United States

Chicago issues new rulings on the taxability of certain web-based services


UPDATE: The city of Chicago has issued guidance delaying the effective date of Property Lease Transaction Tax Ruling #12 from Sept. 15, 2015, to Jan. 1, 2016.  This delay in the effective date will allow Chicago time to consider possible changes to the ordinance addressed by the ruling, and will allow businesses additional time to make any necessary changes to their billing systems or other procedures.

On June 9, 2015, the Chicago Department of Finance issued two tax rulings. The first, Personal Property Lease Transaction Tax (PPLTT) Ruling No. 12, addresses the application of the city's PPLTT to nonpossessory computer leases. The second, Amusement Tax (AT) Ruling No. 5, addresses the application of the city's AT to electronically delivered amusements.

PPLTT Ruling No. 12

PPLTT Ruling No. 12, effective July 1, 2015, addresses the application of the city's PPLTT to nonpossessory computer leases, including remotely hosted software, searchable online databases and certain cloud-based services. The 9 percent tax is imposed on charges for the use of personal property within the city of Chicago, including charges paid pursuant to a nonpossessory computer lease, unless such charges are exempt under Exemption 11. The term "nonpossessory computer lease" means a nonpossessory lease in which the customer obtains access to the provider's computer and uses the computer and its software to input, modify or retrieve data or information, in each case without the intervention of personnel acting on behalf of the provider.

The ruling solidifies the city's position that certain charges for cloud computing, cloud services, hosted environment, software as a service, platform as a service, or infrastructure as a service are subject to the tax. Pursuant to the ruling, examples of nonpossessory computer lease transactions subject to the tax include charges incurred to perform legal research or online database searches, consumer credit reports, information or data that has been compiled, entered and stored on the provider's computer, and other functions such as word processing, calculations, data processing, tax preparation, spreadsheet preparation, presentations and applications available to a customer through access to a provider's computer and its software.

Further, the ruling provides clarification on an exemption from the tax, Exemption 11, which exempts transactions in which the customer's 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 provider's computer. The ruling outlines that exempt use of a provider's computer may be demonstrated either by access to information or data which is entirely passive, without interactive use, or, in other cases, by access to materials that are primarily proprietary, such as copyrighted newspapers, newsletters or magazines.

Lastly, the ruling provides guidance regarding sourcing the tax. If the customer has employees or other individuals using the provider's computer from locations both within and outside Chicago, the charge should be apportioned based on the "principal office location" of the individual users. If the provider has no information to indicate that any of its customer's use will take place in Chicago, then the provider will not be required to collect the tax from its customer. If the provider has information to indicate that some of its customer's use will take place in Chicago, but no information of its own that allows it to perform a reasonable apportionment between the customer's Chicago use and non-Chicago use, the provider may rely on actual data or estimates provided by the customer. If a customer does not supply either actual data or estimates, the provider should collect tax based on the assumption that all use takes place in Chicago.

Note that PPLTT Ruling No. 12 specifically excludes copyrighted entertainment materials such as movies, books and films from the PPLTT.

AT Ruling No. 5

In AT Ruling No. 5, also effective July 1, 2015, Chicago has indicated that it will impose its 9 percent AT on charges paid for (1) electronically delivered television shows, movies or videos; (2) the privilege of listening to electronically delivered music; and (3) the privilege of participating in games, online or otherwise. Providers who receive payments for electronically delivered amusements will be required to collect the tax from their Chicago customers.

Additional guidance

While the effective date for both rulings is July 1, 2015, the Department is limiting the effect of the rulings to periods on or after Sept. 1, 2015, in order to allow affected businesses time to change their internal systems to accurately account for the tax.


Cloud-based services are becoming increasingly prevalent in the modern business world, and a lack of guidance, particularly at the city level, coupled with statutory provisions predating the digital revolution has created a great deal of uncertainty regarding the transaction tax treatment of purchases of cloud computing and related goods and services. PPLTT Ruling No. 12 and AT Ruling No. 5 provide much needed guidance in this area, and taxpayers should consider these rulings carefully in relation to their own specific facts and circumstances.


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