Chicago DOR Expands Lease Transaction Tax

The Chicago personal property lease transaction tax (CTT) is the city's version of a lease or rental tax on personal property.1 It is an 8 percent tax that applies to any lease or rental of personal property in the city of Chicago, and the use in Chicago of personal property leased or rented outside the city.2 Personal property subject to the CTT includes property such as computer software. The CTT also taxes lease time for the use of computers and computer software.3

Effective September 1, the Chicago Department of Revenue has modified CTT Ruling 5 (originally Ruling 9) to expand the CTT to some perpetual licenses of computer software (Amended Ruling 5). Previously, Ruling 5 did not impose the CTT on perpetual licenses of computer software because it equated those licenses to sales rather than leases. To extend the reach of the CTT, Amended Ruling 5 now subjects to the tax any license of computer software that qualifies as a nontaxable license under the Illinois retailers' occupation tax (ROT) software regulations.4 Because non-perpetual licenses of software that qualify as nontaxable licenses under the ROT software regulations have always been subject to the CTT, Amended Ruling 5 has expanded the CTT to those perpetual licenses of software that are likewise nontaxable under the ROT.5

1. Background

   When the scope of the CTT was first interpreted as applying to computer software, the Chicago DOR decided to issue a ruling to instruct taxpayers on the application and limitations of the CTT. On February 1, 1987, it promulgated a ruling to clarify that a lease could encompass some licenses of computer software. However, the Chicago DOR had to be mindful of the Illinois Constitution's prohibition on municipalities taxing sales of services or intangibles.6 Consequently, when the DOR drafted the ruling, it distinguished licenses of computer software that were similar to sales in that some ownership interest in the underlying software copies was provided- that is, the copies could be used for an indefinite period of time—from licenses of computer software for a limited duration that were more like leases.7

   Regarding leases of computer software, section 4 of Ruling 5, effective before September 1, 2013, states:

   This would include all agreements for the use or possession of such software including license agreements .... However, if title or ownership of the software passes in an agreement, then a sale occurs and no lease tax would be due. The section gives examples: (a) A computer software owner (or licensor) and a Chicago user sign an agreement called a copyright license agreement which transfers the possession and use of certain software to the user, and allows such user to use such software on a month to month basis for a payment of a specific monthly fee. No other fees are charged the user. At the end of the contract term or upon cancellation by the parties, the software is either returned to the owner (or licensor) or erased. Only incidental training and a question answering service is provided and is a part of the monthly fee. In this case, the total monthly fee is taxable as a lease charge for the use of the software. (b) Same facts as (a) above, except that the agreement provides for an indefinite use of the software for a flat fee of $2,000.00. The...