The Rolling Stones famously told people to get off of their cloud. The City of Chicago, on the other hand, is perfectly happy for your business to be on the cloud. But you’ll need to pay taxes to the city for the privilege of doing so.
Chicago’s so-called “cloud tax” set off howls of opposition throughout the startup and small business community when it was announced in 2015. Those howls were loud enough to get the city to make changes to how the tax is applied, specifically providing an exemption for some small businesses. But the tax remains in full force and effect, and Chicago entrepreneurs and business owners should have an understanding of their potential tax liability for their use or provision of cloud-based software and services.
What is the “Cloud Tax?”
When Chicago announced it would be taxing cloud-based software and services such as hosting, it wasn’t creating a new tax obligation from scratch. Rather, it claimed that such services were now covered under the city’s existing “Personal Property Lease Transaction Tax.” Under that tax, Mun. Code of Chicago 3-32-020, cloud-based services are included in definition of a “nonpossessory computer lease,” which provides:
“[A] nonpossessory lease 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, in each case without the intervention (other than de minimis intervention) of personnel acting on behalf of the provider. The term “nonpossessory computer lease” includes, but is not limited to, time sharing or time or other use of a computer with other users.”
Though the city initially set the tax rate for cloud services at 9%, it later reduced it 5.5% under pressure from the local business community.
Does the Cloud Tax apply to SaaS, PaaS, streaming and other online services?
Unless your Chicago-based business is exempt, you will be on the hook for this tax if you are using or accessing a cloud-based service from a computer terminal located in the City of Chicago. When usage takes place both inside and outside of Chicago, the usage is apportioned using an affidavit provided by the city. If you look at your bill for cloud-based services from companies such as Amazon Web Services, Basecamp, Salesforce, etc., you will likely see a line-item for the tax.
Conversely, if your business provides cloud-based software or services to customers in Chicago, you will be responsible for assessing and collecting the tax from those customers and remitting those sums to the city.
Is your business exempt from the cloud tax?
There is a “small new business” exemption from the city’s tax which applies to companies that have under $25 million in gross receipts or sales during its most recent full calendar year and have been in operation for fewer than 60 months. Businesses that qualify for this exemption neither have to pay taxes on services they use nor collect taxes on services they provide. There are numerous other exemptions to the cloud tax which apply to specific types of services and uses as well.
For small companies in Chicago which rely on remote, cloud-based services for their operations in some way (which is the vast majority of such companies), Chicago’s cloud tax can be a hefty burden. For Chicago start-ups which provide such services, collecting and accounting for the taxes on their customers can also be an administrative challenge.
If you have questions or concerns about how Chicago’s cloud tax impacts your business and its tax obligations, please contact us. We welcome the opportunity to assist you.