Did an out-of-state inventory-software company have Illinois nexus when warehouses used its program and it earned a per-pallet spread?

Plain-English summary

Illinois did not decide whether the inventory-software company had nexus. It said the factual record needed for nexus is often best gathered by an auditor and gave only general rules.

The requester described an out-of-state company with no Illinois real or personal property, payroll, or inventory and only infrequent travel. Its program helped manufacturers and warehouse operators track stock and arrange pallet shipments. The warehouse billed the software company by pallets housed and shipped; the software company billed the manufacturer at a higher per-pallet amount.

Software taxability depended on canned versus custom software

The GIL says canned computer software was generally a taxable retail sale regardless of how it was delivered, including electronic download. Custom software prepared to the customer's special order might not be a taxable retail sale under 86 Ill. Adm. Code 130.1935.

The Department did not decide which category applied to the requester's program.

The nexus discussion was general and historical

An Illinois retailer accepted purchase orders in Illinois or maintained Illinois inventory used to fill Illinois orders. A retailer maintaining a place of business in Illinois registered as a Use Tax collector.

Under the Quill framework discussed in 2011, physical presence could include an agent or representative, not just an office. Repetitive delivery and installation could also trigger Use Tax collection responsibilities.

An out-of-state retailer without sufficient nexus did not collect Illinois Use Tax, but its Illinois customers still had to self-assess and remit the tax on taxable purchases.

What this means for you

Software providers using third-party warehouses

This letter does not resolve whether the warehouse relationship or per-pallet payment structure created nexus. It supplies audit-oriented principles only.

Sellers of software

Classify the software separately from the nexus question. Canned software was described as taxable even when downloaded; custom software required preparation to the customer's special order and might not be taxable.

Businesses evaluating current nexus

The physical-presence discussion reflects the framework cited in 2011 and is not a current safe harbor. The GIL is nonbinding and expressly leaves the taxpayer's nexus unresolved.

Common questions

Q: Did Illinois rule that the warehouse created nexus?
A: No. It declined to decide nexus.

Q: Was electronically downloaded canned software taxable?
A: Generally yes under the rule described.

Q: Was custom software taxable?
A: Software prepared to a customer's special order might not be a taxable retail sale; the GIL did not classify the requester's program.

Q: Who paid Use Tax if an out-of-state seller lacked nexus?
A: The Illinois customer had to self-assess and remit it.

Citations and references

• 35 ILCS 120/2 and 35 ILCS 105/3 — Retailers' Occupation Tax and Use Tax.
• 86 Ill. Adm. Code 130.1935 — canned and custom computer software.
• 86 Ill. Adm. Code 150.201(i) and 150.801 — retailer maintaining a place of business and Use Tax registration.
• Quill Corp. v. North Dakota, 112 S. Ct. 1904 (1992) — nexus framework discussed in the GIL.
• Brown's Furniture, Inc. v. Zehnder, 171 Ill. 2d 410 (1996) — Illinois physical-presence authority cited.

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-11-0107.pdf

Original ruling text

ST 11-0107-GIL 12/28/2011 NEXUS
This letter discusses nexus. See Quill Corp. v. North Dakota, 112 S.Ct. 1904 (1992). (This is a
GIL.)

December 28, 2011

Dear Xxxxx:
This letter is in response to your letter dated November 17, 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:
A General Information Letter is being requested to discuss nexus and any filing
requirements for the following taxpayer.
The taxpayer, a corporation of a foreign state, has developed a unique computer program
that tracks inventory for manufacturers and distributors/warehouse operators.
This taxpayer does not own or rent any real or personal property within the borders of
Illinois, have any payroll in Illinois or own inventory in Illinois. Travel to Illinois, if any, will
be infrequent by the owner or employees of the taxpayer.
In each transaction, there will be four parties involved- the taxpayer, a manufacturer, the
warehouse operator and the customer.
The customer will contact the manufacturer as to what product and how much product it
wants shipped to its store. The manufacturer, utilizing the taxpayer’s computer program,
will determine if all or part of the order can be fulfilled and notify the warehouse operator
to fulfill the order. The warehouse operator will then fulfill the order by placing the
manufactured goods on pallets and then having the pallets shipped by trucks. None of
these trucks are owned or leased by the taxpayer.

In addition to aiding in the shipping process, the computer program is also utilized to let
both the manufacturer and warehouse operator know what is in stock at the warehouse.
Once the order is completed, the warehouse operator bills the taxpayer based on the
number of pallets it has housed and shipped.
Once the taxpayer gets the invoice from the warehouse, it then bills the manufacturer for
the use of its program based on the number of pallets that were shipped on behalf of the
manufacturer. The difference between what it pays the warehouse operator per pallet
and what it collects from the manufacturer per pallet is the taxpayer’s source of income.
Please comment if there is nexus created between the taxpayer and Illinois and what
filing requirements, if any, exist.
If there are any questions, do not hesitate to contact us.

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. 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.
Generally, sales of “canned” computer software are taxable retail sales in Illinois. Sales of
canned software are taxable regardless of the means of delivery. For instance, the transfer or sale of
canned computer software downloaded electronically would be taxable. However, if the computer
software consists of custom computer programs, then the sales of such software may not be taxable
retail sales. See 86 Ill. Adm. Code 130.1935. Custom computer programs or software must be
prepared to the special order of the customer.
The Department declines to make nexus determinations in the context of Private Letter Rulings
or General Information Letters because the amount of information required to make those
determinations is often best gathered by an auditor. The following information outlines the principles
of nexus. We hope it is helpful to you.
An “Illinois Retailer” is one who either accepts purchase orders in the State of Illinois or
maintains an inventory in Illinois and fills Illinois orders from that inventory. The Illinois Retailer is then
liable for Retailers' Occupation Tax on gross receipts from sales and must collect the corresponding
Use Tax incurred by the purchasers.
Another type of retailer is the retailer maintaining a place of business in Illinois. The definition
of a “retailer maintaining a place of business in Illinois” is described in 86 Ill. Adm. Code 150.201(i).
This type of retailer is required to register with the State as an Illinois Use Tax collector. See 86 Ill.
Adm. Code 150.801. The retailer must collect and remit Use Tax to the State on behalf of the

retailer’s Illinois customers even though the retailer does not incur any Retailers' Occupation Tax
liability.
The United States Supreme Court in Quill Corp. v. North Dakota, 112 S.Ct. 1904 (1992), set
forth the current guidelines for determining what nexus requirements must be met before a person is
properly subject to a state's tax laws. The Supreme Court has set out a 2-prong test for nexus. The
first prong is whether the Due Process Clause is satisfied. Due process will be satisfied if the person
or entity purposely avails itself or himself of the benefits of an economic market in a forum state. Quill
at 1910.
The second prong of the Supreme Court's nexus test requires that, if due process
requirements have been satisfied, the person or entity must have physical presence in the forum
state to satisfy the Commerce Clause. A physical presence is not limited to an office or other physical
building. Under Illinois law, it also includes the presence of any agent or representative of the seller.
The representative need not be a sales representative. Any type of physical presence in the State of
Illinois, including the vendor’s delivery and installation of his product on a repetitive basis, will trigger
Use Tax collection responsibilities. Please refer to Brown’s Furniture, Inc. v. Zehnder, 171 Ill.2d 410,
(1996).
The final type of retailer is the out-of-State retailer that does not have sufficient nexus with
Illinois to be required to submit to Illinois tax laws. A retailer in this situation does not incur Retailers’
Occupation Tax on sales into Illinois and is not required to collect Use Tax on behalf of its Illinois
customers. However, the retailer’s Illinois customers will still incur Use Tax liability on the purchase of
the goods and have a duty to self-assess and remit their Use Tax liability directly to the State.
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