As part of the 2021 Chicago budget, the Chicago Personal Property Lease Transaction Tax, commonly referred to as the “cloud tax,” has been approved for an increase. Effective January 1, 2021, this Chicago tax will increase from 7.25% to 9%. This is an additional increase from the 2020 budget, which had approved an increase of the “cloud tax” from 5.25% to 7.25%, effective January 1, 2020.
For several years, the tax rate for most lease transactions was 9%. However, the aforementioned lower rates of 5.25% and 7.25% were previously applicable for a “nonpossessory computer lease” (SaaS or cloud-based products). A nonpossessory computer lease is one in which the “customer obtains access to the provider’s computer and uses the computer and its software to input, modify or retrieve data or information.” This differentiation no longer applies now, as all personal property lease transactions will be taxed at 9%.
How is this tax assessed?
One important aspect of this tax is that it is only imposed on customers who are physically located in Chicago. The City issued a ruling that allows a taxpayer to apportion based on a customer’s Chicago use, and non-Chicago use and only collect tax on charges apportioned to use inside Chicago. Therefore, it is important to determine where all users are located in order to properly assess and collect the tax, especially in the current remote environment. Additionally, if the taxpayer fails to collect the tax or does not have a requirement to collect due to “nexus,” then the customer is responsible for paying the tax directly to the City.
Certain types of organizations and businesses are exempt lessees, including governmental bodies, insurance companies, and charitable, educational and religious organizations. There are also several exemptions to this tax such as “de minimis” customer use, passive access to information, re-leases, and if you are a small new business, among others. It is also worth noting that although charges may not be subject to the lease tax, they could be subject to another tax, such as the City’s amusement tax.