Chicago’s Controversial Cloud Tax

CHICAGO, Illinois – Tech companies, entertainment services, and taxpayers in Chicago are about to suffer a pretty bit financial hit after the city’s finance department made the decision to reinterpret two taxes.

There’s an ominous cloud hanging over Chicago, and it’s about to unleash its dark wrath on the city. The Personal Property Lease Transaction Tax, now better known as the “cloud tax,” is slated to go into effect on January 1, 2016 and will require a tax to be imposed on cloud services.

However, taxpayers aren’t the only ones reeling from the implications of the statute. Tech companies and entertainment providers are finding that the recent tax change is a hard pill to swallow.

 

Implications for tech companies and cloud transactions

The Lease Tax was previously imposed on computer and software rentals. However, the government now wants to impose taxes on “nonpossessory leases.” In other words, the government seeks to impose a whopping 9 percent tax on tech-based transactions, like cloud services, leaving several companies in a state of anxiety over the fees they will soon be required to calculate and charge loyal customers – not to mention leaving the consumers themselves pretty upset over the fact that they will have to fork over extra money.

Yet, there may be a silver lining on the cloud tax – at least for tech startup companies. Several tax lawyers and taxpayer advocacy groups have voiced their concerns to the government and have been fighting to help burgeoning businesses avoid these tariffs. Mayor Rahm Emanuel has shown empathy toward entrepreneurs in the past and has previously stated that startups could be “basically exempt” from the tax.

However, we have yet to see a firm resolution on the matter. As of right now, everything’s still up in the air. Even if startups will be granted some form of tax relief, we have yet to learn what the relief will actually entail or what kind of prerequisites startups will have to meet in order to qualify for tax relief. For now, startups shouldn’t rely too much on these assumptions, and figure the tax into their company strategies to at least prepare for what may come. After all, as the old adage goes, “better safe than sorry.”

 

Entertainment taxes on streaming services

The cloud tax has an ugly twin, and it aims to impose fees on entertainment services that can be streamed starting September 1. As it stands, the city already imposes what it calls an “Amusement Tax” on various forms of entertainment. Under the statute, taxable “entertainment” includes anything from an activity that people can physically participate in and enjoy, like a sporting event or concert, to something that is viewed or witnessed electronically. And soon, the tax will apply to online streaming services, like Netflix, and gaming.

Here’s where it gets tricky. When it comes to electronic forms of entertainment, the Amusement Tax will only be imposed on rentals. So, let’s say you download a movie to have and enjoy for all of time. In this case, you would not have to cough up taxes because it is “permanent” download. However, if you are renting a movie from your cable company’s Pay-Per-View option, for example, you would be subject to the tax.

To make matters worse, some companies don’t automatically include the tax when charging for the download. If the company that is providing the entertainment services has a physical presence in Chicago, then they are ultimately responsible for charging and collecting tax payments from customers. However, if they are based elsewhere, this means that the burden of figuring out how much is owed to the government each time a form of electronic “entertainment” is streamed lies solely on the Chicago taxpayer. Fun, huh?

If you are utterly confused at this point, don’t worry, you’re not the only one.

 

Possible long-term consequences

Imposing these taxes may backfire, leading to an overwhelming surge in the number of permanent download and non-leased tech services. Some might think that this may put an end to the overages and allow for locals to “have their cake and eat it too.” But, as any tax attorney can vouch for, there’s no such thing.

If a large percentage of Chicagoans start turning away from streaming and investing in permanent downloads or purchases, it will only be a matter of time before the government starts imposing taxes on ALL forms of entertainment – leased or otherwise. And when it does, it will surely exceed 9 percent.

The city stands to make approximately $12 million in revenue from taxes, but due to the fact that not all forms of entertainment will be subject to tax, both entertainment suppliers and taxpayers are enraged. In the end, the tax is much more likely to backfire than succeed, as companies and residents will undoubtedly try to find clauses with the statute and fight for exemptions with certain forms of entertainment.