Some clarity and bad news regarding taxation of cloud computing in Chicago

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Some clarity and bad news regarding taxation of cloud computing in Chicago


A trap for the unwary has been the Chicago Personal Property Lease Transaction Tax, which is currently imposed at the rate of 9% on certain leases of tangible personal property. The Chicago Department of Finance, which enforces the Chicago Personal Property Lease Transaction Tax, interprets the term “lease of tangible personal property” broadly, to include use of computers. Thus, if a provider maintains a data center in Chicago, the storage of data on the provider’s servers in Chicago is treated as a “lease” of the servers, thus subjecting the customer to a 9% tax. This would apply to IaaS, to the extent it involves storage on a computer located in Chicago. Interestingly, there would be no Illinois or Chicago sales or use tax as a result of this transaction, because neither Illinois nor Chicago imposes a use tax on storage of data or indeed on data processing.

The clarity has resulted from the Department’s promulgation of Personal Property Lease Transaction Tax Ruling #12, which is effective on July 1, 2015. The Ruling makes clear that use of software hosted on a server in Chicago, otherwise known as software as a service or “SaaS,” is taxable in Chicago only if terminals to access the software are located in Chicago. Thus, even though the software may be hosted on a server in Chicago, it is only taxable to the extent that the terminals are located in Chicago. The good news about Ruling #12 is that it clarifies some uncertainty from Transaction Tax Ruling #3, which suggested that access to computers and operating software on computers located in Chicago is subject to the tax without the qualification of the access terminals being in Chicago.

The bad news is that the Ruling makes clear that situsing of the personal property lease transaction tax turns on the location of the user (i.e., the terminal to access the server), and not the computer that is used. Thus, if users of a data processing service or SaaS users are located in Chicago, the lease personal property transaction tax applies, even though the server that is being used and/or the software that is accessed is located outside of the City limits.

This, of course, presents an anomaly. While the property being leased is outside Chicago, Chicago seeks to extend jurisdiction to locations outside of the City. This presents significant Commerce Clause and Due Process Clause issues.

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