City of Chicago Issues Guidance Regarding the Applicability of the Amusement and Transaction Taxes to Electronic Transactions
On June 9, 2015, the Chicago Department of Finance ("Department") issued two rulings regarding the City's Amusement Tax and the Personal Property Lease Transaction Tax. The rulings are intended to clarify the City's position on when electronically delivered amusements or services will be subject to either the Amusement Tax or the Transaction Tax. Given the lack of certainty regarding the applicability of the taxes to businesses that stream data, provide cloud-computing services, or otherwise provide electronically delivered goods, these rulings may prove a helpful step in resolving any ambiguity.
Viewed together, the two rulings, Personal Property Lease Transaction Tax Ruling #12 and Amusement Tax Ruling #5, attempt to delineate the contours of when the Amusement Tax will apply to a certain transaction, and when the Transaction Tax will apply. The Department has recently attempted to explain when "nonpossessory computer leases" are subject to the Transaction Tax, but Ruling #12 certainly goes further than the Department has previously ventured in its explanations. Specifically, Ruling #12 explains that legal research databases, databases that provide credit reports, programs that involve compiled information, such as real estate prices, stock prices, economic statistics, or weather statistics, and programs that perform functions such as data processing or tax preparation, will be subject to the Transaction Tax. The Ruling goes further, however, to explain services that are not subject to the Transaction Tax. For instance, if a customer pays a provider to write a report that is accessed electronically, no tax applies. Charges for storage of information on a server are not subject to the tax, nor are sales of entertainment materials. Finally, the Ruling makes clear that a "true object" test, or something of the sort, will apply to whether a transaction is taxable. Passive access to information, for example, is an exempt use of a provider's computer.
In addition to explaining what types of transactions are taxable, Ruling #12 also provides that where a customer enters into a transaction subject to the Transaction Tax, but uses the service within and without Chicago, the tax should be apportioned. This requirement arguably contradicts the clear language of the Ordinance, which provides that property leased outside the City and used more than 50% outside the City is not subject to the tax. However, the Ruling acknowledges this, and would appear to suggest that apportionment need only occur when, under the previous rule, the entire transaction would be subject to tax because the agreement was entered into within Chicago. This is a very important development regarding the Transaction Tax, and would appear to resolve what had been a perceived Constitutional infirmity of the tax.
Amusement Tax Ruling #5 picks up where Ruling #12 leaves off. Whereas entertainment materials are not subject to the Transaction Tax, Ruling #5 explains that charges paid for the privilege of watching electronically delivered television shows, movies, videos, music, or games are subject to tax. The actual purchase of these items, however, is not subject to tax. Previously, many had thought these transactions would fall under the Transaction Tax. Ruling #5 makes clear that the Department does not find that to be the case.
Although the rulings are effective July 1, 2015, the rulings state that they will not be implemented until September 1, 2015, in order for taxpayers to have sufficient time to make required system changes.
One issue that remains unclear in the wake of these two new rulings is the extent to which the Department will find nexus to exist for a provider not located within Chicago. Each of the taxes is technically imposed upon the customer. To the extent a customer located in Chicago enters into transactions subject to either the Amusement or Transaction Taxes, the tax will apply. However, whether the provider will be required to collect remains an open question. The rulings both specifically state that the issue of nexus is beyond the scope of the rulings.
These rulings obviously come in the wake of the City's decision to impose its existing taxes more aggressively and to industries that were not contemplated when the taxes were initially adopted. As Breen Schiller discussed in a recent blog post, some of these attempts certainly raise questions and are on questionable legal footing. Whether these new rulings improve the business environment in Chicago by providing more certainty regarding the applicability of the taxes or if the rulings serve to improperly expand the City's taxing authority, for now, remains an open question. I can only hope that the answer is the former.