As we have previously reported, since the U.S. Supreme Court’s landmark decision in South Dakota v. Wayfair, 585 U.S. __ (June 21, 2018), forty-four (44) states (all except Florida and Missouri) have adopted economic nexus provisions for sales tax compliance purposes. Even the Alaskan local jurisdictions have gotten in on the action, adopting an intergovernmental agreement to establish a Commission that will provide governance over a streamlined, single-level administration of sales tax collection and remittance.
City of Chicago Economic Nexus “Safe Harbor”, effective July 1, 2021
the City formally adopts an economic nexus threshold of $100,000 (measured over the preceding 4 quarters)... effective July 1, 2021.
Most recently, the City of Chicago has issue a bulletin stating that the City formally adopts an economic nexus threshold of $100,000 (measured over the preceding 4 quarters) for purposes of Chicago's amusement tax, Chapter 4-156 of the Municipal Code of Chicago (“Code”) as applied to amusements that are delivered electronically, such as video streaming, audio streaming and on-line games; and Chicago's personal property lease transaction tax, Code Chapter 3-32, as applied to nonpossessory computer leases. [City of Chicago, INFORMATION BULLETIN – NEXUS AND SAFE HARBOR (January 21, 2021)] This economic nexus “safe harbor” is effective July 1, 2021.
The City of Chicago interprets nonpossessory computer leases to include cloud-based products, or “any usage of remote computing or software, including but not limited to SaaS, IaaS and PaaS, such as (a) automated deployment of servers, processing power and networking, (b) software applications accessed remotely such as office suite software, project management software and customer relationship management (CRM) software, (c) web hosting, and (d) database search products. [See, City of Chicago, INFORMATION BULLETIN - NONPOSSESSORY COMPUTER LEASES (November 2015)]
the economic nexus "safe harbor" applies to amusements that are delivered electronically, such as video streaming, audio streaming and on-line games, as well as non-possessory computer leases, including cloud-based products.
The City of Chicago retains home rule authority to generate its own taxes, something the State has historically respected. With respect to nexus, the City of Chicago has historically taken a position that business activity directed at customers within a home-rule jurisdiction is enough to justify imposing a tax collection obligation on a seller, whether physical presence exists or not. However, for purposes of the City’s amusement tax on such as video streaming, audio streaming and on-line games, and for purposes of the City’s personal property lease transaction tax on cloud-based products, the City will adopt a “safe harbor” nexus threshold.
Specifically, an out-of-state entity that received under $100,000 in revenue from Chicago customers during the most recent consecutive four calendar quarters will not be expected to collect the following taxes from its Chicago customers during the current calendar quarter:
1. Chicago's amusement tax, Chapter 4-156 of the Municipal Code of Chicago (“Code”) as applied to amusements that are delivered electronically, such as video streaming, audio streaming and on-line games; and
2. Chicago's personal property lease transaction tax, Code Chapter 3-32, as applied to nonpossessory computer leases (cloud-based products).
This safe harbor is extended with the following conditions and qualifications:
a. It will apply only to an entity that has no other significant contacts with Chicago, (such as agreements that the entity has with other businesses in Chicago; activities that the entity's employees or other agents perform on the entity's behalf in Chicago; any physical presence that the entity has in Chicago; advertising directed at Chicago customers; and any other facts that support or oppose the conclusion that the entity has purposefully availed itself of the privilege of carrying on business in Chicago.
b. It will apply on a prospective basis, beginning July 1, 2021. No refunds or credits will be granted for taxes paid or remitted before that date.
c. If an out-of-state business initially qualified for the safe harbor but no longer does, it must (i) register with the City's Department of Finance within 60 days, (ii) begin collecting Chicago taxes within 90 days, and (iii) continue collecting Chicago taxes for at least twelve months.
d. The safe harbor concerns only the issue of whether a provider has a duty to collect taxes from its customers; it does not affect the issue of whether a customer has a duty to pay those taxes.
[City of Chicago, INFORMATION BULLETIN – NEXUS AND SAFE HARBOR (January 21, 2021)] To the extent a remote seller has previously registered for the City amusement tax or personal property lease transaction tax, and believes that it falls within the nexus “safe harbor”, this seller may close its account.
The City also notes that it retains the authority to review a remote seller’s nexus on a case-by-case basis. As such, while the City has established a “safe harbor” below which a remote seller of streaming or cloud-based products may not have a Chicago transaction tax compliance obligation, to the extent the seller engages in other activities, such as those noted above, the City may deem the seller to have nexus.