Partner Breen Schiller
Breen M. Schiller
Chair | State & Local Tax Group
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Breen Schiller published in Tax Notes – “Navigating Local Labyrinths: Practitioners’ Guide to Local Taxes”

Tax Analysts 11/25/2019
Partner Breen Schiller
Breen M. Schiller
Chair | State & Local Tax Group
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Read the full article on Tax Notes here (subscription required).

Breen Schiller, Stephen J. Jasper, Mitchell A. Newmark and Carley A. Roberts discuss businesses entering new jurisdictions. Breen explains Chicago's unique Personal Property Lease Transaction Tax and how it affects businesses operating in the city. Download a PDF of the full article here.

Chicago Personal Property Lease Transaction Tax

For taxpayers unfamiliar with Chicago, the most troubling discovery when beginning to transact business in the city can be the personal property lease transaction tax. It’s imposed upon: (1) the lease or rental in the city of personal property or (2) the privilege of using in the city personal property that is leased or rented outside the city.1 The lease transaction tax is the city’s version of a lease or rental tax on personal property.2

Effective January 1, 2016, Chicago expanded its lease transaction tax to “clarify” its position on the taxability of non-possessory computer leases.3 This expansion was to address advances in how software is conveyed to customers today — that is, primarily through the cloud. However, instead of drafting a new tax to accomplish its goals, the city shoehorned new tax policy into old tax language. And although the term “non-possessory lease” had been in the ordinance since 1994, its extension to cloud-based products was a new application. The result is that since 2016 the lease tax is imposed on cloud-based software. And while the tax is generally imposed at a rate of 9 percent, charges for the non-possessory lease4 of a computer to input, modify, or retrieve data or information that is supplied by the customer are subject to a lower 5.25 percent rate.5

What Else to Know About the Lease Transaction Tax

An exemption exists (Exemption 11)6: If the non-possessory lease of a computer in which the customer’s use or control of the computer is de minimis and the related charge is predominately for the information transferred to the customer rather than for the customer’s use or control of the computer, then the lease is exempt from tax.7

The lease transaction tax applies to perpetual licenses of computer software.8 Historically, Chicago did not impose the tax on perpetual licenses of computer software because it equated those licenses to sales rather than leases.9 But to extend the reach of the lease transaction tax, the city began to tax any license of computer software that qualifies as a nontaxable license under the Illinois retailers’ occupation tax (ROT) software regulations.10 Because non-perpetual licenses of software that qualify as nontaxable licenses under the ROT regulations have always been subject to the lease transaction tax, the tax has been expanded to those perpetual licenses of software that are likewise nontaxable under the ROT.11

In addition to “clarifying” its application of the lease transaction tax to non-possessory computer leases, the Chicago Department of Finance’s Ruling No. 12 further clarified Exemption 11. Ruling No. 12 explained that exempt uses may be demonstrated by either (1) access to information or data that is entirely passive (such as streaming data), without interactive use, or (2) access to materials that are primarily proprietary, such as copyrighted newspapers, newsletters, or magazines. In addition to explaining what types of transactions are taxable, Ruling No. 12 also provides that when a customer enters into a transaction subject to the lease transaction tax, but uses the service in and outside Chicago, the tax should be apportioned.

The lease transaction tax includes a “lease for re-lease” exception.12 Consequently, a lessee is not subject to the lease transaction tax provided the lessee supplies written verification to the lessor that the property is being re-leased and it is in fact the same property, and provides either a re-lease certificate or documentary evidence.13

A lease of personal property is deemed to take place where the lessee takes possession or delivery of the property.14 The place of the lease or rental is treated as the location of the terminal or other device by which a user accesses the computer.15 As a result, liability for the tax is triggered when a customer in Chicago makes remote use of a provider’s computer or software, even if the provider’s software is located outside Chicago. If the customer’s location is not otherwise clear or when the user accesses the provider’s computer from a mobile device, the Chicago Department of Finance will apply the rules set forth in the Illinois Mobile Telecommunications Sourcing Conformity Act, 35 Ill. Comp. Stat. 638.16 As a result, the transaction tax will generally apply to customers whose residential or primary business street address is in Chicago, as reflected by credit card billing address, ZIP code, or other reliable information.



1 Municipal Code of Chicago section 3-32-030.

2 M.C.C. section 3-32, et seq.

3 See Chicago Department of Finance, Personal Property Lease Transaction Tax Ruling No. 12.

4 A “non-possessory lease” is a lease or rental under which use but not possession of the personal property is transferred. Id. A non-possessory lease includes a non-possessory computer lease. Id.

5 Id.

6 Additional exemptions apply: (1) when the use is to “effectuate the execution, clearing, processing, matching or recording of a trade” of securities or commodities (M.C.C. section 3-32-050(9) or Exemption 9); (2) when the use is to “effectuate the deposit, withdrawal, transfer or loan of money or securities, including any related review of accounts or investment options by the account owner” (M.C.C. section 3-32-050(10) or Exemption 10); and (3) for new small businesses within the city provided they meet specific qualifications. See City of Chicago Info. Bulletin Nov. 2015.

7 M.C.C. section 3-32-050(A)(11).

8 Chicago Department of Finance, Personal Property Lease Transaction Tax Ruling No. 5. For purposes of the lease transaction tax, the words “lease” or “rental” originally included a transfer of the use of software only if, for purposes of the retailer’s occupation tax and Illinois use tax, the software was not custom software and the transfer was an exempt license of software. M.C.C. section 3-32-020(l).

9 Id.

10 See Ill. Admin. Code tit. 86, section 130.1935(a)(1).

11 Id.

12 M.C.C. section 3-32-060.

13 Id.

14 M.C.C. section 3-32-030(C).

15 M.C.C. section 3-32-010(I).

16 Id.

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