Startups Express Concern Over Chicago’s Controversial Cloud Tax

While the cloud is often viewed as a flexible, productivity-boosting resource in IT, for Chicago businesses and residents, a new tax could make cloud services a little more costly.

On June 9, 2015, the Chicago Department of Finance issued rulings on two particular taxes — the Personal Property Lease Transaction Tax and the Amusement Tax — clarifying their scope and confirming that the taxes include cloud services, according to a report from ArsTechnica.

Through the Lease Transaction Tax, the city is now taxing common business uses of the cloud, such as real estate listings, car prices and economic statistics, as well as data processing and tax preparation. The Amusement Tax is focused on streaming services, such as Spotify and Netflix, that provide music, movies, games and satellite television, and imposes a 9 percent tax rate on use of those services.

With the city in financial turmoil as a result of the spiraling public-pension debt, it’s clear that city leaders are looking for ways to bring more money to the city’s drained coffers. Predictably, however, Chicago’s cloud tax was not well received by the city’s startup tech community.

Harper Reed, founder of mobile-commerce developer Modest, shared his thoughts on the tax with Crain’s Chicago Business.

“My initial concern was that I might have to charge our Chicago customers more. … Then there was this other part of it … where all cloud services would be taxed. This is a big thing,” he said.

Terry Howerton, co-founder of TechNexus, a venture collaborative focused on connecting large companies with startups, commented in an article in the Chicago Tribune. “Every tech startup 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,” he said.

Chicago mayor Rahm Emanuel, having positioned himself as a strong supporter of Chicago’s robust tech community, responded directly to the concerns expressed by members of 1871, a startup incubator in the city, and other startup voices in the community. The mayor’s office sent 1871 a statement on the city’s position on the cloud tax:

“…we will announce that the administration will be taking measures to provide relief to small businesses so as not to put them at a competitive disadvantage with their peers in other cities. It will take us a month or so to formalize the proposal, but it will basically exempt start-ups (based on revenue) from paying the tax. Obviously, a lot of legal issues here as this tax has been on the books for decades, but we are confident we can work through them.”

With cloud technologies transforming the way we live and work, issues are likely to continue to surface as things shift from physical infrastructures to digital infrastructures. And startups will have to lobby to ensure their voices and concerns are not drowned out in the reaction to emerging digital dynamics.