Was cloud-streamed dental patient-education video subject to Illinois sales and use tax when customers received no property or software?

Plain-English summary

Cloud access to streamed patient-education videos generally was not subject to the listed Illinois transaction taxes if the customer received no software or other tangible personal property. The requester planned to replace physical dental-education DVDs with hosted streaming presentations that patients could view at a dental office but could not save or copy.

The Department distinguished several categories:

• Physical media such as DVDs, CDs, and CD-ROMs were taxable tangible personal property.
• Information or data transferred or downloaded electronically was not considered tangible personal property.
• Canned software was taxable tangible personal property even when transmitted electronically.
• Custom software might not be a taxable retail sale, and a software license meeting every criterion in 86 Ill. Adm. Code 130.1935(a)(1) could avoid Retailers' Occupation Tax.
• In general, access to a database of information without any software or tangible-property transfer did not create Retailers' Occupation, Use, Service Occupation, or Service Use Tax liability.

The GIL supplied those rules but did not make a binding classification of the proposed streaming-video product.

What this means for you

For a hosted-content product, the key question was what the customer actually received. View-only access with no download, copy, software transfer, or physical media fit the Department's general nontaxable-access description. Providing a DVD, canned software, or another item of tangible personal property could change the result.

Common questions

Q: Were the seller's physical DVDs taxable?
A: Yes. The letter says DVDs and similar physical media were subject to Retailers' Occupation Tax.

Q: Was electronically delivered information tangible personal property?
A: No, but canned computer software remained taxable tangible personal property even when transferred electronically.

Q: Did the Department conclusively classify this streaming service?
A: No. It gave general rules and said database access without software or tangible property generally did not trigger the listed taxes.

Subject

Miscellaneous

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2011.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2011/st-11-0052.pdf

Original ruling text

ST 11-0052-GIL 06/30/2011 MISCELLANEOUS
If no tangible personal property is transferred to customers, then no Illinois Retailers'
Occupation Tax, Use Tax, Service Occupation Tax Act, or Service Use Tax liability would be
incurred on the sales to those customers. See 86 Ill. Adm. Code 130.301. (This is a GIL.)

June 30, 2011

Dear Xxxxx:
This letter is in response to your letter dated June 6, 2011, 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:
COMPANY is a retailer of dental supplies and equipment with nexus in your state.
I would like a determination of the taxability of these items.
We sell the ABC line of informational DVD presentations used to help a dentist explain a
particular procedure to their patients. ABC is coming out with a new product line for
which the presentations will be hosted by COMPANY as a cloud based streaming video
service.
The service will be sold to a dental practice, with the price based on the number of
simultaneous connections allowed. The dentist’s patients will view the presentation at
the dentist’s office. There will not be a way to save or copy the presentation; they will
only be able to be viewed as streaming video.
We are requesting a ruling on exactly how this product should be defined. Is this simply
streaming video similar to renting a movie, is it an online information service or is it an
online training class.
Based on the answer to that question, is this product considered taxable in your state at
either the full or a special rate.

If there are any questions please contact me.

DEPARTMENT’S RESPONSE:
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. Items such as VHS tapes, DVDs, CDs and CD-ROMs, with
or without content, are subject to Retailers’ Occupation Tax.
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.
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.
In general, if a company provides access to a database of information and does not transfer
any software or other tangible personal property to its customers, the company would not incur Illinois
Retailers' Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax liability.
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