Did Illinois approve a service-company tax matrix, and how did it explain tax on property transferred with services, electronic data, software, and equipment leases?

Plain-English summary

Illinois did not validate the service company's item-by-item tax matrix. It instead explained that Retailers' Occupation and Use Taxes did not apply to services with no transfer of tangible personal property. When tangible property was transferred with a service, the serviceman could have Service Occupation Tax or Use Tax liability.

The GIL described four calculation methods: tax on the separately stated selling price of transferred property; tax using 50% of the entire service bill; Service Occupation Tax on cost for a registered de minimis serviceman; or Use Tax on cost for a de minimis serviceman not otherwise required to register. The first two methods could not use a tax base below the serviceman's cost. The letter stated the de minimis thresholds as less than 35% of annual service receipts, or 75% for pharmacists and graphic-arts producers.

Electronically transferred information or data was not tangible property. Canned software was tangible property regardless of delivery method, while custom software or a license meeting all Section 130.1935(a)(1) criteria could be nontaxable. Professional or consulting services with no tangible transfer produced no Service Occupation or Use Tax, but reports, CDs, manuals, or seminar materials could create tax consequences.

For leases, a nominal purchase option generally indicated a taxable conditional sale. In a true lease, the lessor was the end user and owed Use Tax on cost; Illinois imposed no tax on rental receipts, and the lessor could not pass its liability through as "tax," although the parties could contract for reimbursement.

What this means for you

Classify the actual deliverables and contract before assigning a matrix code. Track tangible-property cost, software-license terms, de minimis status, registration, and lease purchase options.

Common questions

Q: Did the Department approve the requester's matrix labels?
A: No. It said it could not approve privately issued publications or documents.

Q: Is an electronically delivered report tangible personal property?
A: Information or data transferred electronically was not tangible property, but canned software was treated differently.

Q: Who owed tax in a true equipment lease?
A: The lessor owed Use Tax on its cost; the GIL said rental receipts and the lessee were not taxed by Illinois under those rules.

Citations and references

• 35 ILCS 120/2 and 35 ILCS 105/3
• 86 Ill. Adm. Code 140.101, 140.106, 140.108, and 140.109
• 86 Ill. Adm. Code 130.2105(a)(3) and 130.1935
• 86 Ill. Adm. Code 140.129
• 86 Ill. Adm. Code 130.2010, 130.220, and 150.310(a)(3)
• 2 Ill. Adm. Code 1200.110 and 1200.120

Subject

Service Occupation Tax

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2010.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2010/st-10-0061.pdf

Original ruling text

ST 10-0061-GIL 08/03/2010 SERVICE OCCUPATION TAX
The Service Occupation Tax is a tax imposed upon servicemen engaged in the business of
making sales of service in this State, based on the tangible personal property transferred
incident to sales of service. See 86 Ill. Adm. Code Part 140. (This is a GIL.)

August 3, 2010

Dear Xxxxx:
This letter is in response to your letter dated June 16, 2010, in which you request information.
The Department issues two types of letter rulings. Private Letter Rulings (“PLRs”) are issued by the
Department in response to specific taxpayer inquiries concerning the application of a tax statute or
rule to a particular fact situation. A PLR is binding on the Department, but only as to the taxpayer
who is the subject of the request for ruling and only to the extent the facts recited in the PLR are
correct and complete. Persons seeking PLRs must comply with the procedures for PLRs found in the
Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General Information Letter
(“GIL”) is to direct taxpayers to Department regulations or other sources of information regarding the
topic about which they have inquired. A GIL is not a statement of Department policy and is not
binding on the Department. See 2 Ill. Adm. Code 1200.120. You may access our website at
www.tax.illinois.gov to review regulations, letter rulings and other types of information relevant to your
inquiry.
The nature of your inquiry and the information you have provided require that we respond with
a GIL. In your letter you have stated and made inquiry as follows:
We are in need of your guidance regarding the attached tax matrix that we have created
for one of our clients in the services industry. In summary, Client X provides their
customers with whatever services their customers need (see variety on attachment),
whether in an outsource situation or a temporary staffing situation. They are what we
would call a job shop for service needs when a company lacks the equipment or staffing
to complete an administrative type or project function.
If your state taxes staffing services, please also respond with the tax treatment for both
supervised and unsupervised contracts. Client X may send in their person for the
customer to direct or Client X may be hired to provide full management assistance and
oversees the staffing. For the services listed, the assistance may occur at the customer
site or Client X’s office.
Please review the attached tax matrix for all listed categories and redline as needed.
Please also provide us with the applicable statutory or regulation sites or
publications/bulletins that will help support how your state taxes these services.
We really appreciate your assistance with this inquiry. In an effort to implement proper
procedures yet for 2010, a response prior by July 31 would be greatly appreciated. Do

not hesitate to contact me with any questions or if you would like a copy of the matrix in
electronic format to make your comments, revisions or enhancements.

TAX MATRIX 2010
Short Description

IL

ACCOUNT MANAGEMENT
NT
BINDING SERVICES
NT
COMPUTER SERVICES (IT Services, Help Desk, Asset
Management, Managing the computers, Back-up Activity)
COST RECOVERY
NT
DATA PROCESSING SERVICES
DESKTOP PUBLISHING (Excel files, Graphic Arts/Graphic
Design/Wordprocessing)
9
DESIGN SERVICES (same as Desktop Publishing)
9
EQUIPMENT RENTAL
9c
FAXING (Must separately state supplies, equipment and labor)
GENERAL OFFICE SERVICES
NT
HOSPITALITY (greeting people, setting up conference rooms, etc.) NT
MAIL (manage mail room; sort, delivery, processing UPS, Fedx
Labels, folding, enclosing, must separately state supplies,
equipment and labor)
MANAGEMENT FEES
NT
OVERTIME LABOR
NT
PRODUCT SALES
T
RECORDS MANAGEMENT (maintaining paperwork, filings,
NT
HR filings)
REPRO( (Must separately state supplies, equipment and labor)
SCANNING (Must separately state supplies, equipment and labor)
SHIPPING/DELIVERY FEES
9a
SUPPLY MANAGEMENT (maintain office supplies,
NT
paper stocking, etc.)
TEMP STAFFING SERVICES
NT
TRAINING SERVICES
*9b
TRAVEL EXPENSES
NT

9
9

NT

*9a

NT
NT

9 – If leads to a tangible product, such as a CD, the transaction becomes taxable, if

separately state [sic] service, the service remains exempt. See Reg. 130.1935; 9a –
Shipping is exempt if separately stated and optional, if bundled entire transaction is
taxable Reg. 130.415, if shipping is manatory [sic] than [sic] taxable. 9b – Training is
taxable however the manuals if given away are exempt, if sold, becomes taxable. 9c –
Rental contract verbage [sic] determines taxability or if it is equipment that is leased to
own.

DEPARTMENT’S RESPONSE:
The Department cannot approve publications or documents other than those issued by the
Department of Revenue. However, we hope the following information will provide sufficient guidance
to answer your questions.

The Illinois Retailers' Occupation Tax Act imposes a tax upon persons engaged in this State in
the business of selling tangible personal property to purchasers for use or consumption. 35 ILCS
120/2; 86 Ill. Adm. Code 130.101. In Illinois, Use Tax is imposed on the privilege of using, in this
State, any kind of tangible personal property that is purchased anywhere at retail from a retailer. 35
ILCS 105/3; 86 Ill. Adm. Code 150.101. These taxes comprise what is commonly known as "sales"
tax in Illinois. If the purchases occur in Illinois, the purchasers must pay the Use Tax to the retailer at
the time of purchase. The retailers are then allowed to retain the amount of Use Tax paid to
reimburse themselves for their Retailers' Occupation Tax liability incurred on those sales. If the
purchases occur outside Illinois, purchasers must self assess their Use Tax liability and remit it
directly to the Department.
Illinois Retailers' Occupation and Use Taxes do not apply to sales of service that do not involve
the transfer of tangible personal property to customers. However, if tangible personal property is
transferred incident to sales of service, this will result in either Service Occupation Tax liability or Use
Tax liability for the servicemen depending upon his activities. For your general information see of 86
Ill. Adm. Code 140.101 through 140.109 regarding sales of service and Service Occupation Tax.
Under the Service Occupation Tax Act, businesses providing services (i.e. servicemen) are
taxed on tangible personal property transferred as an incident to sales of service. See 86 Ill. Adm.
Code 140.101. The purchase of tangible personal property that is transferred to the service customer
may result in either Service Occupation Tax liability or Use Tax liability for the servicemen depending
upon his activities. The serviceman’s liability may be calculated in one of four ways: (1) separately
stated selling price of tangible personal property transferred incident to service; (2) 50% of the
serviceman's entire bill; (3) Service Occupation Tax on the serviceman's cost price if the serviceman
is a registered de minimis serviceman; or (4) Use Tax on the serviceman's cost price if the
serviceman is a de minimis serviceman and is not otherwise required to be registered under
Section 2a of the Retailers' Occupation Tax Act.
Using the first method, servicemen may separately state the selling price of each item
transferred as a result of the sale of service. The tax is then calculated on the separately-stated
selling price of the tangible personal property transferred. If the servicemen do not separately state
the selling price of the tangible personal property transferred, they must use 50% of the entire bill to
the service customer as the tax base. Both of the above methods provide that in no event may the
tax base be less than the servicemen's cost price of the tangible personal property transferred. See
86 Ill. Adm. Code 140.106.
The third way servicemen may account for their tax liability only applies to de minimis
servicemen who have either chosen to be registered or are required to be registered because they
incur Retailers' Occupation Tax liability with respect to a portion of their business. See 86 Ill. Adm.
Code 140.109. Servicemen may qualify as de minimis if they determine that the annual aggregate
cost price of tangible personal property transferred as an incident of the sale of service is less than
35% of the total annual gross receipts from service transactions (75% in the case of pharmacists and
persons engaged in graphics arts production). Servicemen no longer have the option of determining
whether they are de minimis using a transaction by transaction basis. Registered de minimis
servicemen are authorized to pay Service Occupation Tax (which includes local taxes) based upon
their cost price of tangible personal property transferred incident to the sale of service. Such
servicemen should give suppliers resale certificates and remit Service Occupation Tax using the
Service Occupation Tax rates for their locations. Such servicemen also collect a corresponding
amount of Service Use Tax from their customers, absent an exemption.

The final method of determining tax liability may be used by de minimis servicemen that are
not otherwise required to be registered under Section 2a of the Retailers' Occupation Tax Act. Such
de minimis servicemen handle their tax liability by paying Use Tax to their suppliers. If their suppliers
are not registered to collect and remit tax, the servicemen must register, self-assess and remit Use
Tax to the Department. The servicemen are considered to be the end-users of the tangible personal
property transferred incident to service. Consequently, they are not authorized to collect a "tax" from
the service customers. See 86 Ill. Adm. Code 140.108.
Information or data that is electronically transferred or downloaded is not considered the
transfer of tangible personal property in this State. See 86 Ill. Adm. Code 130.2105(a)(3). However,
canned computer software is considered taxable tangible personal property regardless of the form in
which it is transferred or transmitted, including tape, disc, card, electronic means or other media. See
86 Ill. Adm. Code 130. 1935. If the computer software consists of custom computer programs, then
the sales of such software may not be taxable retail sales. See Section 130.1935(c). If transactions
for the licensing of computer software meet all of the criteria provided in Section 130.1935(a)(1),
neither the transfer of the software or the subsequent software updates will be subject to Retailers’
Occupation Tax.
The provision of professional or consulting services that do not include the transfer of tangible
personal property with the provision of such services does not result in Service Occupation Tax or
Use Tax liability. The transfer of any tangible personal property such as, for example, written reports,
tangible media (CDs) and training manuals incident to a sale of service would result in Service
Occupation Tax liability or Use Tax liability. See 86 Ill. Adm. Code 140.01 et seq. In regards to
workshops or training classes when tangible personal property may be transferred to participants,
please see the Department’s regulations on the taxation of seminar materials at 86 Ill. Adm. Code
140.129.
The State of Illinois taxes leases differently for Retailers’ Occupation Tax and Use Tax
purposes than the majority of other states. For Illinois sales tax purposes, there are two types of
leasing situations: conditional sales and true leases.
A conditional sale is usually characterized by a nominal or one dollar purchase option at the
close of the lease term. Stated otherwise, if a lessor is guaranteed at the time of the lease that the
leased property will be sold, this transaction is considered to be a conditional sale at the outset of the
transaction. Persons who purchase items for resale under conditional sales contracts can avoid
paying tax to suppliers by providing certificates of resale that contain all the information set forth in 86
Ill. Adm. Code 130.1405. All receipts received by a lessor/retailer under a conditional sales contract
are subject to Retailers’ Occupation Tax. See 86 Ill. Adm. Code 130.2010.
A true lease generally has no buy out provision at the close of the lease. If a buy-out provision
does exist, it must be a fair market value buy-out option in order to maintain the character of the true
lease. Lessors of tangible personal property under true leases in Illinois are deemed end users of the
property to be leased. See 86 Ill. Adm. Code 130.220. As end users of tangible personal property
located in Illinois, lessors owe Use Tax on their cost price of such property.
The State of Illinois imposes no tax on rental receipts. Consequently, lessees incur no tax
liability. As stated above, in the case of a true lease, the lessors of the property being used in Illinois
would be the parties with Use Tax obligations. The lessors would either pay their suppliers, if their
suppliers were registered to collect Use Tax, or would self-assess and remit the tax to the
Department. If the lessors already paid taxes in another state with respect to the acquisition of the
tangible personal property, they would be exempt from Use Tax to the extent of the amount of such
tax properly due and paid in such other state. See subsection (a)(3) of 86 Ill. Adm. Code 150.310.

Under Illinois law, lessors may not “pass through” their tax obligation to the lessees as taxes.
However, lessors and lessees may make private contractual arrangements for a reimbursement of
the tax to be paid by the lessees. If lessors and lessees have made private agreements where the
lessees agree to reimburse the lessors for the amount of the tax paid, then the lessees are obligated
to fulfill the terms of the private contractual agreements.
I hope this information is helpful. If you require additional information, please visit our website
at www.tax.illinois.gov or contact the Department’s Taxpayer Information Division at (217) 782-3336.

Very truly yours,

Richard S. Wolters
Associate Counsel
RSW:msk