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Chicago Reaps Revenue Bonanza With Cloud Computing Tax

The city of Chicago is collecting hundreds of millions of dollars under a one-of-a-kind strategy to tax business use of remote computing services. Chicago collected $87.8 million during initial years of the cloud tax Chicago alone among states and cities to use lease rules to tax cloud computing The city of Chicago has figured out an innovative—and lucrative—way to tax the cloud. Chicago four years ago implemented a one-of-a-kind strategy to tax businesses for their use of remote computing services, like information from an out-of-state provider stored on the internet, or cloud, instead of on a computer hard drive. Under the program, known as the Personal Property Lease Transaction Tax, tax collections on cloud computing contracts have been ramping up at an impressive clip, according to data obtained by Bloomberg Tax from a Freedom of Information Act request. Chicago reported collections of $13.9 million during the first six months of the program which became effective Jan. 1, 2016. That number rose during the next full year to $30.5 million for the period between July 1, 2016 and June 30, 2017, and then to $43.4 million for the period between July 1, 2017 and June 30, 2018. “I consider it a success. Not only did this generate a significant amount of revenue, but it also raised awareness in the industry and within accounting and law firms of the potential exposure that exists out there,” said Elaine Herman, deputy director of tax in Chicago’s Department of Finance. Actual collections are likely higher, Herman said. The data does not reflect collections from businesses that made payments but failed to file tax returns. And the numbers do not reflect collections on leases for database products. The department noted 623 businesses filed returns and remitted taxes on cloud computing leases during the first two and a half years of the program. In total, 2974 businesses are registered with the city to collect or remit under the broader lease tax. Chicago’s collections could surge for several years as businesses continue to embrace cloud-based products. Global sales of cloud services are projected to grow “exponentially” for several years, according to the consulting firm Gartner Inc., racing from $182 billion last year to $331 billion in 2022. A significant portion of Chicago’s cloud computing tax revenue came into city coffers under a special Voluntary Disclosure Agreement (VDA) program, which permitted taxpayers to self-assess and pay outstanding liabilities without penalties. In total, Chicago collected $9.6 million under the voluntary program for liabilities racked up during 2015 and nearly 200 business came in from the cold. At least six businesses entered into settlements totaling more than $500,000. Settlement Data A related FOIA demand by Bloomberg Tax revealed the names and liabilities of 21 large businesses settling under the voluntary agreement. In some cases the names of the taxpayers were redacted by the Chicago Law Department. Bloomberg Tax is challenging that decision in an appeal filed with the Illinois Attorney General. The six largest settlements are: Undisclosed Taxpayer #1 paid […]

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