Implementation Date for Controversial Chicago Tax Pushed back to January 1, 2016


In a list of proposed changes to the City of Chicago’s 2016 budget proposal, Chicago Mayor Rahm Emanuel confirmed that the effective date of a controversial Tax Ruling regarding the Chicago Personal Property Lease Transaction Tax (“Chicago Lease Transaction Tax” or “Tax”) has been pushed back to January 1, 2016. Mayor Emanuel also confirmed that the rate of the Tax will be lowered from 9 percent to 5.25 percent, in order to compete with leading technology cities such as Boston, New York, Austin and Seattle. 

Pursuant to the Tax Ruling, the Chicago Lease Transaction Tax will apply to charges that are paid for the use of tangible personal property, including charges paid pursuant to a “nonpossessory computer lease,” such as cloud computing, cloud services, hosted software, software as a service, platform as a service, or infrastructure as a service and licenses for use of the same.  Once the Tax Ruling goes into effect, companies providing services to customers in Chicago must consider carefully if they are required to collect the Tax on behalf of their Chicago customers.  While the Tax  applies to lessees, in the Tax Ruling, the City of Chicago Department of Finance specifically declined to address whether service providers are required to assess and collect the tax on behalf of the lessee, and noted that providers with questions regarding the obligation to collect the tax should consult with an attorney.


The Chicago Lease Transaction Tax is a municipal tax on the leasing of tangible personal property or the use of leased property.  The Tax is particularly controversial because of the unusual way that the Illinois Sales and Use Tax treats leases.   Most states require lessors to collect the sales tax on the periodic payments for leases of tangible personal property.  As a result, in most states, property that is purchased for the purpose of being leased is typically exempt from state sales tax.  In Illinois, however, lessors are required to pay sales tax to their vendors on the purchase price of the property, rather than collecting tax on the lease revenue stream.  Because state sales tax is not assessed on lease payments, the City of Chicago adopted the Chicago Lease Transaction Tax to assess its own tax on the periodic lease payments. 

The City of Chicago takes a very broad view of what is considered the leasing of tangible personal property that is subject to the Chicago Lease Transaction Tax.  Specifically, pursuant to the Tax, the City treats nonpossessory computer leases as taxable transactions, and requires these transactions to be sourced to the location of the leesse’s own computer or access terminal that is used to access the computer or software that is being leased.  As a result, if the lessee’s access the leased software or computer from the lessee’s location in Chicago, the tax will apply to the periodic lease payments for the duration of the lease.

In the recent Tax Ruling, the City of Chicago limited a critical exemption to the Chicago Lease Transaction Tax.  Under the exemption, a lease will be exempt from taxation in two circumstances.  First, the customer’s use or control of the provider’s computer must be “de minimis.” Second, the related charge must be “predominantly for information transferred to the customer rather than for the customer’s use or control of the computer.” The Letter Ruling limits the scope of the exemption by broadly interpreting what constitutes “control” and narrowly interpreting when a transaction is for “information.”  As a result, information services and software services that claimed the exemption in the past will likely no longer qualify for the exemption.

Industry Response

The recent Letter Ruling has been met with ire from the tech industry.  Tech lobbyists in the startup and venture capital communities pushed strongly for modifications to the Tax, and are mollified but not completely satisfied by the recent changes announced by Mayor Emanuel.   The nonprofit group Liberty Justice Center has filed a lawsuit against the City of Chicago for the extension of the tax, alleging that the tax may violate the federal Internet Tax Freedom Act.

All companies providing cloud-based services must consider closely if they will be required to collect the Tax on sales to Chicago customers once the Tax goes into effect. 

Clients with questions on whether the Tax applies to its services should contact the attorney assigned to the account.

ATTORNEY ADVERTISING DISCLAIMER: This information may be considered advertising in some jurisdictions under the applicable law and ethical rules. The determination of the need for legal services and the choice of a lawyer are extremely important decisions and should not be based solely upon advertisements or self-proclaimed expertise. No representation is made that the quality of the legal services to be performed is greater than the quality of legal services performed by other lawyers

Sign Up To Receive Our
Advisories and Compliance Alerts

Sign up for our email list to receive notifications regarding new advisories and news