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The Chicago Lease Tax: Important Details For SAAS Companies



Monika Miles

Understanding sales tax compliance for SaaS companies is difficult. Some states tax it, some don’t. But what about cities?

Although Illinois doesn’t tax SaaS at the state level, Chicago’s Personal Property Lease Transaction Tax (or Chicago lease tax) is one that these types of businesses need to know about. While it’s not a sales tax, it’s applicable to any entity leasing personal property – including cloud services – to customers in the city.

What Is The Chicago Lease Tax?

Chicago’s lease tax applies to businesses or individuals that either have a lease or lease out personal property that’s used in the city.

Why not just charge a sales tax like other jurisdictions? As the Chicago Bar Association’s Samantha Breslow explains on BloombergTax.com, “Chicago is barred from taxing services, causing it to develop tax rules capturing transactions for the usage of property through a lease or license.”

Although the most recent version of the tax went into effect January 1, 2016, the first Chicago lease tax began in 1974. As the city explains in its information bulletin, the Department of Finance has applied this tax to remote uses of computers and software since 1985. Language clarifying its jurisdiction over “nonpossessory computers” was stated in 1994, when the ordinance was updated to include that this term refers to any payments in which the customer has access to a provider’s computer and its software.

A few key elements of the Chicago lease tax include:

  • The customer needs to be in Chicago for the tax to be applicable
  • The use of the computer and software is taxable, regardless of the language surrounding the customer’s agreement with the provider (e.g. lease, rental, license, etc.)
  • The tax is imposed on the customer’s payment itself; if the customer doesn’t need to pay, the provider is not liable to collect and remit the tax
  • There are specific exemptions to the ordinance, including securities trading, accessing/managing financial accounts, minimal computer use, re-leases and small new businesses
How Does The Chicago Lease Tax Apply to SaaS?

In the newest version of the Chicago lease tax law, the city specified it’s collecting a lower rate of 5.25 percent (versus 9 percent) for certain cloud products, such as SaaS.

The bulletin also clarified an important distinction between:

  • Cloud products like SaaS, where the lease allows the customer to use the provider’s computer and software to input, modify or retrieve information supplied by the customer
  • Database products, where the lease allows the customer to input, modify or retrieve data supplied by the provider

To summarize, the Chicago lease tax applies to sales made to customers leasing property in the city, including data that’s stored and accessed online. However, if the data is supplied by the customer rather than the provider, the lease fee is taxed at a lower rate.

Additional Details About The Chicago Lease Tax, SaaS & More

Do you want to know more about how the Chicago lease tax, or other state taxes, may affect your SaaS company?

Contact Monika Miles

 

Monika Miles

Monika founded Miles Consulting Group which focuses on multi-state tax consulting, helping clients navigate state tax issues such as sales tax and income tax in interstate commerce, including e-commerce.

Prior to forming the firm, Monika worked for 12 years combined in Big 4 Public Accounting and private industry. Monika has provided such services as federal and state income/franchise tax compliance and consulting, sales/use tax consulting, audit support, and credits and incentives reviews. She has served clients in a variety of industries including manufacturing, technology, telecommunications, construction, utility, retail and financial institutions.

Monika graduated from the University of Texas at El Paso (UTEP) with a BBA in Accounting/Finance and has a Masters in Taxation from San Jose State University.

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