How did Illinois tax game access codes, downloadable software, subscription or points cards, and online content?

Plain-English summary

A retailer asked about paper or online access codes for web-based virtual goods and downloadable games, plus plastic subscription, points, and stored-value cards used on gaming networks.

IDOR said selling a card or coupon that gave the holder a right to redeem for tangible personal property was a sale of an intangible, not a retail property sale. Tax applied when the card was redeemed for tangible property, based on the redeeming retailer's gross receipts.

Ordinary information or data transferred electronically was not tangible personal property. Canned software was different: complete games, add-ons, updates, and other canned software were taxable regardless of whether delivered by disc, card, access code, download, or other electronic means. Custom software prepared to a customer's special order could be nontaxable.

A canned-software license was nontaxable only if it met all five conditions in Section 130.1935(a)(1), including a written agreement signed by both parties, restrictions on use and transfer, replacement or archival-copy policy, and destruction or return at the end of the license period. Checking a box online did not satisfy the signature requirement described.

IDOR did not specifically classify every listed card or virtual-content product. It also said SaaS and cloud transactions were still under evaluation and any later determination would apply prospectively.

What this means for you

The code or card itself did not settle taxability. The underlying redemption—intangible content, taxable canned software, or tangible property—and the software-license terms controlled the analysis.

Common questions

Were downloaded canned games taxable? Yes.

Was ordinary online data tangible property? No.

Did click-through acceptance satisfy the exempt-license signature rule? No.

Citations and references

• 86 Ill. Adm. Code 130.2105(a)(3).
• 86 Ill. Adm. Code 130.1935(a) and (c).

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2015.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2015/st-15-0013.pdf

Original ruling text

ST 15-0013 GIL 03/16/2015 COMPUTER SOFTWARE
This letter concerns the taxation of computer software transactions. See 86 Ill. Adm.
Code 130.1935. (This is a GIL.)

March 16, 2015

Dear XXXX:
This letter is in response to your letter dated October 8, 2014, 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:
After carefully reviewing the relevant state codes and regulations we
would like to have clarification on any updated and /or changes to the
application of sales tax on certain products currently available for sale in
our retail stores located throughout the state as well as our website. We
are seeking guidance on the following product classes. Specific examples
of representative products have been cited for reference:
1) Remote Access Software/Virtual Goods-the purchase by retail
consumers of digital content for use in an online video game. The
virtual goods are accessed by customers online and typically involve
either accessing a complete game or accessing additional content
within a game that resides on a third party computer server.
COMPANY sells an access code printed on a paper receipt to individual
customers that allows the customer to access the described content on a
third party server. COMPANY will also soon sell such codes via its

website and customers would print out or otherwise record the code
displayed on screen for later use.
Please clarify whether or not the sale of such access codes by
COMPANY in a physical retail environment and/or via the Internet is
taxable.
Examples of products in this category are completely web-based games
such as Facebook, Zynga, and Farmville and/or in-game content available
for use in such online games such as access to pay-only play levels or
virtual in-game tools for use in playing an online game.
2) Downloadable Digital Content-the purchase by retail consumers of
electronically delivered pre-written software in the form of complete
video games or video game add-ons that are downloaded directly to a
customer’s personal computer, gaming console, or mobile device.
COMPANY sells an access code printed on paper receipt to individual
customers that allow the customer to access and download software from
a third party server directly to the customer’s device. COMPANY will also
soon sell such codes via its website and customers would print out or
otherwise record the code displayed on screen for later use.
Please clarify whether or not the sale of such access codes by
COMPANY in a physical retail environment and/or via the Internet is
a taxable transaction.
Examples of products in this category are the download of entire video
games currently offered on disc in a retail store, such as Mine Craft, or
Marvel Hero’s, or the download of add-on map packs and play levels,
currently offered only via internet download, that may be integrated into
previously purchased video game, such as map packs offered for call of
Duty or Red Dead Redemption.
3) Subscription Cards-the purchase by retail consumers of plastic cards
containing subscription time to be used to access online networks that
allow game play, interaction among other players on a network, access
to digital online content, or the direct download of digital content to a
consumer’s device.
COMPANY sells plastic cards containing a subscription that allow the
customer to access a third party network or content on a third party
network for specified period of time. Cards offering points may provide
network access for a period of time, be used to access digital content on
the network, or be used to directly download digital content from the
network.

Please clarify whether or not the sale of subscription cards by
COMPANY in a physical retail environment and/or via the Internet is
a taxable transaction.
An example of a product in this category is the Microsoft Xbox Live
Subscription card.
4) Points Cards-the purchase by retail consumers of plastic cards
containing point values to be used within online networks for game
play, interaction among other players on a network, access to digital
online content, or the direct download of digital content to a
consumer’s device.
COMPANY sells plastic cards containing points that allow the customer to
access content on a third party network for specified number of points.
Cards offering points may provide network access for a period of time, be
used to access digital content on the network, or be used to directly
download digital content from the network.
Please clarify whether or not the sale of points cards by COMPANY
in a physical retail environment and/or via the Internet is a taxable
transaction.
An example of a product in this category is the Microsoft Xbox Live Points
and Nintendo card.

5) Notional Dollar Value Cards - the purchase by retail consumers of
plastic cards containing notional dollar values to be used within online
networks for game play, interaction among other players on a network,
access to digital online content, or the direct download of digital
content to a consumer’s device.

COMPANY sells plastic cards containing notional dollar values that allow
the customer to access content on a third party network for specified
number of points. Cards offering points may provide network access for a
period of time, be used to access digital content on the network, or be
used to directly download digital content form the network.
Please clarify whether or not the sale of notional dollar value cards
by COMPANY in a physical retail environment and/or via the Internet
is a taxable transaction.*
An example of a product in this category is the ABC PlayStation Network
Card.

*We note that ABC currently collects sales tax at the time of card use, as
do all current issuers redeeming notional dollar value cards. COMPANY
does not collect sales tax in cases where the issuer collects tax upon card
redemption. However, we would still like clarification on taxability should a
situation arise in which an issuer does not collect sales tax on the
redemption of notional dollar value cards.
We appreciate your assistance and look forward to your written response.
Should you require any additional information please contact me at [XXXXXX-XXXX] or via email at [email protected]
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.
Persons who are engaged in the business of selling cards or coupons, which
entitle purchasers to the right to redeem those cards for tangible personal property, are
not engaged in selling tangible personal property. Rather, they are making sales of
intangibles. Such sales are not subject to the Retailers' Occupation Tax. However, when
those cards or coupons are used to purchase tangible personal property, the retailers
transferring that tangible personal property incur Retailers' Occupation Tax liability
based on their gross receipts from those sales.
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 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)

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.

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 he or she accepts 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.
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.
The Department is currently evaluating the taxability of Software as a Service
(SaaS), cloud computing, computer software Application Service Providers (ASPs) and
similar types of transactions. The Department has found that there is no universal
agreement regarding the nature of these transactions. When the Department makes a
determination regarding the taxability of these transactions, that determination will
operate prospectively only.
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
CB:kd