Were a college's iPhone apps sold through Apple's App Store taxable canned software or sales for resale?

Plain-English summary

A college developed iPhone applications and made them available only through Apple's App Store. Apple sold the apps to customers, and the college received a percentage of sales. The college asked how to report the receipts.

IDOR said, based on the limited facts, the applications appeared to be canned computer software. Canned software was taxable tangible personal property regardless of whether transferred by tape, disk, card, electronic download, or another medium. Custom software prepared to a customer's special order could receive different treatment, but assembling prewritten programs did not make software custom without real and substantial changes or interfacing logic.

The college's transfers to Apple also appeared to be sales for resale, because Apple resold the apps to end users.

A seller accepting a proper resale certificate with a registration or resale number valid when given generally ended its liability. Without that certificate, the sale was presumed not to be for resale, although invoices and purchaser certifications could be used as other evidence—with a greater audit risk.

Common questions

Did electronic delivery make canned software nontaxable? No.

Were the college's sales to Apple retail sales? IDOR said they appeared to be sales for resale.

Was the conclusion definitive? No. The letter expressly said it could not be certain with the information provided.

Citations and references

• 86 Ill. Adm. Code 130.1935, 130.201, 130.210, and 130.1405
• Rock Island Tobacco and Specialty Co. v. Illinois Department of Revenue, 87 Ill. App. 3d 476, 409 N.E.2d 136 (3d Dist. 1980)

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-12-0055.pdf

Original ruling text

ST 12-0055-GIL 10/03/2012 COMPUTER SOFTWARE
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. (This is a GIL.)
October 3, 2012
Dear:
This letter is in response to your letter dated September 21, 2012, 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 is a request for a General Information Letter pursuant to the provisions of 2 Ill. Admin.
Code 1200. The COLLEGE is requesting information from the Illinois Department of Revenue
regarding how the COLLEGE needs to report certain income on Form ST-1, Sales and Use
Tax and E911 Surcharge Return.
The COLLEGE is developing phone applications, specifically iPhone Apps. Examples of the
phone applications include: checking the weather, finding restaurants, tracking weight, and
assisting with health issues.
Apps for the iPhone are only available to customers through Apple. Apple will sell the apps on
its iPhone App store website. The COLLEGE will receive a percentage of sales from Apple on
the iPhone Apps.
Is the COLLEGE required to report such sales on its Form ST-1?
If so, is the sale categorized as:
(1) sales for resale (where Apple charges sales tax on the iPhone Apps) on line 4
of Schedule A, or
(2) sales of service (where the Apps are not subject to sales tax) on line 14 of
Schedule A?
Please contact me at XXX if you have any questions or require additional information.
Thank you for your assistance in this matter.

ST 12-0055-GIL
October 3, 2012
Page 2

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. See 86 Ill. Adm.
Code 130.101. The tax is measured by the seller's gross receipts from retail sales made in the
course of such business. "Gross receipts" means the total selling price or the amount of such sales.
The retailer must pay Retailers' Occupation Tax to the Department based upon its gross receipts, or
actual amount received, from the sale of the tangible personal property.
Generally, sales of “canned” computer software are taxable retail sales in Illinois. Canned computer
software is considered to be tangible personal property regardless of the form in which it is
transferred or transmitted, including tape, disc, card, electronic means, or other media. However, if
the computer software consists of custom computer programs, then the sales of such software may
not be taxable retail sales. 86 Ill. Adm. Code 130.1935. Computer software that is not custom
software is considered to be canned computer software, whether it is “stand-alone” or not.
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).
Charges for updates of canned software are fully taxable pursuant to Section 130.1935.
updates qualify as custom software under Section 130.1935(c), they may not be taxable.

If the

When a person purchases items of tangible personal property with the intention of reselling them to
purchasers for use or consumption, that person engages in making retail sales of tangible personal
property. This makes the initial purchase a purchase for resale, and the subsequent sale is a taxable
sale at retail subject to Illinois Retailers' Occupation and Use Tax liabilities. See 86 Ill. Adm. Code
130.201 and 130.210. For general information regarding resale certificates, the Department’s
regulation for resale certificates, “Seller's Responsibility to Obtain Certificates of Resale and
Requirements for Certificates of Resale,” is found at 86 Ill. Adm. Code 130.1405.
The obligations of a seller with respect to accepting a Certificate of Resale were addressed in Rock
Island Tobacco and Specialty Company v. Illinois Department of Revenue, 87 Ill.App.3d 476, 409
N.E.2d 136, 42 Ill. Dec. 641 (3rd Dist. 1980). The Rock Island court held that when a retailer obtains
a proper Certificate of Resale that contains a registration or resale number that is valid on the date it
is given, the retailer’s liability is at an end. If the purchaser uses that item himself or herself (i.e., it
was not purchased for resale), the Department will proceed against the purchaser, not the retailer,
provided the above stated conditions are met. The purchaser’s registration or reseller number can be
verified at the Department’s website by clicking on the “Tax registration inquiry” box.
Failure to present an active registration number or resale number and a certification to the seller that
a sale is for resale creates a presumption that a sale is not for resale. This presumption may be
rebutted by other evidence that all of the seller’s sales are sales for resale, or that a particular sale is
a sale for resale. For example, other evidence that might be used to document a sale for resale,
when a registration number or resale number and certification to the seller are not provided, could
include an invoice from the purchaser to his customer showing that the item was actually resold,

ST 12-0055-GIL
October 3, 2012
Page 3
along with a statement from the purchaser explaining why it had not obtained a resale number and
certifying that the purchase was a purchase for resale in Illinois. The risk run by companies in
accepting such a certification and the risk run by purchasers in providing such a certification is that an
Illinois auditor is more likely to require that more information be provided as evidence that the
particular sale was, in fact, a sale for resale.
Although we cannot be certain with the information you have provided, it appears the applications you
are selling to Apple may be canned computer software. It also appears that the sales to Apple would
be considered sales for resale.
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