Was a cloud restaurant back-office system sold to franchisees taxable in Illinois when no hardware was provided?

Plain-English summary

A restaurant chain developed a cloud back-office system for franchisees covering labor scheduling, inventory, ordering, cash and sales, preparation lists, and personnel. No hardware was supplied, and the request described the offering as software as a service.

IDOR said it was difficult to classify the transaction without more facts. A pure service with no transfer of tangible personal property generally is outside Illinois Retailers' Occupation, Use, Service Occupation, and Service Use Taxes. Electronically transferred information also is not tangible personal property.

Canned software, however, is taxable regardless of electronic delivery. If the franchisees were licensing software, the license was taxable unless it met all five conditions in Rule 130.1935(a)(1). IDOR emphasized that merely clicking a box accepting online terms did not satisfy the required written agreement signed by both licensor and customer.

Common questions

Did IDOR hold that SaaS was exempt? No. It left the transaction's classification unresolved.

Would clickwrap satisfy the software-license exemption? Not under the signature requirement described in this 2013 GIL.

Citations and references

• 35 ILCS 105/3 and 120/2
• 86 Ill. Adm. Code 130.1935(a) and (c)
• 86 Ill. Adm. Code 130.2105(a)(3)
• 86 Ill. Adm. Code 140.101 through 140.109

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2013.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2013/st-13-0051.pdf

Original ruling text

ST 13-0051-GIL 09/13/2013 COMPUTER SOFTWARE
This letter concerns the taxation of computer software. See 86 Ill. Adm. Code 130.1935.
(This is a GIL.)

September 13, 2013

Dear Xxxxx:
This letter is in response to your letter dated March 12, 2013, 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 am writing from COMPANY to request a ruling of taxability on the following
scenario:
COMPANY is a retail restaurant chain with company and franchise operated
locations. We are currently working on a restaurant back office system that
provides the following service to our franchisees:
•
•
•
•
•
•

Labor Scheduling
Food Cost – Inventory
Food and Supply Ordering
Cash & Sales
Prep List
Personnel

There is no hardware involved and all the software is on the Cloud as Software as
a Service.

Please advise if we need to charge sales tax to our franchisees for this service.

DEPARTMENT’S RESPONSE:
Sales of Service:
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.
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 a sale of service, this will result in either Service Occupation
Tax liability or Use Tax liability for the serviceman depending upon his activities. For
information on Service Occupation Tax, please see 86 Ill. Adm. Code 140.101 through 140.109.
As noted, these taxes only apply if tangible personal property is transferred incident to the sale of
service. If no tangible personal property is transferred, these taxes do not apply.

Computer Software:
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). To be considered “custom,” the computer programs or software must be prepared to
the special order of the customer.
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. If
transactions for the licensing of computer software meet all of the criteria provided in subsection
(a)(1) of Section 130.1935, neither the transfer of the software nor the subsequent software
updates will be subject to Retailers' Occupation Tax. A license of software is not a taxable retail
sale if:
A)

It is evidenced by a written agreement signed by the licensor and the customer;

B)
C)

D)

E)

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 it is very common for software to be licensed over the internet and the
customer to check a box that states that they accept the license terms. Acceptance in this manner
does not constitute a written agreement signed by the licensor and the customer for purposes of
subsection (a)(1)(A) of Section 130.1935. To meet the signature requirement for an exempt
software license, the agreement must contain the written signature of the licensor and customer.
It is very difficult to answer your inquiry without additional facts regarding the nature of
these transactions. It is not clear whether the franchisees will be licensing software from you to
perform these tasks, but, to the extent they are, this license would be taxable unless it meets the
exemption criteria above.
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.
Sincerely,

Samuel J. Moore
Associate Counsel
SJM:msk