Chicago Mayor’s Tax-Heavy Budget Passes: Lease and Amusement Tax Implications

Posted In Illinois

Last week the Chicago City Council approved Mayor Rahm Emanuel’s 2016 revenue ordinance as part of his tax-laden budget proposal. The revenue ordinance included noteworthy changes to the personal property lease transaction tax (lease tax) and amusement tax, both of which we have covered in-depth since the Department of Finance (Department) issued two rulings over the summer officially extending a nine percent tax to most services provided online. The portions of the revenue ordinance related to the lease tax were drafted in response to the concerns raised by the startup community. As discussed in more detail below, the lease tax amendments provide little relief for the vast majority of businesses dreading the January 1st effective date of the ruling. The amendments to the amusement tax provide no relief whatsoever.

Chicago Lease Tax Amendment

The changes to the Lease Tax Ordinance include: (1) a narrowly defined exemption for small businesses; (2) a reduction of the rate for cloud-based services where the customer accesses its own data; and (3) codification of the applicability of the Illinois mobile telecom sourcing rules. The amendments were touted by the mayor as addressing many of the concerns expressed by small businesses after the Department administratively interpreted the nine percent lease transaction tax to apply to most cloud-based services in June. In response to an outcry from the startup community, the Department subsequently delayed the effective date of the ruling to January 1, 2016. Unfortunately the mayor’s solution falls short of providing any significant relief and will not alleviate the concerns of the vast majority of customers and providers affected by the ruling.

Effective immediately upon publication, the lease transaction amendments approved yesterday will:

  1. Exempt “small new businesses” that are lessors or lessees of non-possessory computer leases from their respective lease transaction tax collection and payment obligations. For this purpose, “small new business” is a business that (1) holds a valid and current business license issued by the city or another jurisdiction; (2) during the most recent full calendar year prior to the annual tax year for which the exemption provided by this subsection is sought had under $25 million in gross receipts or sales, as the term “gross receipts or sales” is defined for federal income tax purposes; and (3) has been in operation for fewer than 60 months. For the purpose of calculating the $25 million limit, gross receipts or sales will be combined if they are received by members of a single unitary business group. This will exclude most subsidiaries from taking advantage of the “small new business” exemption.
  2. Reduce the rate from nine percent to 5.25 percent of the lease or rental price in the case of the non-possessory lease of a computer primarily for the purpose of allowing the customer to use the provider’s computer and software to input, modify or retrieve data or information that is supplied by the customer.
  3. Codify the use of the sourcing rules set forth in the Illinois Mobile Telecommunications Sourcing Conformity Act (35 ILCS 638, as amended) for the purpose of determining which customers and charges are subject to the lease transaction tax when the user accesses the provider’s computer via a mobile device. The lease transaction tax ruling issued in June prescribes the use of these rules, but the legislation adds clarity by codifying this regime. Generally these rules result in tax applying to Chicago residents and companies with primary business addresses in the city. Customers can provide evidence of complete or partial out-of-city use. If a provider has no information indicating Chicago use, it has no duty to collect tax. If the sourcing rules indicate that the tax applies, a taxable presumption is created unless the contrary is established by books, records or other documentary evidence.

The “relief” provided by the amendments is minimal as very few companies will qualify for the small business exemption and rate reduction. Because the amendments do not modify the actual imposition of the lease tax (instead they simply provide an exemption, reduce the rate for certain taxpayers and codify sourcing rules) the January 1, 2016, effective date of the lease tax ruling still appears to be in effect.

Chicago Amusement Tax Amendment

The changes to the Amusement Tax Ordinance merely codify the sourcing rules announced in the Department’s latest ruling. Specifically, the amendment provides that

“[i]n the case of amusements that are delivered electronically to mobile devices, as in the case of video streaming, audio streaming and on-line games, the rules set forth in the Illinois Mobile Telecommunications Sourcing Conformity Act, 35 ILCS 638, as amended, may be utilized for the purpose of determining which customers and charges are subject to the tax imposed by this chapter. If those rules indicate that the tax applies, it shall be presumed that the tax does apply unless the contrary is established by books, records or other documentary evidence.”

This change is significant because video streaming, audio streaming and on-line games were formerly not included in the imposition language of the Amusement Tax Ordinance.  The amendment illustrates that the City Council is well aware of and approves the Department’s recent ruling that explicitly imposes the tax on charges for video streaming, audio streaming, computer game subscriptions, and other forms of online entertainment.  The amusement tax ruling became effective September 1st and is currently being challenged in the Circuit Court of Cook County.

Catherine A. Battin
Catherine (Cate) A. Battin represents clients in state and local tax controversies at the audit, administrative and judicial levels in numerous jurisdictions. She provides national state tax strategies for clients on a full range of state tax issues, including income tax apportionment, nexus, combination and sales tax characterization of products and services. She has defended numerous internet sellers in cases brought under the Illinois False Claims Act alleging fraudulent failures to collect and remit use tax. Read Catherine A. Battin's full bio.

Eric D. Carstens
Eric D. Carstens focuses his practice on state and local tax matters, assisting clients with state tax controversy, compliance and multistate planning across all states for a variety of tax types and unclaimed property. Eric engages in all forms of taxpayer advocacy, including litigation, legislative monitoring and audit defense. He works closely with several of the Firm's taxpayer coalitions focused on specific state tax policy issues such as the taxation of digital goods and services and unclaimed property. Read Eric D. Carstens' full bio.

Stephen P. Kranz
Stephen (Steve) P. Kranz is a tax lawyer who solves tax problems differently. Over the course of his extensive career, Steve has acquired specific skills and developed a unique approach that helps clients develop and implement holistic solutions to all varieties of tax problems. He combines strategic thinking with effective skills for the courtroom, the statehouse and the conference room. Read Stephen Kranz's full bio.




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