Nonprofits May Be Exempt From Chicago Cloud Tax
Changes to the application of Chicago’s Personal Property Lease Tax took effect on January 1, 2016. The so-called “cloud tax” created a flurry of debate in the nonprofit community about its merits and legality, implementation, and most important from your organization’s point of view, a possible exemption for charitable, educational, and religious organizations.
Individual organizations may need to provide vendors with a copy of their IRS determination letter in order to verify their exempt status and have the tax removed from their bill.
Eight months later, Chicago-area nonprofits may still be unknowingly paying the tax because they don’t know if they are eligible for exemption, or how to go about claiming it if they are. Even if the new tax has not been tacked onto your bill since the first of the year, you’ll want to make sure you are exempt before interest and penalties build up.
How the tax on nonpossessory computer leases works
The city of Chicago has levied a personal property lease transaction tax on its citizens since the 1970s. The 9 percent tax is imposed on personal property that is leased or rented inside or outside of the city but used primarily in the city. Until recently, car rentals and other types of equipment were the main targets.
But a 2015 court ruling expanded the tax to include “nonpossessory computer leases” that give a customer access to a vendor’s computer in order to use the hardware and software for the input, modification, or retrieval of data or information.
Nonpossessory computer leases covered by the law may include fees paid toward:
- Legal research or similar online data base searches
- Search and download of consumer credit reports
- Real estate or stock listing services
- Cloud computing applications
No tax is due if there is no cost for the service (like Google searches), or when there is only minimal use or control of the provider’s computer by the customer. This might happen when information is being primarily transferred to the customer rather than the customer using or controlling the vendor’s computer. On the other hand, the premium version of some otherwise free services like LinkedIn Premium are collecting the tax from customers in Chicago.
The location of the customer use is one of the keys to determining who must pay the cloud tax. Liability is triggered when a customer in Chicago makes remote use of a provider’s computer or software, even if the provider’s assets are located outside of the city. Depending on state and federal law, the provider may have an obligation to collect and remit the tax, but ultimate responsibility for paying the tax lies with the customer. Should a delinquency be discovered, interest and penalties for nonpayment will be due from the customer not the vendor.
A lower tax rate for certain cloud products
Effective January 1, 2016, there is a lower rate of 5.25 percent for certain cloud products such as platform as a service (PaaS), software as a service (SaaS), and infrastructure as a service (IaaS), where the nonpossessory lease is in place primarily to allow the customer to use the provider’s computer and software to input, modify, or retrieve the customer’s own data or information. This could include a wide range of applications such as cloud-based customer relationship management, project management, web hosting, office suite software, or cloud accounting.
The higher 9 percent rate (described above) is for database products where the primary purpose of the lease is to allow the customer to use the provider’s computers and software to access and modify data supplied by the provider.
Don’t mistake this for the Netflix tax
Chicago’s Personal Property Lease Tax should not be confused with the city’s amusement tax, which has no exemption for nonprofits. The amusement tax can be assessed on charges paid to witness, view, or participate in an “amusement” that is delivered electronically. Charges paid for rental, streaming, or temporary download of television shows, movies, music, and games are all subject to the levy: Netflix, Hulu, Amazon Prime, Xbox Live, and Spotify are just a few of many examples. If a nonprofit in Chicago is using any such service, it is probably paying the tax.
The nonprofit exemption
Nonprofit organizations set up for charitable, educational, or religious purposes under Section 501(c)(3) of the Internal Revenue Code are generally exempt from the Personal Property Lease Tax. This includes churches, public and private schools, social services agencies, and others. Government entities are also exempt.
It should be noted that Section 501(c)(3) organizations established for the purpose of scientific, literary, testing for public safety, fostering amateur sports competition, or preventing cruelty to children or animals are not exempt from the Chicago Lease Tax.
It is also important to note that the city of Chicago does not issue formal certificates of exemption. Individual organizations may need to provide vendors with a copy of their IRS determination letter in order to verify their exempt status and have the tax removed from their bill. The letter should include the name of organization, an identification number, a statement in support of the charitable, educational, or religious purpose of the organization, and an official signature.
Chicago nonprofits may have a situation where they are a branch or satellite office of an organization whose headquarters is elsewhere; the American Red Cross would be an example (headquarters in Washington, DC). A prorated tax may still be applied to the fee paid for a nonpossessory computer lease based on the level of access provided within the Chicago city limits.
How we can help
If you’ve already paid several months of the cloud tax when you didn’t have to, can you get it back? It may be possible to do a reverse audit to discover the amounts wrongly paid, but because the time period is only a matter of months, it may not be cost effective. It’s worth having a conversation with your CLA professional.
Like many issues of taxation and regulation in the digital realm, the Chicago cloud tax is complicated, and rarely are answers spelled out in black and white. Nonprofits that are not exempt from the tax should comply with the law, but even the exemption question can be complicated and confusing. CLA professionals and a qualified tax attorney can help you maneuver through the twists and turns of this tax so you can focus your energy on fulfilling your charitable mission.