Were prepaid software-license fees and related monthly license and support fees exempt from Illinois Retailers' Occupation Tax?

Plain-English summary

An Illinois company sold computer systems and licensed about 50 standard software applications to automobile, truck, and motorcycle dealers. Customers used either on-premise software or an internet-hosted format. They paid a one-time prepaid license fee plus a mandatory monthly license-and-support fee covering the license, telephone support, and upgrades.

IDOR said the company's software-license fees were exempt from Retailers' Occupation Tax. After reviewing the submitted agreements, the Department found that they met all five requirements in 86 Ill. Adm. Code 130.1935(a)(1): a signed written agreement, restrictions on duplication and use, restrictions on transfers to third parties, a qualifying replacement-or-archival-copy policy, and destruction or return of copies at the end of the license period. Because the license fees were nontaxable, the related support fees were also nontaxable.

The letter also explained the broader rules. Canned software was generally taxable regardless of delivery method. Separately sold optional maintenance agreements were generally not taxable when sold, although the provider could owe Use Tax on property supplied during service. Canned-software updates were taxable, and a maintenance bundle containing such updates could become fully taxable when update charges were not separately stated and taxed.

What this means for you

Internet delivery alone did not create an exemption. The written license terms controlled. A software vendor seeking this treatment needed every regulatory condition, not merely restrictions on copying.

The PDF header says March 26, 2016, but the letter itself is dated March 23, 2016. Because its expiration clause runs ten years from the date of the letter, this PLR ceased to bind IDOR by March 23, 2026, or earlier if relevant law, rules, case law, or facts changed.

Common questions

Did the result cover both on-premise and hosted software? Yes. The company licensed both formats under the agreements IDOR reviewed.

Were the related monthly support fees taxable? No, on the stated facts.

Is electronically delivered canned software automatically exempt? No.

Citations and references

• 86 Ill. Adm. Code 130.1935(a), (b), and (c).
• 86 Ill. Adm. Code 140.301(b)(3).
• 2 Ill. Adm. Code 1200.110(e).

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2016.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2016/st-16-0003-plr.pdf

Original ruling text

ST 16-0003-PLR 03/26/16 COMPUTER SOFTWARE
This letter discusses the taxability of computer software. See 86 Ill. Adm. Code 130.1935.
(This is a PLR.)

March 23, 2016

Dear XXXXX:
This letter is in response to your letter dated December 30, 2015, 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.
Review of your request disclosed that all the information described in paragraphs 1 through 8
of Section 1200.110 appears to be contained in your request. This Private Letter Ruling will bind the
Department only with respect to COMPANY for the issue or issues presented in this ruling, and is
subject to the provisions of subsection (e) of Admin. Code § 1200.110, governing expiration of Private
Letter Rulings. Issuance of this ruling is conditioned upon the understanding that neither COMPANY
nor a related taxpayer is currently under audit or involved in litigation concerning the issues that are
the subject of this ruling request. In your letter you have stated and made inquiry as follows:
RE: Private Letter Ruling Request on behalf of COMPANY 1
Pursuant to 2 Ill. Adm. Code 1200.110, I am requesting a Private Letter ruling (“PLR”)
on behalf of COMPANY , pertaining to COMPANY’s liabilities under the Illinois Retailers
Occupation Tax (“ROT”). COMPANY requests that the Department of Revenue
(Department) issue a PLR regarding whether the one-time prepaid software license fees
and related monthly license and support fees described herein are exempt from ROT
pursuant to 86 Ill. Adm. Code 130.1935(a)(1). This request contains all information
1

The business activities currently conducted by COMPANY that give rise to this ruling request were formerly conducted by a
business known as “ABC.” Prior to DATE, ABC was a division of DEF. On DATE the ABC division was separately incorporated as
DEF. On DATE DEF. was spun off and became COMPANY, although it continued to use the same EIN that had been used by DEF.
For ease, all references to these entities in this submission will be to “COMPANY.” All material facts asserted as to COMPANY are
also true as to DEF, Inc. and ABC, during the respective time periods that those entities owned the licensed software described in this
submission, unless explicitly stated otherwise.

required by 2 Ill. Adm. Code 1200.110(b)(a)-(8). A Power of Attorney authorizing my
representation of COMPANY has previously been provided to the Department, and
copy is enclosed.
This PLR request relates to all ROT periods that are currently open for a refund
pursuant to the applicable statute of limitations as well as all prospective periods (the
“Periods at Issue”). There is currently no audit or litigation pending with the Department
regarding COMPANY’s Illinois ROT liability for the Periods at Issue. There is also no
audit and/or litigation currently pending with the Department for COMPANY involving
any other tax type or tax periods.
Statement of Material Facts
COMPANY is located at ADDRESS, CITY, IL, XXXXX, FID: XX-XXXXX. COMPANY
sells computer systems, which include computer hardware consisting of central
processing units and peripheral equipment. COMPANY also licenses various industryspecific computer software applications to automobile, truck and motorcycle dealers.
The separate software applications are standard (canned) applications which are
offered to all clients and range from back-office accounting and inventory control
applications to front–office showroom traffic tracking and vehicle financing applications.
The software is offered in both an on-premise format and in a remotely-accessed ASP
Hosted software format in which the customer accesses the software via the Internet.
COMPANY offers approximately 50 of these standard prewritten software applications.
A large multi-franchise dealer licenses an average of 20 applications, while singlefranchise dealers license an average of 9 applications. COMPANY has approximately
1,000 to 1,500 clients located in Illinois.
Each of the approximately 50 software applications represents standard software
offered universally to all clients. The average term of a software license agreement is
five to seven years. For each software application licensed by the client, there is a onetime prepaid software license fee that ranges from $$$ to $$$, depending on the
software application selected.
The average prepaid software license fee is
approximately $$$. There is also a monthly license and support fee. For any single
software application, the list price fee is the same from client to client since the software
applications licensed are the same from client to client. The monthly license and
support fee is a bundled charge which includes a monthly software license fee,
telephone support services and upgrades to the software being licensed. The monthly
license and support fee is not optional for the client.
The license granted by COMPANY to its customers is evidenced by a written
agreement. (Copies of Master Services Agreements2 [“MSAs”] attached as Exhibits A,
B and C). The agreements provide, inter alia, that: (1) the customer’s rights to
duplicate and use the software is restricted; (2) the customer may not license,
sublicense or transfer the software to third parties with the permission and continued
control of CDK, (3) the licensee may make and keep an archival copy, and (4) the

The MSA’s attached hereto as Exhibits A, B and C are representative of all agreements entered into between COMPANY and its
customers in Illinois, and all provisions material to the legal analysis in this submission appear in all agreements the COMPANY
enters into with all customers.
2

customer must destroy or return all copies of the software to COMPANY at the end of
the license period.
Required Disclosure
Pursuant to 2 Ill. Adm. Code 1200.110(b)(4), COMPANY states that the department has
previously ruled on a similar issue for a predecessor of CDK. See Private Letter Ruling
No ST99-0036-PLR (Ill. Dep’t of Revenue Nov. 2, 1999.) (Copy attached as Exhibit D)
(“1999PLR”). However, as described in greater detail below, the relevant regulation, 86
Ill. Adm. Code 130.1935(a)(1) was amended on October 2, 2000. This amendment
materially impacted the analysis in the 1999 PLR, and COMPANY now believes that its
software license agreements are exempt from Illinois ROT. As a result of this
amendment, the 1999 PLR no longer binds the Department or COMPANY. Private
Letter Ruling No. ST99-0036-PLR (Ill. Dep’t of Revenue November 2 1999. (“This ruling
will cease to bind the Department if there is a pertinent change in statutory law, case
law, rules, or in the material facts recited this ruling”)(paraphrasing 2 Ill. Adm.
Code1200.110(d)). In any event, the 1999 PLR was revoked by operation of law on
November 2, 2009. See 2 Ill. Adm. Code 1200.110(e) (“Beginning July 1, 2002 every
letter ruling is revoked on the date that is 10 years after the date of issuance of the
ruling or July 1, 2002 whichever is later”).
Law and Analysis
Prior to October 2, 2000, and at the time that the Department issued the 1999 PLR, 86
Ill. Adm. Code 130.1935(a)(1) provided in relevant part,
a) Computer software means all types of software including operational,
applicational, utilities, compilers, templates, shells and all other forms.
Canned 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. The sale at retail, or
transfer, of canned software intended for general or repeated use is
taxable, including the sale by a retailer of software which is subject to
manufacturer licenses restricting the use or reproduction of the
software.
1) 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);
D) the vendor will provide another copy at minimal or no charge if
the customer loses or damages the software;

E) the customer must destroy or return all copies of the software to
the vendor at the end of the license period.

Effective October 2, 2000, 86 Ill. Adm. Code 130.1935(a)(1) was amended. Section
(a)(1) of the regulation remained nearly identical to the previous version in all material
respects, except for subsection (D), which now provided,
D) the licensor has a policy of providing another copy at minimal or no charge if
the customer loses or damages the software, or of 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
(emphasis supplied)
Prior to the amendment, the 1999 PLR concluded that the 1999 MSA met the
requirements of 86 Ill. Adm. Code 1935(a)(1)(A), (B), (C), and (E). The MSA attached
to this PLR request, which are identical in all material respects to the 1999 MSA, also
meet the requirements of 86 Ill. Adm. Code 1935(a)(1)(A), (B), (C) and (E).


The software license is evidenced by a written agreement signed by the licensor
and the customer (Exhibit A; Exhibit B, Exhibit C).



The agreement restricts the customer’s duplication and use of the software
(Exhibit A, ¶¶6.B, C; Exhibit B, ¶¶ 6.B,C; Exhibit C, ¶¶ 6.B, C);



The agreement prohibits the customer from licensing, sublicensing or transferring
the software to third parties (except to a related party) (Exhibit A ¶¶4.C, 6.B;
Exhibit B, ¶¶4.C, 6.B; Exhibit C, ¶¶4.C, 6.B);



The customer must destroy or return all copies of the software to the vendor at
the end of the license period (Exhibit A, ¶¶ 4.D, 6.D; Exhibit B, ¶¶4.D, 6.D;
Exhibit C, ¶¶ 4.D, 6.D).

The 1999 MSA had been found not to meet the requirements of former subsection (D)
because the MSA did not contain a provision that the vendor would provide an
additional copy of the software at minimal or no charge if the customer lost or damaged
the software. However, as a result of the October 2, 2000 amendment, a license
agreement meets the requirements of subparagraph (D) if it either provides a copy at
minimal or no charge or “if it permits the licensee to make and keep an archival copy,
and such policy is…stated in the license agreement.” 86 Ill. Adm. Code 130.1935(a)(1).
Paragraph 6.C of the MSAs at Exhibits A, B and C provides explicitly that “[c]lient shall
not copy, in whole or in part, the ADP products related documentation….provided,
however, that Client may make an appropriate number copies of the ADP
Products3 for back-up purposes only. (Exhibits A, B and C at ¶6.C) (emphasis
Paragraph 6.C of Exhibits B and C refers to “COMPANY,” not “DEF” This change reflects the ownership changes described above
in footnote1.
3

supplied). Thus, as a result of the regulatory change to subparagraph (D), the MSAs
attached at Exhibits A, B and C meet all five requirements set forth in 86 Ill. Adm. Code
130.1935(a)(1) to qualify as exempt from Illinois ROT.4
Ruling Requested
COMPANY requests that the Department issue a PLR concluding that all sales of
software licenses to COMPANY customers pursuant to the attached MSAs (and all
sales pursuant to MSAs that are identical in all material respects to the attached MSA)
are exempt from Illinois ROT because they meet the requirements of 86 Ill. Adm. Code
130.1935(a)(1), regardless of whether the software is on-premise or accessed
electronically via the internet.
There is no specific trade secret information in either this letter or the attached exhibits
that must be redacted prior to public dissemination. The only redactions are those that
will be made by the Department pursuant to 2. Ill. Adm. Code 120.110(c), including the
name and address of COMPANY and COMPANY representative. Although there is no
specific trade secret information, COMPANY respectfully requests that the department
not include any portion of Exhibits A, B and C in the publicly disseminated version of the
PLR, other that the quoted provisions above which are necessary for the Department’s
legal analysis.
Thank you for your consideration of COMPANY’s Request. If the department requires
any additional information to conduct its analysis, please do not hesitate to contact me.
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
2Ill. Adm. Code 1200.110(B)(6) requires a statement of authorities contrary to the taxpayer’s views” In addition, if “the taxpayer
determines that there are no authorities contrary to his or her views, or taxpayer is unable to locate such authority, the request must
contain a statement to the effect.” 2Ill. Am. Code 1200.110(b)(6). COMPANY 1 has been unable to locate any other contrary
authority that present sufficiently similar facts and a legal conclusion which would be dispositive of the issues presented in this letter,
and contrary to the ruling requested by COMPANY 1.
4

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.
In general, maintenance agreements that cover computer software are treated the same as
maintenance agreements for other types of tangible personal property. See 86 Ill. Adm. Code
130.1935(b). The taxation of maintenance agreements is discussed in subsection (b)(3) of Section
140.301 of the Department’s administrative rules under the Service Occupation Tax Act. See 86 Ill.
Adm. Code Sec. 140.301(b)(3). The taxability of agreements for the repair or maintenance of tangible
personal property depends upon whether charges for the agreements are included in the selling price
of the tangible personal property. If the charges for the agreements are included in the selling price of
the tangible personal property, those charges are part of the gross receipts of the retail transaction
and are subject to tax. In those instances, no tax is incurred on the maintenance services or parts
when the repair or servicing is performed. A manufacturer’s warranty that is provided without
additional cost to a purchaser of a new item is an example of an agreement that is included in the
selling price of the tangible personal property.
If agreements for the repair or maintenance of tangible personal property are sold separately
from tangible personal property, sales of those agreements are not taxable transactions. However,
when maintenance or repair services or parts are provided under those agreements, the service or
repair companies will be acting as service providers under provisions of the Service Occupation Tax
Act that provide that when service providers enter into agreements to provide maintenance services
for particular pieces of equipment for stated periods of time at predetermined fees, the service
providers incur Use Tax based on their cost price of tangible personal property transferred to
customers incident to the completion of the maintenance service. See 86 Ill. Adm. Code
140.301(b)(3). The sale of an optional maintenance agreement or extended warranty is an example
of an agreement that is not generally a taxable transaction.

If, under the terms of a maintenance agreement involving computer software, a software
provider provides a piece of object code (“patch” or “bug fix”) to be inserted into an executable
program that is a current or prior release or version of its software product to correct an error or
defect in software or hardware that causes the program to malfunction, the tangible personal property
transferred incident to providing the patch or bug fix is taxed in accordance with the provisions
discussed above.
In contrast to a patch or bug fix, if the sale of a maintenance agreement by a software provider
includes charges for updates of canned software, which consist of new releases or new versions of
the computer software designed to replace an older version of the same product and which include
product enhancements and improvements, the general rules governing taxability of maintenance
agreements do not apply. This is because charges for updates of canned software are fully taxable as
sales of software under Section 130.1935(b). (Please note that if the updates qualify as custom
software under Section 130.1935(c) they may not be taxable). Therefore, if a maintenance agreement
provides for updates of canned software, and the charges for those updates are not separately stated
and taxed from the charges for training, telephone assistance, installation, consultation, or other
maintenance agreement charges, then the whole agreement is taxable as a sale of canned software.
We have reviewed the license agreements that you provided with your letter. Based on these
agreements, it is the Department’s opinion that the software license fees are exempt from Illinois
Retailers’ Occupation Tax as they meet all of the criteria provided in subsection (a)(1) of Section
130.1935. Because the software license fees are nontaxable, the related support fees which you
mention in your letter are also considered nontaxable.
The factual representations upon which this ruling is based are subject to review by the
Department during the course of any audit, investigation, or hearing and this ruling shall bind the
Department only if the factual representations recited in this ruling are correct and complete. This
Private Letter Ruling is revoked and will cease to bind the Department 10 years after the date of this
letter under the provisions of 2 Ill. Adm. Code 1200.110(e) or earlier if there is a pertinent change in
statutory law, case law, rules or in the factual representations recited in this ruling.
I hope this information is helpful. If you have further questions concerning this Private Letter
Ruling, you may contact me at (217) 782-2844. If you have further questions related to the Illinois
sales tax laws, 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
Chairman, Private Letter Ruling Committee
RSW:CB:bkl