Taxing the cloud: States are looking at how to do it

Chicago raises its cloud tax, but remote work may limit revenue gains

In late November, Chicago City Council approved a bump to its tax on nonpossessory computer leases – meaning cloud services. Effective January 1, 2021, the cloud tax increases from 7.25% to 9%, which is the rate the city taxes other leases or rents.

The cloud tax is based on the idea that organizations using cloud services are essentially leasing access to a cloud provider’s hardware and software. The tax applies to organizations based in Chicago leasing cloud services elsewhere. Chicago’s tax was first introduced in 2015 and charged 5.25%. In 2019 it was raised to 7.25% and was expected to bring in $17 million.

The law “presumes that the location of the access device is at a taxpayer’s principal office location (generally within Chicago),” a JDSupra blog said, but with the COVID-driven remote work environment, “that presumption may be incorrect.”

According to Dec. 2 Tax Insight by PWC, taxpayers have been able to apportion the tax when “software use occurs both inside and outside the city,” so organizations whose employees are now teleworking from outside the city limits may be able to reduce their taxes.

Although Chicago’s cloud tax is unique among municipalities, JDSupra wrote, some states tax software-as-a-service offerings, and they should consider how they will be implemented going forward.

“Given the likelihood that the current work-from-home environment will continue into 2021, and given that almost every state and local government across the country is faced with similar budget shortfalls, other state and local governments may seek to enact and implement new or expanded taxing schemes similar to Chicago’s Cloud Tax,” the bloggers wrote.

About the Author

Susan Miller is executive editor at GCN.

Over a career spent in tech media, Miller has worked in editorial, print production and online, starting on the copy desk at IDG’s ComputerWorld, moving to print production for Federal Computer Week and later helping launch websites and email newsletter delivery for FCW. After a turn at Virginia’s Center for Innovative Technology, where she worked to promote technology-based economic development, she rejoined what was to become 1105 Media in 2004, eventually managing content and production for all the company's government-focused websites. Miller shifted back to editorial in 2012, when she began working with GCN.

Miller has a BA and MA from West Chester University and did Ph.D. work in English at the University of Delaware.

Connect with Susan at [email protected] or @sjaymiller.


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