Yesterday, the City of Chicago (City) Department of Finance (Department) published an Information Bulletin that provides additional guidance on the Personal Property Lease Transaction Tax (Lease Tax) and extends a new Voluntary Disclosure Agreement (VDA) offer to providers and customers. The updated guidance includes an overview of the Lease Tax, a description of the amendments included in the FY 2016 Revenue Ordinance that passed on October 28, 2015, and answers to 15 FAQs. The details on the Department’s controversial interpretation of the Lease Tax in Ruling #12 and the recent amendments to the Lease Tax have been covered by the authors in prior blog posts, available here and here. The new VDA offer is a significant development that may be enticing to certain providers and customers. However, before providers and customers rush to sign up to pay the Lease Tax for the foreseeable future, they should carefully evaluate whether any Lease Tax obligation is in fact due and whether they qualify under the loose terms outlined in the Bulletin (discussed in detail below). It should be noted at the outset that the guidance (and accompanying VDA offer) do not relate to the City’s amusement tax, which has also been of concern after a ruling was issued this summer interpreting the tax to apply to streamed digital content.
VDA Offer Terms
The most significant component of yesterday’s guidance is the VDA offer beginning on page 6 of the Bulletin. While the VDA may seem enticing, we encourage providers and customers alike to proceed with caution as the practical application of the ambiguous (and discretionary) terms are tainted with uncertainty.
As a threshold to qualifying, the provider or customers must qualify (i.e., be a qualified discloser) for the City standard voluntary disclosure program. Under the standard program, a taxpayer must not be under audit or investigation (i.e., has not received a written notice relating to an audit or investigation for the tax at issue) and must “waive their right to an administrative hearing or claim for refund or credit, and agree not to initiate or join any lawsuits for the payments made under the program.” This is significant because we believe a challenge to the Lease Tax is imminent and those that participate in the VDA program will not benefit if any such challenge is successful.
Even if a taxpayer is considered a qualified discloser under the standard program, to qualify for the more favorable Lease Tax offer providers and customers must file an application by January 1, 2016, and come into compliance with the Lease Tax Ordinance by the same date (or such later date that the Department may agree to). If all of these requirements are met, they will receive the following terms:
- As to charges for nonpossessory computer leases that qualified for Exemption 11 under the Department’s interpretation of the exemption before the issuance of Ruling #12, no liability for tax, interest or penalties based on those charges for any periods ending before January 1, 2016.
- As to charges for other nonpossessory computer leases (i.e., charges for nonpossessory computer leases that do not meet the requirements of paragraph 1 above), payment of tax for the period of January 1, 2015 through December 31, 2015 (one year), and no liability for interest or penalties.
- As to any other taxes owed (in other words, Lease Tax based on leases other than nonpossessory computer leases, or taxes other than Lease Tax), the terms of the City’s standard voluntary disclosure program will apply. Thus, for those other tax liabilities, penalties will be waived, and there will be no more than four (4) years of liability for tax and interest.
Unlike most VDA programs, there is no indication in the Bulletin that taxpayers can request acceptance of the voluntary disclosure on an anonymous basis. Instead, the Bulletin simply provides that “[a]ny provider or customer who wishes to accept the Department’s offer should send an email indicating such to email@example.com with their business name, taxpayer contact name, and telephone number.”
The main concern with the VDA offer is that there is no guidance on which charges for nonpossessory computer leases qualified for Exemption 11 under the Department’s former interpretation of the exemption (i.e., before the issuance of Ruling #12). Because qualification for Exemption 11 under the old standard is a prerequisite to receiving a prospective-only VDA, we anticipate controversy over whether charges would have qualified—something no VDA applicant wants to deal with. Since there appears to be no opportunity for anonymity, once a business signs up with the Department, it may be stuck paying one year of taxes if the Department disagrees. Providers and customers interested in participating in the Lease Tax VDA offer should consult their advisors before contacting the City.