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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 on multistate taxation 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.
If you have questions, please contact Kelly Zack, MST, Director, State & Local Tax at 774.512.4001 or kzack@aafcpa.com—or your AAFCPAs Partner.
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