What’s the Deal with This Cloud Computing Tax in Chicago? Everything You Need to Know
Many Chicago business leaders have probably already heard that there’s a new tax on the business scene. As the Cloud has continued to dominate the business space, regulators have taken notice and there is now a cloud-computing tax that affects businesses’ cloud usage and delivery. This tax impacts not only the Chicago businesses that are taking advantage of the Cloud, but also everyday users who rely on Cloud-based products and services.
Everything You Need to Know About the Chicago Cloud Computing Tax
The Chicago cloud-computing tax was originally announced in June 2015 as a clarification that Chicago’s 1995 nonpossessory computer lease tax does indeed apply to cloud software and services. However, this original announcement was met with much pushback from the Chicago business community. Tax regulators went back to the drawing board and by November 2015 they had decreased the tax rate on certain transactions from 9.0% to 5.25%.
These rates officially took effect on January 1st, 2016. This means, for the last three years Chicago businesses and consumers that rely on the Cloud have been subject to paying this Cloud computing tax. However, despite a few years on the scene, many businesses are still scratching their head, wondering how the tax works and if their business is supposed to be collecting it from their consumers. Don’t sweat it. We’ve got you covered. Read on for a checklist that includes everything you need to know about the Chicago Cloud-computing tax.
Whose affected by the tax?
The tax takes effect when a customer located in the city of Chicago uses the Cloud to remotely access a provider’s computer or software – whether the hardware or software is located within Chicago city limits or not.
There is a short list of specialized categories of transactions that are exempt from the tax, however, overall, only three blanket exemptions exist, including:
- Governmental bodies
- Charitable, educational, and religious organizations
- Insurance companies
How much is it?
There are two different rates associated with the Chicago Cloud-computing tax which are determined as a percentage of the lease payments. Here are the two different transaction types and the corresponding tax rates:
- Rate 1: Provider Data – If the remote access allows a customer to use a provider’s hardware and software to input, modify, transmit, or retrieve data or that is supplied by the provider itself the tax rate remains at 9.0%.
- Rate 2: Customer Data – If the remote access allows a customer to use the provider’s hardware or software to input, modify, transmit or retrieve data that is supplied by the customer, the rate is 5.25%. This includes Cloud offerings like Platform as a Service (PaaS), Infrastructure as a Service (IaaS), and Software as a Service solutions (SaaS).
It’s important to note that the taxes are directly linked to lease payments, so if remote use is free, no tax is applied to the Cloud-computing access.
Is locally stored data subject to the tax?
Let’s say you charge a fixed rate to store data for consumers locally, off the Cloud and on an on-site computer. Will you be taxed on this data storage? The short answer is no.
Charges for storing data on a local computer are not subject to the Chicago Cloud-computing tax, as long as the charges are just for data storage. Keep in mind, though, that if a customer is later charged for accessing that stored information from a remote location in Chicago, the remote access is taxable.
Who pays the tax?
The direct consumer is responsible for paying the tax. However, this doesn’t mean service providers are without responsibility here. Providers are responsible for and required to collect the tax from their consumers.
If the provider fails to collect the tax, the customer is still liable to make payment directly through the City of Chicago website. It’s important to note that Chicago doesn’t require businesses to collect the tax unless they have a sufficient amount of contacts and connections with the city.
What about data use outside of Chicago?
Many providers have large customer bases wherein only some of their consumers are taking advantage of remote hardware and software access from within Chicago. The solution here is that if a provider’s charges cover access from both within and outside of Chicago, the charge is apportioned.
The City of Chicago has made clear that they will accept any reasonable basis for apportioning remote use in and out of the city so long as the apportionment is supported by financial records.
When it comes to consumers using remote Cloud-access on a mobile device, it goes without saying that the access could occur both within and outside of Chicago city limits. In this case, all access will be considered to take place at the primary office location disclosed by the consumer in the service agreement.
Are small businesses exempt?
Tax exemptions for Chicago small businesses currently only apply to “new small businesses.” Here’s the three requirements to meet the city’s definition of a “new small business”:
- Your business must have a valid and current business license – officially issued by the city of Chicago or an alternate jurisdiction.
- Your business must have under $25 million in gross sales during the most recent Calendar year, prior to the tax year from which you want to be exempt.
- Your business has been operating (making gross sales) for less than 60 months.
Preparing for the Chicago Cloud Computing Tax: What Your Business Needs to Do
Now that we’ve outlined the basics, it’s time for you to put together a game plan. If you’ve read all this information and think you might be subject to paying or collecting this tax, it’s time to take an inventory of your business’ Cloud use and access to figure out where and how your Cloud interactions may be taxable.
Here’s the main priorities to consider when preparing for the Chicago cloud computing tax:
- Assess your Cloud computing situation
- Use our guide above to figure out if your business is subject to the tax
- Develop standard operating procedures for collecting the tax
- Reach out to Chicago IT professionals for consultation and support
If you’re looking for a Chicago tech professional to help you determine the parameters of your Cloud-tax obligations, why not reach out to the team of Cloud experts at Infiniwiz. We’ve been providing IT consultation and support services in Chicago since 2002. We know the Chicago Cloud-computing tax in-and-out and we can help you make sure you’re paying or collecting what you’re supposed to.
Don’t sit around and wait to find out that you’re not paying or collecting the Chicago Cloud computing tax correctly. Reach out to the team at Infiniwiz with your questions and concerns. Before you know it, we’ll help you understand everything you need to know about the tax.