City of Chicago Expands Lease Tax Base to Include Perpetual Software Licenses—City Continues to Ignore Its Own Ordinance

by Reed Smith
Contact

On August 6, 2013, the City of Chicago’s Department of Finance revised its June 1, 2004 Personal Property Lease Transaction Tax ("Lease Tax") Ruling #5. The revised ruling, effective September 1, 2013, expands the Lease Tax base to include perpetual software licenses.

Background

The City of Chicago imposes an 8 percent Lease Tax upon personal property—including software—leased or used within the city limits. The Lease Tax does not apply to sales of software. However, the Lease Tax does apply to certain "software licenses."

Prior to September 1, 2013, the City’s Department of Finance followed its Lease Tax Ruling #5, which provided that the Lease Tax applied to nearly all software licenses that were not "perpetual licenses." As mentioned above, the Department has now revised Ruling #5 to conclude that the Lease Tax is also due on perpetual licenses of computer software.1 As a practical matter, as of September 1, 2013, the City’s position is that nearly all software licenses are now subject to the Lease Tax.

In our view, taxpayers should challenge the application of the Lease Tax to their sales or purchases of software licenses because the City’s broad application of the Lease Tax goes beyond the scope of its own ordinance.

The Lease Tax Rulings Exceed the Authority Provided for in the City’s Own Ordinance

The City’s ordinance specifically provides that only software licenses that are exempt from the Illinois Retailers’ Occupation Tax and Illinois Use Tax ("IL Tax"), are subject to the Lease Tax.2 The only exemption from the IL Tax applicable to software is for retail sales of software used to operate exempt machinery and equipment used primarily in the manufacturing or assembling of tangible personal property for wholesale or retail sale or lease, or software used in exempt farm machinery and equipment.3 All other software licenses, including perpetual licenses, are excluded (not exempt) from IL Tax.

The difference between an exclusion and an exemption from tax is very clear and significant.4 If something is excluded from tax, the legislature never intended to tax it. In contrast, something that is exempt from tax is actually "subject to tax," but the legislature decided not to tax it by way of that exemption.

Thus, in our view, because nearly all other software licenses, including perpetual licenses, are excluded from the IL Tax (not exempt from the IL Tax), those software licenses should not be subject to the Lease Tax.

A Change to Nine Years of Settled Law can only be made by a Change in Law, not by an Administrative Ruling

In addition, the City cannot change its interpretation of the Lease Tax ordinance to impose the Lease Tax on perpetual licenses, because for more than nine years, the City has consistently interpreted the ordinance as not taxing such licenses.5 The City cannot disturb the settled expectations produced by the prior interpretation without a change in law.6

Based on the above, the City can only impose Lease Tax on software used to operate manufacturing and farm machinery and equipment.

Taxpayers who have paid the Chicago Lease Tax on any software licenses—including licenses of software that were not perpetual licenses—should consider filing refund claims. Taxpayers should also consider not paying Lease Tax on any software licenses—including perpetual licenses—going forward.

If you are interested in more details on this issue, please contact one of the authors of this alert, or the Reed Smith attorney with whom you normally work. For more information on Reed Smith’s Illinois tax practice, visit www.reedsmith.com/iltax.


  1. 86 Ill. Admin. Code § 130.1935(a)(1) sets forth a five-part test to determine whether the transfer of software is not a "sale at retail" subject to the Illinois Retailers’ Occupation Tax law (35 ILCS 120/1 et seq.). A sale at retail is taxable unless otherwise exempted by law. Revised Ruling #5 uses the same five-part test to determine whether a software license is a perpetual license and, according to the revised ruling, subject to the Lease Tax.
  2. Municipal Code of Chicago § 3-32-020(I).
  3. 86 Ill. Adm. Code § 130.1935(d); 86 Ill. Adm. Code § 130.305(k); 86 Ill. Adm. Code § 130.330.
  4. As specifically noted by numerous state courts, "exemptions" from tax are distinct from "exclusions" from tax. See, e.g., Dearborn Wholesale Grocers, Inc. v. Whitler, 413 N.E.2d 370, 373 (Ill. 1980); Lancaster Laboratories, Inc. v. Commonwealth, 631 A.2d 739, 741 n.1 (Pa. Commw. Ct. 1993); Grace v. State Tax Commission, 332 N.E.2d 886, 889 (N.Y. 1975); Roark Amusement & Vending, L.P. v. Combs, 2011 Tex. App. LEXIS 632, *12 (Tex. Ct. App. 2011).
  5. American Oil Co. v. Mahin, 273 N.E.2d 818, 822-23 (Ill. 1971); Mississippi River Fuel Corp. v. Illinois Commerce Commission, 116 N.E.2d 394, 397 (Ill. 1953).
  6. American Oil Co., 273 N.E.2d at 822-23.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Reed Smith | Attorney Advertising

Written by:

Reed Smith
Contact
more
less

Reed Smith on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!