If the City of Chicago hasn’t already approached your business looking for Sales & Use Tax returns and money, you should be prepared for their knock.
For years, State and Municipal governments have become more and more aggressive in collecting Sales & Use Tax from businesses within their boundaries on purchases where the vendor didn’t bill any or the correct amount of tax. In some cases, companies buy tangible goods from out of state, and the vendor doesn’t bill IL sales tax. In other cases, a vendor in a suburb might bill you the IL+suburban tax when the City of Chicago expects the higher City of Chicago tax to be billed and paid.
Further, the City of Chicago has decided to treat Software as a Service the same way it does the rental of personal property and is applying their personal property rental tax rate against SaaS services. While taxing a service doesn’t make sense, their argument is that each company that uses SaaS is essentially renting their vendors services which are tangible personal property.
To give you a sense of what might be coming down the pike:
- A client of mine was contacted by the City of Chicago Dept of Revenue looking for tax returns going back to the inception of the company. To the best of our knowledge they found my client by looking at Illinois Secretary of State records for businesses with addresses in Chicago.
- We had to determine the amount of purchases of tangible items that were not fully taxed for each year ending 6/30/XX and the amount of SaaS that were taxed by the vendors for each of the same years. Not an easy or fun process. Because my client had not filed the forms for either the Purchase of Tangible Personal Property or the Rental of Personal Property, we had to dig through old records to determine the numbers that applied for each year.
- Because the City of Chicago has changed rates effective 1/1/XX but their returns are for the 12 months ended 6/30/xx, we had to file two returns for some one year periods.
- Because the City of Chicago created its business small tax exemption effective 1/1/16, we had to file two returns for the year ended 6/30/16.
- The rate on SaaS was 8% for a few years, increased to 9% and then went down to 5.25% on 1/1/16.
- The 5.25% rate is only applicable to SaaS services where the user is putting their data on the vendor’s server. Thus some but not many SaaS services are still taxed at the 9% rate.
- Because this client is a small business and was less than five years old for part of this period, we were able to take advantage of the “small business tax exemption” which went into effect 1/1/16 for businesses less than five years old and with revenue of less than $25M.
You may have heard references over the last few years to Chicago’s “Cloud Tax.” When it comes to Chicago charging taxes on SaaS, this is what they are talking about. If you are not remitting your taxes due monthly and filing the returns each year by 8/15/XX, I expect that some day you will get a letter asking you to complete the forms, pay the tax and interest. They seem to be lenient about penalties.
While each of you and every other business owner in Chicago will make their own decision as to whether to start filing returns and remitting payment for back years as well as current payments or to wait until they come knocking, you should know about these taxes and the fact that the City of Chicago is likely to find you and have you pay all the back taxes plus interest.
If you wish to discuss this with me, please let me know at llevy@CFOoptionsinc.com.