In Short
The Situation: Facing historic budget shortfalls, Chicago looks to grow tax revenue from remote work locations.
The Result: Chicago may raise the lease tax rate applied to users of cloud computing.
Looking Ahead: Taxpayers can update and exclude non-Chicago work locations to reduce the tax on cloud computing.
On August 31, 2020, Chicago Mayor Lori Lightfoot voiced her interest in raising the tax rate on nonpossessory computer leases subject to the Chicago Personal Property Lease Transaction Tax ("lease tax"). Chicago taxes virtually all software as a service ("SaaS") and cloud computing services provided to users physically located in Chicago. It does so by deeming such arrangements "nonpossessory computer leases." See City of Chicago, Personal Property Lease Transaction Tax Ruling No. 12 (June 9, 2015).
Chicago is facing a $1.2 billion budget gap in 2021, but Mayor Lightfoot noted that the increase in remote work is likely to boost revenue from the lease tax on nonpossessory computer leases. Mayor Lightfoot informally proposed hiking the rate on nonpossessory computer leases from the current 7.25% rate to 9%. While the correlation between increased remote work and increased lease tax revenues seems intuitively reasonable, it fails to account for the large number of employees of Chicago-based businesses that no longer work within the Chicago city limits.
The Chicago lease tax applies only to leases that occur in Chicago. Ruling No. 12 explains that the place of lease or rental is "the location of the terminal or other device by which a user accesses" a computer, and that for "any given individual assigned an access code, seat, license or other ability to use the provider's computer, all of that individual's use will be presumed to take place at the individual's principal office location." That presumption is not accurate when employees are allowed to work outside of Chicago, and it is demonstrably incorrect where shelter-in-place measures require individuals to work from locations outside Chicago. In such instances, the location of the access device, and the individual's principal office location, are known to be outside Chicago.
Ruling No. 12 allows providers to apportion the lease charge subject to tax based on "actual data or estimates provided by the customer." Companies whose workforce has been displaced from a Chicago location may wish to update their provider with the actual location of that portion of their workforce that no longer accesses the provider's software or computer from within Chicago, to both reduce the current tax due and soften the impact of a future rate increase. To implement the apportionment of Ruling No. 12, the Chicago Department of Finance has template for an Affidavit for Apportionment of Use of Nonpossessory Computer Leases to reflect the change in the number of Chicago users and non-Chicago users to compute the "Chicago Percentage of Use" that should be applied to the tax.
The COVID-19 shelter-in-place orders and subsequent remote work arrangements have resulted in an unprecedented number of people working remotely on a full-time and long-term, and possibly permanent, basis. Many of these remote workers are working from their homes located outside Chicago. Even those employees that lived in Chicago prior to the pandemic may be working from other locations outside of Chicago such as vacation homes, parents' homes, long-term rental homes, etc. And a nontrivial number of these employees will likely never return to Chicago.
Organizations subject to the lease tax that have undergone a significant displacement of employees may find it beneficial to identify employees and other users who no longer use the taxed services in Chicago in order to adjust their tax liability downward on that basis as permitted by Ruling No. 12.
Two Key Takeaways
- The Chicago lease tax rate on nonpossessory computer leases (e.g., cloud computing and SaaS) is likely to increase.
- The workforce has moved, and organizations subject to the tax can reduce their tax base through apportionment to exclude users who work at locations outside of Chicago.
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