Yes, Chicago Has a “Cloud Tax” and Here’s What it Means

Chicago is known for its museums, lakefront, baseball, hot dogs, skyscrapers, deep dish pizza and now, a cloud tax?

The city has a 9 percent tax on online databases and streaming entertainment services that use the cloud. The Verge explains,

“Chicago’s new tax is actually composed of two recent rulings made by the city’s Department of Finance: one covering ‘electronically delivered amusements’ and another covering ‘nonpossessory computer leases.’ Each one takes an existing tax law and extends it to levy an extra 9 percent tax on certain types of online services.”

From Netflix subscriptions to Lexis Nexis and SaaS customers, users will have to pay a 9 percent tax to use those services (that use the cloud) within city limits. Why are Chicago taxes going after the cloud? The city believes it’s losing money from businesses, including property and sales taxes to cloud services. People are streaming content on their devices instead of going to local stores and purchasing it.

With this tax in place, how will it affect the internet as well as the IT and tech industry moving forward?

What it means

First, the cloud tax not only affects media subscribers, but also small tech organizations and startups that rely on the cloud services, making Chicagoland less attractive for the tech industry. In an email to Blue Sky, Terry Howerton, the co-founder at TechNexus wrote, “Every tech startup in Chicago is either using cloud computing services or selling them, and the city being the first to set this precedent puts us at a disadvantage to every other major tech hub…or even our own suburbs.” If more cities adopt this taxing policy, it could be an issue for company’s basic IT virtualization principles, such as operating systems, data storage devices and computer networks where the cloud service is being used.

Furthermore, this tax can affect how businesses run overall. Financial Times writes, “For multinationals, the shift tax landscape can inflict unexpected damage to revenue streams, profit margins, partnerships, compliance risk, brand reputation–all these and more business aspects of global operations today.” If the cloud tax expands to other services, businesses will have to rethink how to run their organization’s network and other cloud services.

In addition, the cloud tax is challenging the rules of the internet. This tax brings issues with 1990’s legislation, including the Internet Tax Freedom Act, which prohibits federal, state and local governments from taxing internet access and electronic commerce—and Telecommunications Act of 1996, which allows anyone to enter any communication business and compete in any market against each other. The cloud tax, though helping government gain lost tax revenues, is pushing legal limits.

The cloud tax is something we will see expand and be challenged in the years to come. Currently, companies like Netflix are making changes so the tax is incorporated to their monthly billing for customers. In addition, organizations are starting to look for locations outside of the city to house their cloud computing services/servers to avoid the tax. Look for this tax to influence the future on how businesses are run and how we enjoy streaming media.

All and all, the cloud has revolutionized how we store data, run business and consume media—and the cloud tax will revolutionize the tech and media industry in the years to come.

Yes, Chicago Has a “Cloud Tax” and Here’s What it Means