Chicago Extends Lease Tax to Software as a Service
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Although states have not been increasing sales tax rates in general, many have begun to expand their tax base as some lawmakers look at expanding the list of taxable items. Some states are looking to tax digital products such as music, book, and video downloads. Many states also tax various forms of software including Software as a Service (SaaS).
While Illinois does not subject SaaS to state tax, the city of Chicago does. This is because Chicago’s nine percent lease tax is imposed on the lease or rental of all property other than real property, and its definition of a lease includes access to software via SaaS, Platform as a Service (PaaS), and Infrastructure as a Service (IaaS). Since the state of Illinois does not tax SaaS, this type of local tax is often overlooked.
Any business physically located in Chicago or with remote employees working in Chicago are required to administer this tax. The tax must be applied to any sales in which the customer is located—and using the software in—Chicago. Chicago has also conformed to the economic nexus standards that most states have moved to since the 2018 Wayfair decision. This means that if a taxpayer has $100,000 or more in sales to Chicago-based customers, they are required to collect this additional nine percent tax.
Keep in mind that if this $100,000 threshold for Chicago sales is reached, that also creates a sales tax filing obligation for the state of Illinois and may have an Illinois corporate income tax impact as well.
How We Help
Sales tax regulations are continually evolving, and taxability of SaaS varies from state to state. If your company is selling any type of lease, including SaaS, to Chicago customers, AAFCPAs can provide guidance to ensure you remain in compliance. We continue to closely monitor legislation affecting retailers that offer digital products as part of their revenue stream or those looking to move in that direction.
As an educational resource, we are committed to keeping you up-to-date on industry news and best practices in regulatory updates, finance, business, technology security and timely news in your industry.
Kelly is a senior leader in AAFCPAs’ Commercial Tax practice. She advises individuals, partnerships, corporations, nonprofits, and trusts operating in multiple states and municipalities on opportunities to save tax dollars through advanced tax planning and risk mitigation. This includes the identification of all location-specific tax incentives and credits that could impact business entities and their owners.
Kelly brings expertise in nexus analysis for income/franchise tax and sales and use taxes along with the analysis of state …
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