Chicago announces Wayfair-based nexus safe harbor for its cloud tax and amusement tax
By Jessica Macklin and Taylor McFadden
On January 21, 2021, the Chicago Departments of Finance and Law published an Information Bulletin (the “Bulletin”) announcing the adoption of an economic nexus safe harbor for the city’s cloud and amusement taxes. The Chicago cloud tax refers to the city’s personal property lease transaction tax (the tax on SaaS, remotely-hosted software and similar items), and the Chicago amusement tax refers to the city’s tax on electronically delivered amusements (such as video streaming, audio streaming and online games).
This safe harbor, which has many similarities to the Wayfair‑based economic nexus minimum threshold adopted by Illinois for sales/use tax purposes, takes effect on July 1, 2021.
Economic nexus background
The Bulletin provides context for its discussion by summarizing the conclusion of the U.S. Supreme Court’s 2018 ruling in Wayfair v. South Dakota, a ruling that permitted states to make remote sellers (those with no in-state physical presence) collect their sales tax. It then harmonized Wayfair’s conclusion with the Illinois Supreme Court’s 1975 description of the power that a home-rule jurisdiction like Chicago has to tax sellers located outside its boundaries.
Next, the Bulletin explained the Wayfair-based economic nexus standard that Illinois adopted (effective October 1, 2018) for purposes of its sales tax on remote sellers (the “use tax”). Under that standard, the Bulletin explained, a remote seller (one with no in-state physical presence) was required to collect Illinois’ use tax (and, effective January 1, 2021, use destination-based sourcing for local tax purposes) if, as of the last day of any particular quarter, that remote seller met either of the following criteria during the preceding 12-month period:
- Its cumulative gross receipts from sales of tangible personal property (TPP) to purchasers in Illinois were $100,000 or more, or
- It entered into 200 or more separate transactions for the sale of TPP to purchases in Illinois.
City of Chicago economic nexus and safe harbor
The city’s safe harbor announced by the Bulletin is similar to Illinois’ use tax economic nexus threshold in that it also protects remote sellers whose city-sourced revenue is less than $100,000, measured quarterly using the prior 12 months’ worth of activity.
However, Chicago’s safe harbor differs from Illinois’ threshold that it applies to revenue from all sales (not just sales of TPP), and it does not have a transaction-based threshold.
Due to the differences between the state’s use tax nexus threshold and the city’s safe harbor, the Bulletin emphasizes that the issue of whether a remote seller falls below the state’s threshold “will not necessarily be determinative” of its obligation to collect Chicago’s cloud tax or amusement tax. The Bulletin explains that the city will also consider other factors, such as:
- Contracts or agreements between the taxpayer and other businesses in Chicago
- Activities that employees or other representatives perform on behalf of the entity in Chicago
- Any physical presence the entity has in Chicago
- Advertising directed at Chicago residents
- Any other facts that support the conclusion that the entity does or does not meet the standard for being considered as carrying on business in Chicago
Tax safe harbor insights
Chicago cloud tax: The fact that Chicago has treated its “cloud tax” as being eligible for safe harbor treatment is especially significant in light of the January 1, 2021 increase in the cloud tax’s rate from 7.25% to 9% caused by the adoption of Mayor Lightfoot’s 2021 budget.
Chicago amusement tax: The fact that the $100,000 revenue threshold was designed to protect small sellers will likely do little to help large sellers — such as Netflix and Spotify — whose challenge to the amusement tax’s legality ended in March 2020 when the Illinois Supreme Court declined to review the Illinois Court of Appeals’ 2019 ruling in Labell v. Chicago. Similarly, even though tech giant Apple Computer filed an amended complaint in its own challenge to the amusement tax on January 19, 2021[1], it is unclear whether its case can avoid the same fate as Labell.
Next steps
Remote sellers that make sales to purchasers in Chicago should consider whether their revenue from those sales will be at least $100,000 from July 1, 2020, to June 30, 2021, and prepare to start collecting the cloud tax or amusement tax starting on July 1, 2021, if necessary.
In addition, Chicago is not the only locality to have announced an economic nexus standard and safe harbor under its locally-administered tax. For example, following the Wayfair case, a number of localities (including Philadelphia and San Francisco) announced economic nexus standards for purposes of their local taxes.
Because this trend is sure to continue, businesses should continue to watch for development in this area. Wipfli can help: Sign up to be automatically notified anytime our economic nexus matrix is updated.
Related content:
[1] The case is Apple, Inc. v. Chicago, Ill. Cir. Ct. 2018 L 050514, Complaint amended Jan. 19, 2021.
