Was a claimed Illinois software-license exemption valid based only on the limited documents submitted?

Plain-English summary

A software customer claimed that its licensing agreement was exempt under 86 Ill. Adm. Code 130.1935(a)(1) and asked IDOR to confirm.

The Department said canned software is generally taxable tangible personal property regardless of whether it is delivered on media or electronically. Custom software prepared to special order may be nontaxable, but assembling prewritten programs is not custom software without real and substantial changes or interface logic under Rule 130.1935(c)(3).

A canned-software license is nontaxable only when all Rule 130.1935(a)(1) requirements are met, including a written agreement signed by licensor and customer, limits on duplication and transfer, a replacement or archival-copy policy, and return or destruction of copies when the license ends. The limited submission did not prove every requirement, so IDOR could not determine whether this license was taxable.

Common questions

Did IDOR approve the exemption? No.

Is electronic delivery enough to avoid tax? No. The GIL treated canned software as taxable regardless of delivery method.

Citations and references

• 86 Ill. Adm. Code 130.1935(a)(1), (c)(3)

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-13-0075.pdf

Original ruling text

ST 13-0075-GIL 11/26/2013 COMPUTER SOFTWARE
This letter discusses the taxability of computer software licenses. See 86 Ill. Adm. Code
130.1935. (This is a GIL.)

November 26, 2013

Dear Xxxxx:
This letter is in response to your letter received in this office on September 26, 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:
COMPANY 1 claims exemption from Illinois Sales and Use Tax for purposes of
the NAME entered into between COMPANY 2 and COMPANY 1 under
authority of Illinois Administrative Code 86 Section 130.1935(a), which
categorizes certain software licensing agreements as not subject to Illinois sales
and use tax.
We have agreed that COMPANY 2 will not invoice, collect and remit Illinois
sales or use tax from COMPANY 1 due to the applicability of this provision.
We have also agreed that if the Illinois Department of Revenue reviews the
exempt status of the subject NAME, COMPANY 2 will immediately notify
COMPANY 1 of such and provide full cooperation with COMPANY 1 to the
extent that COMPANY 1 (at its expense) chooses to defend the exempt position
on this agreement.
We have further agreed that if the Illinois Department of Revenue, upon
reviewing this position with COMPANY 1, determines that sales or use tax
should have been collected and remitted on the Enterprises Agreement,
COMPANY 2 may invoice and collect from COMPANY 1 any sales or use tax,
plus any applicable interest and penalties, which it is required to remit to the state
as a result of determination.

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).
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)

It restricts the customer’s duplication and use of the software;

C)

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;

D)

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

E)

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.

A license of canned software is subject to Retailers' Occupation Tax liability if all of the
criteria set out in 86 Ill. Adm. Code 130.1935(a)(1) are not met. We cannot determine from the

limited information provided in your letter whether the software license is subject to Retailers’
Occupation Tax liability. It appears that you have attached a form provided by the licensor in
which you claim that your COMPANY 1 does not owe excise tax on the licensing agreement.
However, software licenses are subject to tax unless all of the criteria set out in 86 Ill. Adm.
Code 130.1935(a)(1) are met. Based on the limited information provided in your letter, we
cannot say whether the license meets all of the criteria in the regulation. Therefore, we cannot
say whether the license is subject to tax.
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,

Cara Bishop
Associate Counsel