Jul 02, 2015

How will Chicago’s “cloud tax” impact businesses that use cloud services?

Chicago recently passed a law imposing a 9% tax on “electronic delivered amusements” (Netflix and Hulu, for example) and “nonpossessory computer leases” (cloud services such as AWS and Azure). While the tax on cloud based entertainment on top of existing sales tax is annoying, the additional cost for business seems like it could have some serious impact, as everything from Office 365 and Salesforce to cloud based big data analytics and disaster recovery will see a sudden cost increase of nearly 10%. How will companies react to this? Will is slow adoption of cloud services?
I think the biggest outrage you'll hear will actually be from consumers who have to pay an additional 9% for Netflix, iTunes, Spotify, Pandora, etc.

The biggest impact may well be tech start ups, which will see a significant source of their expenses increase overnight by nearly ten percent. Pretty much any tech oriented business is either using or providing cloud services, so this tax could have a very real, very negative impact very quickly. How can a cloud provider in Chicago compete if they are forced to add that 9% tax to their services? That's going to present a problem. Companies such as law firms that have large bills for cloud services such as Lexis-Nexis are going to have to spend significantly more money each month for those same services, instead of spending it on increased compensation, which ironically would be taxed at a higher rate anyway.

This also sends a message to potential start-ups that Chicago is not a friendly city for their business, and I suspect many will look elsewhere.

On the other hand, Chicago claims they will see millions of dollars in increased revenue. They estimate $12 million annually, which seems pretty low when you add in all of the companies that use cloud services, so I'm wondering if they are only counting the consumer/entertainment portion of the tax. I'm also doubtful they are accounting for the loss of revenue from decreased salaries and loss of potential new business because of this tax.
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