True Alert: Taxing Cost of Leasing in Chicago

 
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By Becca Perryman, Senior Tax Manager and Bryan Fairholm, Tax Consultant

At a time when more and more businesses are relying on cloud computing to satisfy their software needs, it is imperative that companies get a firmer grasp on changes in cloud computing that could impact their businesses.

What is the Chicago Lease Transaction Tax?

The Chicago lease transaction tax imposes a levy on customers who lease personal property in the city or who use, within the city, personal property that is leased outside the city. While any lessor with Chicago nexus is responsible for collecting the tax from its lessees, the ultimate burden of the tax falls on the lease consumer. If the provider does not have sufficient nexus with the city to require it to collect the tax, then the Chicago lease customer must pay the tax directly to the city.

Effective January 1, 2016, Chicago amended its Lease Transaction tax to clarify its position on the taxability of nonpossessory computer leases.  Essentially, Chicago has expanded its Lease Transaction Tax to reflect advances in how software is conveyed to customers today – that is, notably and with ever-increasing popularity – through the cloud.  The result is that, as of January 1, 2016, the lease tax is imposed on cloud-based software.

As a part of the January 2016 amendment, the lease tax rate varies depending on the type of property being leased. Generally, the Lease Tax rate is 9%. However, certain nonpossessory computer leases are only taxed at a rate of 5.25%. The lower rate applies to “cloud” products wherein the non-possessory computer lease is primarily for the purpose of allowing the customer to use the provider’s computer and software to input, modify, and retrieve data or information that is supplied by the customer.

Owe Tax? Things to Consider

For the most part, if you are leasing personal property in Chicago – as either a lessor or lessee – you owe the lease tax and are required to either (1) collect and remit or (2) self-assess and remit the tax to Chicago.  However, there are some exemptions that exist.

Most notably, a new exemption created last year is available to lessors and lessees that are small businesses. To qualify for the small-business exemption, the business must hold a valid and current business license issued by the city or by another jurisdiction, must have under $25 million in gross receipts or sales during the most recent full calendar year, and must be operating for fewer than 60 months.

Other longstanding Lease Transaction exemptions are for:

  • Nonpossessory lease of a computer where the charge is predominately for information transferred rather than for the customer’s use or control of the computer
  • Property is leased outside the city and used primarily outside the city
  • A lease for re-lease
  • Leases to related parties

For more information on the Chicago Lease Transaction Tax, including whether it applies to your business or if you qualify for an exemption, please contact Becca Perryman, Senior Tax Manager, or Katie Callison, Tax Manager, at True Partners Consulting. 

Down this Alert (PDF)

Contacts:

Becca Perryman, Senior Tax Manager
Rebecca.Perryman@TPCtax.com

Katie Callison, Tax Manager
Katie.Callison@TPCtax.com

 

 

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