Was a remotely hosted email-marketing platform taxable as canned software or nontaxable as an online service in Illinois?

Plain-English summary

A company hosted its proprietary email-marketing platform on out-of-state servers. Clients accessed the software through the web, uploaded their own data and content, and could not download the platform. The company sought confirmation that its platform and related services were not subject to Illinois sales tax.

IDOR declined to give that requested result. It said the taxation of application service providers, software hosting, and web-based software should be determined through formal administrative rulemaking rather than case-by-case letters.

The GIL supplied general rules. Electronically transferred information or data was not tangible personal property, but canned software remained taxable even when delivered electronically. Custom software prepared to special order could be nontaxable. A software license avoided tax only if it met all five requirements in Section 130.1935(a)(1); clicking online acceptance did not satisfy the historical signed-writing requirement.

Canned-software updates were taxable. If a maintenance agreement included taxable updates without separately stating and taxing them, the entire agreement was taxable. Separately stated installation, phone support, training, and seminars could be exempt when they transferred no tangible property; training with custom software or a qualifying license was also nontaxable under the described rule.

Common questions

Did IDOR rule the hosted platform nontaxable? No.

Why not? It said hosted and web-based software should be addressed through rulemaking.

Were electronic data and canned software treated the same? No. Electronic data was not tangible, while canned software was taxable regardless of delivery method.

Citations and references

• 86 Ill. Adm. Code 130.2105(a)(3) and 130.1935
• 86 Ill. Adm. Code 140.101 through 140.109

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2012.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2012/st-12-0002.pdf

Original ruling text

ST 12-0002-GIL 01/06/2012 COMPUTER SOFTWARE
This letter concerns the taxation of computer software transactions. See 86 Ill. Adm. Code
130.1935. (This is a GIL.)

January 6, 2012

Dear Xxxxx:
This letter is in response to your letter dated September 27, 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:
ABC has employees in Illinois and has been appropriately filing income and payroll tax
returns with your state. We submitted a Voluntary Disclosure Agreement (‘VDA’) with
your state, but rescinded it after discussions with a representative of your state
indicated that our products and services were not subject to sales and use tax in Illinois.
In order to confirm this position, we request a written ruling or advisory opinion from
your state on the application of sales tax in the situations enumerated here below.
Illustrative Facts:
(01) ABC (or ‘the Company’), provides hosted marketing services to clients that use
email, direct mail and other marketing channels to reach their customers. Serving
various industries, the Company’s branded software platform and related services help
clients evaluate their potential and existing customers, and then plan and implement
marketing campaigns. Because its software platform is hosted, the Company can easily
accommodate 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 clients 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 who solicit
sales and forward orders to the Company’s headquarter [sic] for acceptance.
(03) The Company has developed a proprietary software platform, or ‘SOFTWARE,’
that allows customers to create, manage and deliver email campaigns. The Company’s
software platform 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 clients [sic] documents and marketing materials (‘content’), a customized
message can then be sent to each of the targeted recipients. Clients load their own
content and data onto computers the Company maintains in its data centers. The
software platform matches the content for each recipient based on the criteria that the
client has entered into the software platform. The software platform then compiles the
message and sends the message to the recipient. Clients load their own Content and
data via the Internet and their data is kept separate from any data belonging to other
clients of the Company. The software platform tracks the client’s email history and
activity, which is stored and made available to the client via web access. The Company
does not sell or provide marketing data. The clients cannot download the SOFTWARE
to perform the functions on their own computers.
(04) Clients of the Company use the SOFTWARE to send targeted emails to their
prospects and customers. Emails are compiled from content and data that the client
owns and stores either in its own systems or on computers in the Company’s data
centers. 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 client 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 client maintains. Via
web access, clients are able to monitor activity on campaigns they have launched, 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. These data centers host the software platform, hold client data in electronic
storage and house 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 events related to messages after they have been sent (open rates,
bounce rates, etc.). Any data a client may keep in the system is stored in these data
centers. Employees of the clients use the SOFTWARE via the web. These employees
may be located anywhere. For example, a client based in Texas can have an employee
in Arizona that logs into the Company’s website to use the SOFTWARE on servers
located in STATE. The client’s employees can be located anywhere in the world and be
able to access the SOFTWARE, as long as they have an Internet connection.
(06) The Company grants its clients a right to use the software platform on its server for
a designated number of interactive users. Title to and ownership of the software
platform, and all its related proprietary items, remain with the Company, and downloads
of the proprietary software platform are not permitted. The Company does not sell the
software platform, but provides its clients on-line remote access to its software platform.
The Company’s clients utilize the software platform as a tool to send
marketing/advertising messages to their targeted customers. Instead, the Company

charges its clients a fee based on the number of messages the client sends to its
customers via email, social, mobile, or the web. The Company offers its clients pricing
plans on a CPM, or price-per-mille (thousand messages) basis, with the CPM generally
dropping incrementally as the number of messages increase incrementally. The
Company also offers and provides clients with professional services and charges for
this separately from the messaging fees. These professional services are primarily
provided on-line.
The client is charged the following fees depending on the order:
Set-Up Fee – To provide the client with access to the SOFTWARE.
Messaging Fee – Fees for messages sent through the software platform. Clients pay a
minimum fee for use of the SOFTWARE based on the committed volume of messages,
plus overages for messages sent in excess of the commitment. This constitutes 80% of
the Company’s business.
Professional Services – Fees for services that include (i) training on use of the
SOFTWARE, (ii) consulting on best practices, (iii) creative services to design
messages, and (iv) services to help execute campaigns. Fees for these services are on
a time and materials or fixed fee basis. These services are primarily delivered out of the
Company offices in STATES via the internet.
(07) The Company does not provide any tangible deliverables. The client uses the
SOFTWARE to send messages to their targeted customers who may be located
anywhere in the world. The client’s employees may access the Internet from any
location in the world to work on the SOFTWARE. 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 client.
Questions:
(1)

The Company’s clients use the Internet to remotely access the Company’s
software platform that is located in its STATE data centers. The software
platform cannot be downloaded by the clients. Will your State consider such
activity a taxable event in your State?
Will the answer change if the Company’s SOFTWARE and software platform is
on a server located in your State?

(2)

Is the Set-Up Fee taxable in your State? This is a one-time charge to set up the
clients’ access to the SOFTWARE. The Company does not provide on-site
installations and no tangible property is delivered for the set-up.
If taxable, is there a special tax rate for such transactions?

(3)

Is the Messaging Fee taxable in your State? The Company provides no tangible
deliverables to its clients in your State. The Company’s clients use the
Company’s software platform located in data centers in STATE to send email
messages to its targeted customers. The targeted customer can be anywhere in
the world. The Company does not monitor the location of its client’s targeted

customers.
the client.

The Messaging Fee is based on the number of messages sent by

If taxable, and there is a method for determining the State(s) of the targeted
customers of the Company’s client, is the tax allocable? If yes, what documents
must the Company obtain from its clients to substantiate the non-taxable
allocable portion?
If taxable, is there a special tax rate for such transactions?
(4)

The Company bills its clients based on their billing location address (since there
are no tangibles delivered in your state). If the Messaging Fee is taxable in your
State, will the answer change if the client’s employees that access the
SOFTWARE reside in another State?

(5)

Are Professional Services taxable in your State?
Professional Services that include:
(i)
Training on use of the SOFTWARE
(ii)
Consulting on best practices
(iii)
Creative services to design messages, and
(iv)
Services to help execute campaigns.

The Company offers

Charges for these services are either time and materials (i.e. hourly plus
expenses) or fixed fee. These services are delivered out of the Company offices
in STATES via the Internet.
What is the applicable tax rate for each of the service [sic] enumerated above?
Is the charge for ‘Training’ taxable if provided ‘on-line’ or in another state?
Does it make a difference if the charges are bundled or not?
Your prompt response will be greatly appreciated and will help in resolving our tax issue
with our clients. 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