Raining on Our Parade: Chicago Starts Taxing the Cloud
July 13, 2015
If you live in Chicago and stream movies and TV on Netflix, expect your Netflix bill to be 81 cents higher beginning this fall. In June, the Chicago Department of Finance issued two rulings which extend two existing taxes to the subscription costs of streaming and cloud-based services. The Amusement Tax was extended to include amusements that are delivered electronically, and the Personal Property Lease Transaction Tax was extended to include nonpossessory computer leases. Both rulings were intended to be effective on July 1, 2015, however, the Department stated it will limit the effect of the rulings to periods on and after September 1, 2015.
Effectively, the Department reinterpreted already existing city ordinances to apply them to modern technology. Instead of just applying to amusements viewed or used in person, the Amusement Tax ordinance is now read to also apply to electronically delivered amusements when they are viewed or used, so Chicago residents will pay the Amusement Tax when they see a movie in theaters and a few months later when they stream the same movie on Netflix. The new interpretation isn’t just limited to movies and shows that you stream on your TV; streamed music and games also fall under the purview of the tax, regardless of the platform that is used (streaming on TVs, game consoles, phones, tablets, and computers is taxable).
Similarly, the Personal Property Lease Transaction Tax will continue to apply to leased or rented personal property that is leased, rented, or used in Chicago, but it will also apply to nonpossessory computer leases, or in layman’s terms, accessing information or services stored on a computer not owned or possessed by the customer. This ruling is actually a clarification of Exemption 11 within the ordinance, which exempts nonpossessory computer leases when “the customer’s use or control of the provider’s computer is de minimis and the related charge is predominantly for information transferred to the customer rather than for the customer’s use or control of the computer.” The ruling provides a list of activities that will now be taxable under the Personal Property Lease Transaction Tax, which include: obtaining real estate and job listings, car and stock prices, marketing data, consumer profiles, performance of word and data processing, and tax and spreadsheet preparation. The ruling also names the following functions or services as being taxable: cloud computing, cloud services, hosted environments, software, platform, or infrastructure as a service.
Unfortunately, both rulings raise more questions than they provide answers. Both taxes are assessed on the customer, however, it is the responsibility of the provider to collect and remit the applicable tax. This raises two questions: who is taxable, and does a provider have the legal obligation to collect and remit the tax? The rulings use the credit card billing address of the customer to determine if the customer’s residential or business address is in Chicago, and therefore taxable. The Personal Property Lease Transaction Tax also allows for apportionment based on use of a service by a business with employees outside of Chicago who use the same service.
However, the ruling does not address use of these services by customers in Chicago who don’t have a Chicago address, or customers with a Chicago address who only use the services outside of Chicago. Instead the rulings rely on the Mobile Telecommunications Sourcing Conformity Act, which could allow for a Chicago resident to be taxed for use that does not occur in Chicago.
Furthermore, when does a provider know it has established the requisite nexus in Chicago and is obligated to collect the tax? Both rulings are mum on this, explicitly declining to address nexus issues in either ruling. As such, the legal issues that states and municipalities are having with regards to nexus and collection of sales and use taxes will also occur with these taxes.
As a result of the great expansion of Chicago’s taxing authority under the rulings, combined with the multiple questions that remain unaddressed, it is likely that the two rulings will be challenged in court as violations of the Illinois and United States constitutions, and as violations of Illinois and federal law. The result of such litigation could be a failed attempt by Chicago to expand its revenue collecting authority, or the establishment of a precedent that will be copied by many states and municipalities looking to boost revenue collections.