chicago business consumers of cloud software or electronically delivered entertainment should determine which items they purchase are subject to the tax and should make plans to pay the tax if the tax is not charged by the provider.
Because of the complexity of the tax and uncertainty surrounding its effective date, businesses should consider carefully their options before moving forward.
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