Tuesday, July 07, 2015
HMB's David Hughes Quoted in Chicago Tribune on How Chicago's
'Cloud Tax' Could Affect Businesses
"How Chicago's 'cloud tax' could affect businesses"
Chicago Tribune, Blue Sky Originals, July 7, 2015
Confusion is driving widespread
anger over last week's quiet enactment of a "cloud tax" in
Chicago...The cloud tax is actually an extension of two existing
taxes, the city amusement tax and the city personal property lease
transaction tax, to cover streaming entertainment as well as
Hughes, a lawyer specializing in state and local tax
at Chicago firm Horwood Marcus &
Berk, said the city is likely to be challenged on its
new interpretation of the personal property lease transaction tax
to include services delivered via the cloud.
He explained how the changes to
this decades-old law could affect businesses:
It's all about the
"nonpossessory computer lease"
In plain English, this means
remotely accessing information or services from a computer you
don't own. A 1989 case ruled that the city of Chicago could tax
transactions on LexisNexis, which was then used on dedicated
terminals connected to a remote mainframe. The tax applied to the
time using the database, not the terminal.
The city is now expanding its
interpretation of that ruling to include access to remote
"computers" - really any device that stores information -
regardless of how they're accessed.
"People do feel like this concept
of a nonpossessory computer lease, while that might have been valid
in the late '80s to tax a LexisNexis-type service as it was
delivered in the late '80s, it's really not the same thing today,"
Companies present in
Chicago must collect
The lease tax remains a tax on
consumers, but how the city receives it varies based on certain
circumstances. Providers that have a presence in Chicago - as in
the form of an office, a store or even salespeople who travel in
for meetings - will be responsible for collecting the taxes, Hughes
But consumers will be responsible
for filing taxes themselves for subscriptions to services from
businesses that don't have a presence in Chicago.
Current exemptions are
Users will not be taxed for passively accessing
information, Hughes said. For example, accessing a stock ticker is
not taxable. But logging into a paid service for stock prices and
searching its database is subject to the 9 percent tax.
And old exemptions are gone
In the personal property lease
transaction tax ordinance, the city included an exemption for
leases entered outside Chicago in which more than 50 percent of the
usage happened outside Chicago. So if a company based in New York
had 10 percent of its employees in Chicago and entered a service
agreement outside of Chicago, the city would not have been able to
tax any of that company's service use.
In the new ruling, the city
says that exception no longer applies, which Hughes said means
the city claims it can tax an entire agreement - and use by
all of that company's employees - regardless of where the
contract was entered and even if the service is mainly used outside
of Chicago, as long as that company has operations in Chicago.
Hughes said sourcing and allocation
- that is, who should be taxed, based on which factors, and how
much of a contract is taxable - will remain major issues for the
city and taxpayers to contemplate.
The list goes
The city listed a number of taxable
services in its ruling, including for the first time cloud
computing and services. Since this ruling is an interpretation of
an existing law and not a statute, Hughes said, it gives the city
"wiggle room" to define which services are taxable thanks to the
nonpossessory computer lease clause.
"I don't think you can limit
yourself to just [what is listed in the ruling] because the city is
going to ultimately say that these are just examples," Hughes said.
That is to say, any service resembling what's listed in the ruling
is likely to be taxed.
You're already on the
The city said in its ruling that
users or companies would not be held accountable for paying taxes
until Sept. 1 but added they could be liable for those payments
effective July 1. "It's the city talking out of both sides of its
mouth," Hughes said.
And he said those assessments could
stretch to before July 1, when the ruling came out, because the
ruling was simply a new interpretation of a law that existed for
decades. Hughes said the city would not necessarily take advantage
of that but that the ruling as written would allow it to.
You can read the
FULL ARTICLE on the Chicago Tribune website along with a
related article -
'Cloud tax' upsets Chicago tech community: 'Life just got 9
Copyright 2015 Chicago Tribune