Did Illinois decide whether a remotely accessed hosted email-marketing platform and its setup, messaging, and consulting fees were taxable?

Plain-English summary

Illinois did not decide whether the hosted email-marketing platform or its setup, messaging, consulting, and support charges were taxable. The Department said the proper forum for Application Service Provider, software-hosting, and web-based-software taxation was formal administrative rulemaking rather than individual inquiries.

The GIL instead gave general 2010 rules. Services without a transfer of tangible personal property were outside Retailers' Occupation and Use Taxes, while service transactions involving items such as printed reports or training manuals could trigger Service Occupation Tax or Use Tax. Electronically transferred information or data was not tangible personal property, but canned software remained taxable regardless of delivery method.

Custom software could be nontaxable, and a canned-software license could avoid Retailers' Occupation Tax only if it met all five conditions in section 130.1935(a)(1). Clicking "accept" online did not satisfy the rule's signed-written-agreement condition. Separately stated installation, phone support, training, and seminar charges could be exempt when no tangible property was transferred. Non-separately-stated canned-software updates made an entire maintenance agreement taxable.

What this means for you

Do not use this GIL as a taxability determination for SaaS or hosted marketing services. Identify every deliverable, distinguish data from software, review the license against all five regulatory conditions, and separately state service and update charges while checking current Illinois law.

Common questions

Q: Did the lack of a software download make the hosted service nontaxable?
A: The Department did not decide that question. It expressly deferred hosted-software taxation to rulemaking.

Q: Was ordinary clickwrap acceptance enough for the license exemption?
A: No. The GIL said clicking "accept" did not constitute the signed written agreement required by the rule.

Citations and references

• 86 Ill. Adm. Code 130.101 and 150.101 (Retailers' Occupation Tax and Use Tax)
• 86 Ill. Adm. Code 140.101 through 140.109 (sales of service)
• 86 Ill. Adm. Code 130.2105(a)(3) (electronic information and data)
• 86 Ill. Adm. Code 130.1935(a)(1), (b), and (c) (computer software)
• 2 Ill. Adm. Code 1200.120 (GILs)

Subject

Computer Software

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-10-0077.pdf

Original ruling text

ST 10-0077-GIL 08/23/2010 COMPUTER SOFTWARE
This letter concerns the taxation of computer software transactions. See 86 Ill. Adm. Code
130.1935. (This is a GIL.)

August 23, 2010

Dear Xxxxx:
This letter is in response to your letter dated May 17, 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:
This letter represents a request for a written ruling or interpretation from your State on
the application of sales tax in the situations enumerated here below.
Illustrative Facts:
(01) Client Company, “The Company”, provides hosted marketing services to clients
that use email, direct mail, and other marketing channels to reach their customer bases.
Serving various industries, the company’s branded software and related services help
clients evaluate their potential and existing customers and then plan and implement
marketing campaigns; because its software platform is hosted, it can easily apply its
software to different types of clients or adapt it to existing clients’ changing needs. The
Company’s clients include Airlines, Hotels, Retail Sales Stores, Auto Rental companies
and a host of other Commercial and Retailing establishments. The Company enables
its customers to increase revenue and customer engagement through successful email
and cross-channel marketing.
(02) The Company is headquartered in STATE where all of its product development
and hosting is performed. The Company has sales people in various states, including
your, [sic] who work out of the Company Office in your State, solicit sales and forward
the same to the company headquarter [sic] for acceptance.

(03) The Company has developed a proprietary program ‘PROGRAM’ that allows
customers to create, manage and deliver email campaigns. The Company’s software
enables users to take information that they accumulate on their customers or prospects
(such as their email address, demographic data, web browsing history and any other
data about the customer) and apply search criteria against that information to derive a
list of targeted recipients to whom a message is to be sent. Using the Customers [sic]
documents and marketing materials (’Content’), a customized message can then be
sent to each of the targeted recipients. Customers load their own content and data into
a storage area onto computer storage the company maintains in its data centers. The
software matches the content for each recipient based on the criteria that the Customer
has entered into the software. The software then compiles the message and sends the
message to the recipient. Customers load their own Content and data via the Internet
and their data is kept separate from any data belonging to other Customers of the
Company. The software does track the history and activity of emails that Customers
send, which is stored and made available to the Customer via web access. The
Company does not sell or provide marketing data. The Customer cannot
download any of the SOFTWARE to perform the functions on their own
computers.
(04) Customers of the Company use the PROGRAM to send targeted emails to their
prospects and customers. Emails are compiled from content and data that the
Customer owns and stores either in its own systems or on computers in the Company’s
data center. The Company never owns the data. That content and data is then
compiled in a way that customized messages are sent to the recipients based on
marketing campaigns or other types of communications the Customer wants to execute.
While the vast majority of messages are sent via email, they can also be sent to a
mobile device (e.g. cell phone or smart phone) or posted to a social site that the
customer maintains. Via the web access, Customers are able to monitor activity on
campaigns they have sent out, run reports on these campaigns and plan future
campaigns.
(05) The messages are sent out of the Company’s servers/data centers that are
located in STATE. The data centers host all of the software developed by the company,
contain all of the electronic storage where the data belonging to Customers is
maintained and houses all the hardware, software and communications infrastructure to
send out high volumes of messages. The equipment in these data centers also track
message activity, or in other words all of the events that have to message once it has
been sent (open rates, bounce rates etc). Any data a Customer may keep in the
system is stored in these data centers. Employees of the Customers use the
PROGRAM via a website that they log into. These employees may be located in any
location. For example, Customer X based out of Texas has an employee in Arizona
that logs into a website to use the PROGRAM located in STATE. The employee could
be located anywhere in the word and be able to access the PROGRAM as long as they
have an Internet connection.
(06) Subject to the payment of fees the Company grants to its customer an
unconditional and irrevocable non-exclusive, non-transferable License to use this
proprietary program for designated number of interactive users. Title to and ownership
of the License and all its proprietary items remain with the Company and no downloads
of the proprietary program is allowed to the customer’s computers. The agreement is
only for service.

The customer is charged the following fee depending on the customer order:
Set-Up Fee – for the initial setup of the Customer to enable them to use the
SOFTWARE.
Messaging Fee – charge to send messages. Customers pay for use of the PROGRAM
based on the volume of messages committed or actually sent if the commitment is
exceeded. The Company offers various package programs to its Customers. This
constitutes 80% of the company business.
Consulting Service Charges that include (i) training on use of the PROGRAM, (ii)
consulting on best practices, (iii) creative services to design messages and (iv) services
to help execute campaigns. Charges for these services are based on the type of
service and are either hourly or fixed rate. These services are primarily delivered out of
the Company offices in STATES via the Internet.
(07) The Company does not provide any tangible deliverables in to any state. The
Customer uses the PROGRAM to their targeted customers via emails who may be
located in the US or any part of the world. Customer’s employee may access the
Internet from any location in the US (or the world) to work on the PROGRAM that is on
a server located in STATE. It is not possible for the Company to identify the number of
messages sent to any given state in the US. Invoices are based on the Bill-to location of
the Customer.
Questions:
(1) Is the company required to register for Sales Tax in your State, even if the
Company has resident sales people soliciting orders in your State, given that the
Company only provides services to its Customers, of the nature described above and
provides no tangibles?
(2) The Company’s customers remotely access the Company’s server (via the Internet)
that is physically located in STATE. The SOFTWARE on the Company’s server that a
customer uses to create, manage and deliver email campaigns cannot be downloaded
on to the customer’s computer. Will your State consider such activity as a taxable event
in your State?
Will the answer change if the Company’s PROGRAM and software was on a server that
was located in your State?
(3) Is the Set-Up Fee taxable in your State? This is a one-time charge for the initial online setup to enable the Customer to use the SOFTWARE. The Company does not
provide on-site installations and no tangibles are delivered for the set-up.
(4) Is the Messaging Fee charged by the Company taxable in your State? There are
no tangible deliverables that the Company provides to its customers in your State. The
Company’s customers use the company software on its server located in STATE to
send email messages to its targeted customers. The targeted customer can be in any
part of the country/world. The Company does not monitor the location of its customer’s
targeted customers.

If taxable, is there an allocation basis if there is a way to determine the State of the
targeted customers of the Company’s customer?
If taxable, is there a special tax rate for such transactions? Is the tax rate based on the
Bill-to customer location that includes state, county, city, district and other local taxes?
(5) The Company bills its customers based on the billing location address (since there
are not tangibles delivered in your state). If the Messaging Fee is taxable in your State
will the answer change if the Company’s employees reside in another State and access
the PROGRAM from outside your State?
(6) Is Consulting Service Charge taxable in your State? The Company offers
professional services that include (i) training on use of the PROGRAM, (ii) consulting on
best practices, (iii) creative services to design messages and (iv) services to help
execute campaigns. Charges for these services are based on the type of service and
are either hourly or fixed rate. These services are delivered out of the Company offices
in STATES via the Internet.
Please provide the taxability rules for these services in your state. Does it make any
difference if the charges are bundled or not?
A prompt response will be greatly appreciated. If you have any question(s), please
contact me.

DEPARTMENT’S RESPONSE:
General information letters are used to direct taxpayers to the Department’s regulations and
other sources of information for general guidance. You may find the Department’s general information
letters helpful in regards to many of the issues raised in your request. The Department’s “Sunshine
Letter” rulings are located on the Department’s Internet website under the heading of
“Laws/Regs/Rulings.”
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. See 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. See 86 Ill. Adm. Code
150.101. These taxes comprise what is commonly known as "sales" tax in Illinois. 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 86 Ill. Adm. Code
140.101 through 140.109 regarding sales of service and Service Occupation Tax. Services that
involve the transfer of tangible personal property (such as, for example, written reports, other tangible
media and training manuals) incident to a sale of service may be subject to either Service Occupation
Tax liability or Use Tax liability.
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).
Custom computer programs or software are prepared to the special order of the customer. The
selection of pre-written or canned programs assembled by vendors into software packages does not
constitute custom software unless real and substantial changes are made to the programs or creation
of program interfacing logic. See Section 130.1935(c)(3).
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. A license of software is not a taxable retail sale if:
A)
B)
C)

D)

E)

It is evidenced by a written agreement signed by the licensor and the customer;
It restricts the customer’s duplication and use of the software;
It prohibits the customer from licensing, sublicensing or transferring the software to a
third party (except to a related party) without the permission and continued control of the
licensor;
The licensor has a policy of providing another copy at minimal or no charge if the
customer loses or damages the software, or permitting the licensee to make and keep
an archival copy, and such policy is either stated in the license agreement, supported by
the licensor's books and records, or supported by a notarized statement made under
penalties of perjury by the licensor; and
The customer must destroy or return all copies of the software to the licensor at
the end of the license period. This provision is deemed to be met, in the case of a
perpetual license, without being set forth in the license agreement.

Please note that acceptance of a software license agreement by clicking “accept” while online
is not considered “acceptance” sufficient enough to constitute a written agreement signed by the
licensor and the customer for purposes of subsection (a)(1)(A) of Section 130.1935. Charges for
updates of canned software are fully taxable pursuant to Section 130.1935. If the updates qualify as
custom software under Section 130.1935(c), they may not be taxable. But, if maintenance
agreements provide for updates of canned software, and the charges for those updates are not
separately stated and taxed, then the whole agreement would be taxable as sales of canned
software.
Assuming that any services provided, such as installation, phone support, training, and
seminars, do not require the transfer of tangible personal property to the recipients of those services,
charges for such services are exempt if they are separately stated from the selling price of canned
software. See Section 130.1935(b). If computer software training or other support services are
provided in conjunction with a sale of custom computer software or a license of computer software,
the charges for that training are not subject to tax.
Please note that the Department has determined that the proper forum to determine the
appropriate taxation of computer software Application Service Providers (ASPs), software hosting and
web-based software is through a formal administrative rulemaking process rather than on a case-bycase basis through individual inquiries.
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,

Debra M. Boggess
Associate Counsel
DMB:msk