Did Illinois decide whether subscriptions to remotely hosted application-service-provider platforms were taxable software or nontaxable information services?

Plain-English summary

The Department did not decide whether remotely hosted ASP subscriptions were taxable software or nontaxable information access. The provider model used external servers, installed no software on subscriber computers, and gave customers access to hosted applications and information.

Illinois said ASP transactions varied too much for a general answer in an individual letter. The Department was researching the products and services and intended to address them through formal rulemaking.

Until then, each ASP had to determine under the statutory definition in 35 ILCS 120/2-25 whether what it sold or leased was “computer software.” The GIL did not endorse the requester's argument that subscription payments were solely for electronically transferred information.

What this means for you

Do not infer an exemption from cloud delivery or the absence of local installation. Analyze the customer's actual rights, functionality, data access, and contract under current Illinois law.

Common questions

Q: Did the GIL hold ASP subscriptions exempt?
A: No.

Q: Did it hold every ASP subscription taxable?
A: No.

Q: What did providers have to do?
A: Apply the statutory computer-software definition to their own products pending broader guidance.

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-10-0089.pdf

Original ruling text

ST 10-0089-GIL 10/05/2010 COMPUTER SOFTWARE
This letter concerns the taxation of computer software transactions. See 86 Ill. Adm. Code
130.1935. (This is a GIL.)

October 5, 2010

Dear Xxxxx:
This letter is in response to your letter dated July 27, 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:
I work for COMPANY, which provides indirect tax calculation services for clients. I am
currently researching product taxability issues connected with sales and use taxes, and
I hope you can help me with a particular question on the taxability of certain
transactions.
Specifically, I am researching the sales tax treatment of application service providers
(ASPs). ASP’s are entities that deploy, host and manage access to a packaged
application. The ASP is maintained on external servers in a centrally managed facility.
Multiple parties can access this application through the internet or network on a
subscription basis. All the information and code for the ASP is maintained on the
servers in the facility; no software is installed or maintained on the subscriber’s
computer. The subscriber is allowed access to the application and information hosted
in the ASP, but cannot access any of the software programming.
According to ILCS § 120/2-25, computer software is defined, in part, as ‘data or
instructions to be used directly or indirectly in a computer to bring about a certain result
in any form in which those statements, data or instructions may be embodied,
transmitted or fixed, by any method now known or hereafter developed.’ Ill. Admin.
Code 130.1935(a) states that ‘computer software means all types of software, including
[...] applicational.’ This seems to include ASPs in that an ASP will provide data from a
database that is transmitted to the subscribing customer via internet. However, a

subscriber is not paying for the software of an ASP; rather they are paying for the
information or data contained in the database that is accessed through the ASP (which,
according to 86 Ill. Admin Code 130.2105(a)(3), would be electronically transferred
information and therefore exempt). In addition, an ASP is not designed to provide data
which will cause a computer to act in a certain manner. The true purpose of an ASP is
to provide access to stored data via the internet. Therefore, it is doubtful that an ASP is
computer software.
I have encountered some difficulty in researching how the Dept. of Revenue taxes the
transaction of ASP subscriptions. There are many private letter rulings and general
information letters on computer software, canned software and custom software, but
none that discuss ASPs. As recently as June 2009, the Dept. of Revenue has
consistently declined to state whether ASPs are taxable software or non-taxable
services, and refers inquiring taxpayers to the general computer software statutes and
regulations (see, e.g., ST 09-0085-GIL).
Based on the lack of clarity on this issue, I am asking for a ruling on the taxability of
ASPs that may be relied upon by our clients. There are not statutory or regulatory
provisions that directly apply to this transaction. Furthermore, the current regulations on
computer software do not apply to ASPs because ASPs are not software as defined in
ILCS § 120/2-25. I believe that a ruling on the taxability of ASPs is absolutely
necessary in order for accurate reporting and remittance of sales tax by a taxpayer.
If there is any other information required by your office in considering this request, I will
be happy to provide it. Thank you in advance for your time and assistance, and I look
forward to hearing from you.

DEPARTMENT’S RESPONSE:
As stated in ST 09-0085 (GIL), the Department believes that the proper forum for providing
guidance regarding transactions involving computer software Application Service Providers (ASPs) is
through a formal administrative rulemaking process rather than through individual inquires such as
letter ruling requests. The Department at present is in the process of researching the nature and type
of services and products provided by ASPs, including discussions with industry participants. The
Department has found, based on the discussions to date and previous letters received by the
Department, that there is no universal agreement regarding the nature of services or products that
ASPs provide to their customers.
When the Department it has completed its review of the products or services ASPs provide to
their customers, it intends to propose regulations for adoption. Until that time, ASPs will have to
determine, based on the definition contained in Section 2-25 of the Retailers’ Occupation Tax Act,
whether the products they sell or lease are “computer software.”
Very truly yours,

Richard S. Wolters
Associate Counsel
RSW:msk