Does Illinois sales tax apply to software delivered by URL that customers can download and duplicate without limit?

Plain-English summary

A company that sells an AI-powered software product delivered via a download URL asked the Illinois Department of Revenue to confirm that its software license qualified for the Retailers' Occupation Tax exemption available to certain software licenses. The Department responded with a General Information Letter (GIL) rather than a binding ruling, and its answer was not favorable to the taxpayer's stated interpretation.

Illinois generally taxes sales of "canned" (prewritten) computer software as retail sales of tangible personal property. But a license of software escapes tax if the license agreement meets five specific criteria in 86 Ill. Adm. Code 130.1935(a)(1), including that it (A) is a signed written agreement, (B) restricts the customer's duplication and use of the software, (C) prohibits the customer from sublicensing or transferring the software without the licensor's permission, (D) commits the licensor to replace lost or damaged copies (or allow an archival copy), and (E) requires the customer to destroy or return the software at the end of the license period.

The taxpayer argued its arrangement was comparable to a Microsoft Windows license — customers can download and duplicate the software without limit, but a unique license key restricts use to a limited number of devices — and that this satisfied criterion (B). The Department disagreed with that self-assessment: because the taxpayer admitted unlimited downloads and duplication were allowed, and did not explain the nature and extent of its usage controls, the Department stated it "does not appear" the agreement would meet criterion (B). The Department also noted it generally does not issue Private Letter Rulings on computer software licensing, though it invited the taxpayer to submit one under 2 Ill. Adm. Code 1200.110 given the "novel issue" raised.

What this means for you

Software companies licensing products in Illinois

If your license agreement lets customers download or duplicate your software without meaningful restriction, this letter signals the Department is likely to view that as failing the exemption's duplication/use-restriction requirement (criterion B), even if you separately limit the number of active devices through a license key. To claim the exemption, the agreement itself should clearly restrict duplication and use — not merely restrict activation on a limited number of devices while permitting unlimited copies to exist.

SaaS and URL-delivered software vendors

The Department's analysis did not turn on the delivery mechanism (a downloadable URL) but on the substance of the license terms. All five criteria in 86 Ill. Adm. Code 130.1935(a)(1) must be met for the license to be exempt — failing even one, such as the duplication restriction here, makes the transaction taxable as a sale of canned software.

Accountants and tax professionals advising software clients

This GIL is a useful illustration of how the Department applies the license-exemption checklist, but it is explicitly not binding — it is general guidance directing the taxpayer to the regulation, not a determination on the taxpayer's specific facts. If a client needs certainty, the letter itself notes the Department would consider a formal Private Letter Ruling request under 2 Ill. Adm. Code 1200.110, even though it does not usually rule on software licensing questions.

Businesses distinguishing canned vs. custom software

The letter also restates the baseline rule: canned (prewritten) software is taxable tangible personal property regardless of the medium of transfer, while custom software prepared to a customer's special order may not be a taxable retail sale. Simply selecting and assembling pre-written components does not make software "custom" unless real, substantial changes or interfacing logic are created. This letter's facts concerned a license of what appears to be prewritten/canned software, not a custom-software dispute.

Common questions

Q: Does this letter say the taxpayer's software is definitely taxable?
A: Not definitively. The Department said it "does not appear" the agreement met one of the five license-exemption criteria, based on the limited facts provided. It did not issue a final, binding determination — that would require a Private Letter Ruling.

Q: What are the five conditions for a tax-exempt software license in Illinois?
A: Under 86 Ill. Adm. Code 130.1935(a)(1), the license must: (A) be evidenced by a signed written agreement; (B) restrict the customer's duplication and use of the software; (C) prohibit sublicensing/transfer to third parties without the licensor's permission and continued control; (D) provide for replacement copies or an archival copy under a stated policy; and (E) require destruction or return of all copies at the end of the license period (deemed met for perpetual licenses).

Q: Why didn't the Department just answer with a ruling?
A: Because this was a GIL request, not a compliant Private Letter Ruling request. A GIL directs taxpayers to the relevant regulations and is not a statement of Department policy or binding on the Department. The letter notes the Department "generally does not issue Private Letter Rulings on licensing of computer software" but was willing to consider one given the novel issue raised.

Q: Is all computer software taxable in Illinois?
A: No. Canned (prewritten) software sold outright is generally taxable as tangible personal property. But a license meeting all five criteria above is not a taxable retail sale, and custom software prepared to a customer's special order may also fall outside taxable retail sales, per 86 Ill. Adm. Code 130.1935(c)(3).

Q: Can I rely on this letter for my own software licensing situation?
A: No. As a GIL, it is not a statement of Department policy and is not binding on the Department, even for the original requester. It illustrates the Department's reasoning but does not resolve any taxpayer's specific facts the way a Private Letter Ruling would.

Citations and references

• 35 ILCS 120/2-25 (definition of computer software)
• 86 Ill. Adm. Code 130.1935 (taxation of computer software; licensing exemption criteria)
• 86 Ill. Adm. Code 130.1935(c)(3) (custom vs. canned software distinction)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedures)
• 2 Ill. Adm. Code 1200.120 (General Information Letter procedures)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2017.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2017/st-17-0027-gil.pdf

Original ruling text

ST 17-0027-GIL 07/17/2017 COMPUTER SOFTWARE
This letter discusses the requirements for a license of computer software. See 86
Ill. Adm. Code 130.1935. (This is a GIL.)

July 17, 2017

Interpretation of Regulation Title 86 130 section 130.1935: Computer
Software
Dear Xxxxx:
This letter is in response to your letter dated June 19, 2017, in which you
requested 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 in reference to subsection B) of the above published
regulation which states:
B) it restricts the customer’s duplication and use of the software
We believe that our company’s technology offering qualify for sale tax
exemption under the above-mentioned tax regulation but wish to confirm
your interpretation before claiming the benefit.
We offer an artificial intelligence technology that automates labor intensive
business functions. Our software is delivered via a URL that our clients
download upon service activation. While our written contracts dictate the
specific application including site deployments, number of service
incidents that can be resolved, and end of usage dates, we allow

ST 17-0027-GIL
Page 2

customers unlimited downloads and duplication of the software from the
URL provided.
It is comparable to a Microsoft Windows license. Upon purchase, the user
can download multiple instances of the software but the company ensures
that the user can only use on limited devices by requiring a unique license
key before activation. In the same vein, we allow our customers to
download and duplicate our software but we control and manage how and
where the software is used.
We believe that this restriction on usage satisfies subsection B of the
regulation.
I anticipate your written agreement or explanation as to how your
interpretation differs.
DEPARTMENT’S RESPONSE:
“‘Computer software’ means a set of statements, data, or instructions to be used
directly or indirectly in a computer in order to bring about a certain result in any form in
which those statements, data, or instructions may be embodied, transmitted, or fixed, by
any method now known or hereafter developed, regardless of whether the statements,
data, or instructions are capable of being perceived by or communicated to humans,
and includes prewritten or canned software.” 35 ILCS 120/2-25. 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. 86 Ill. Adm. Code 130.1935. However, if the computer software consists of
custom computer programs, then the sales of such software may not be taxable retail
sales. 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 86 Ill.
Adm. Code 130.1935(c)(3). Computer software that is not custom software is
considered to be canned computer software.
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;

ST 17-0027-GIL
Page 3

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.

If a license of canned computer software does not meet all the criteria the software is
taxable.
By your own admission you allow unlimited downloads and duplication. You
state that the Company controls and manages how and where the software may be
used but you do not provide an explanation of the nature and extent of that control and
management. From the limited information you have provided it does not appear your
agreement would meet paragraph B of the Department’s licensing requirements
contained subsection (a)(1) of Section 130.1935.
The Department generally does not issue Private Letter Rulings on licensing of
computer software. However, your letter raises a novel issue that the Department
would be willing to consider should you submit a request conforming with 2 Ill. Adm.
Code 1200.110.
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
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