Does Illinois Retailers' Occupation (sales) Tax apply to the sale of cryptocurrency 'utility tokens' that represent ownership of mining hardware?

Subject

Sale At Retail

Plain-English summary

A limited liability company planned to build a clean-energy cryptocurrency mining datacenter in Illinois, partially funded through an Initial Coin Offering (ICO). Unlike a typical ICO where the token acts as a currency or company share, this company planned to sell "utility tokens" — smart contracts representing a fractional ownership interest in the company's "Mining Hardware." Each token would represent an equal percentage of the total mining hardware, with a fixed, non-expandable total token count. The company itself would manage and operate the hardware on the token holder's behalf, returning mining profits (in cryptocurrency) to the holder on a set schedule; the holder could take physical possession of the hardware at any time but generally would not.

The company had already contacted the Department's Central Registration Division about whether it needed an Illinois business license, and was directed to request a ruling on the "proper classification" of its business and any resulting Illinois tax responsibility. The company's own view, after consulting counsel, was that selling these tokens amounted to a resale of goods, so an Illinois business license and sales/use tax would likely be required.

The Department disagreed with that self-assessment. It held that the utility tokens described are sales of intangible personal property, and under 86 Ill. Adm. Code 130.120, intangible personal property is not subject to tax. Because Illinois sales tax attaches only when tangible personal property is transferred, no sales tax liability attaches to the sale of these tokens.

As the letter itself notes, this is a General Information Letter (GIL), not a Private Letter Ruling (PLR) — it directs the taxpayer to relevant regulations but is not a statement of Department policy and is not binding on the Department (2 Ill. Adm. Code 1200.120).

What this means for you

Businesses selling crypto-linked tokens or smart contracts

If your business sells a token or smart contract that represents an ownership stake in an asset — rather than transferring physical possession of tangible goods — this GIL suggests the Department may view that sale as a transfer of intangible personal property, which is not subject to Illinois Retailers' Occupation Tax under 86 Ill. Adm. Code 130.120. That conclusion turned on the specific facts presented: the token represented a contractual ownership interest in equipment managed and operated by the seller, not a transfer of physical possession of the hardware itself.

Accountants and tax professionals

The Department's reasoning here is narrow and fact-bound: it looked at what was actually being conveyed (an intangible ownership/contract right, with the seller retaining operational control and possession of the physical mining hardware) rather than accepting the taxpayer's own initial characterization of the transaction as a "resale of a good." Advisors should note the letter does not address other potential tax issues raised by such an arrangement — for example, income tax treatment of the profits paid to token holders, or whether other Illinois business licensing requirements apply — since the Department's response is limited to the sales/use tax question addressed under 86 Ill. Adm. Code 130.120.

Anyone relying on this letter

Because this is a GIL rather than a PLR, it is not a statement of Department policy and does not bind the Department, even as to the original requester. A taxpayer with materially similar facts who wants a binding answer would need to request a Private Letter Ruling under 2 Ill. Adm. Code 1200.110.

Common questions

Q: Did Illinois rule that cryptocurrency itself is exempt from sales tax?
A: Not exactly. The ruling addresses the specific "utility tokens" described in the letter — smart contracts representing fractional ownership of mining hardware that the seller continues to manage and operate. The Department concluded those tokens are intangible personal property, and intangible personal property is not taxable under 86 Ill. Adm. Code 130.120.

Q: Why did the Department disagree with the taxpayer's own view that sales/use tax would apply?
A: The taxpayer believed a business license and sales/use tax would be required because it viewed the token sales as a "resale of a good." The Department instead looked at the substance of the transaction: the token holder receives a contractual ownership interest and a share of mining profits, not physical possession of tangible hardware, so the transaction is a sale of intangible property rather than tangible personal property.

Q: Does the letter say whether the token holder could ever take physical possession of the hardware?
A: Yes — the taxpayer's letter states that "the individual owner and holder of a utility token will retain the right to sell their hardware at any time" and that the holder could take physical possession later, even though "the individual will never need to take physical possession of their hardware." The Department's ruling did not separately address the tax consequences if and when a holder actually takes possession.

Q: Is this letter binding on the Illinois Department of Revenue?
A: No. It is a General Information Letter, which "is not a statement of Department policy and is not binding on the Department" (see 2 Ill. Adm. Code 1200.120). Only a Private Letter Ruling, requested under the procedures in 2 Ill. Adm. Code 1200.110, is binding, and even then only as to the specific taxpayer and facts presented.

Q: Does this letter address income tax or business licensing requirements for the mining company?
A: No. The Department's response is limited to the sales tax question — whether 86 Ill. Adm. Code 130.120 exempts the token sales from Retailers' Occupation Tax. The letter does not rule on the separate business-license question that had been raised with the Central Registration Division, nor on income tax treatment of the mining profits distributed to token holders.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2018.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2018/st-18-0025-gil.pdf

Original ruling text

ST 18-0025-GIL 09/13/2018

SALE AT RETAIL

Sales of intangible personal property are not taxable under the Retailers’ Occupation Tax Act.
86 Ill. Adm. Code 130.120. (This is a GIL.)

September 13, 2018

Dear Xxxxx:
This letter is in response to your letter dated March 8, 2018, 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:
Our Limited Liability Company, COMPANY, recently communicated with the Illinois
Department of Revenue Central Registration Division in an effort to determine whether
our business model and endeavors would require the necessity of applying for an Illinois
business license. After outlining our business model to the Department of Revenue
Central Registration Division, I was advised to contact your office and request and
obtain a legally binding advisory opinion regarding the proper classification of our
business and any subsequent Illinois tax responsibility.
Our company is duly licensed in the State of STATE as A [sic] limited liability company,
doing business in the State of Illinois. Our business model is to create a clean energy
crypto currency mining facility, or datacenter, in the Northern region of Illinois. We are
working in partnership with local non-profit and for-profit organizations on the overall
engineering and design of our facility and clean energy micro grid that will be created to
facilitate the high energy demand of our datacenter. The project will be partially publicly
funded through the sale of utility tokens (smart contracts) via block-chain technology.
This process is commonly known as an ICO (Initial Coin Offering).
Unlike many traditional ICO, where the token being sold is to act as a currency or
company share, we are selling a smart contract (tokens) that represent a tangible

ST 18-0025-GIL
Page 2

product. This type of blockchain token has become commonly known as a Utility
Token. A portion of COMPANY’s products, deemed “Mining Hardware”, will be sold to
our customers via the aforementioned smart-contracts. Each individual’s ownership of
the mining hardware will be represented by their respective holding of a token (smart
contact). The mining hardware will be divided into a predetermined number of utility
tokens with each token representing an equal percentage of the total mining hardware.
No additional tokens will ever be created or minted. The number of tokens representing
the mining hardware will remain static indefinitely.
The smart contract that a person holds represents their physical ownership of the
mining hardware that our company will manage and operate on their behalf as services
rendered. Any profits generated by an individual’s mining hardware (represented by the
number of tokens that person holds) will be returned to that individual in crypto currency
on a preset schedule. In addition, since the smart contract tokens that COMPANY will
be using which represents an individual’s ownership of a physical asset will be deemed
a utility token, the tokens will never be listed on any crypto currency exchanges.
However, the individual owner and holder of a utility token will retain the right to sell
their hardware at any time.
Since every utility token sold by COMPANY to our customers during our initial funding
phase represents a contract that the individual will own as a portion of the mining
hardware that our company will manage and operate on their behalf, it is our
understanding that any such transactions represent the resale of a good. Accordingly, it
is our belief after conferring with legal counsel that an Illinois business license would be
required, and that appropriate sale or use tax would be due to the State of Illinois for
any customer transactions that occur within the State of Illinois.
In summary, with our business model the only difference between a customer coming
and purchasing physical hardware from our location and taking it home to use for crypto
currency mining is that once they purchase it from us we will provide the service of
managing and operating it. The individual will never need to take physical possession
of their hardware but will retain the right to do so at a later time. We believe the sale of
our utility token, a smart contract, which represents the customer’s individual ownership
of the mining hardware, is no different than selling a customer hardware that they would
physical [sic] take possession.
We also understand that the emergence of blockchain technology, crypto currency, and
utility tokens/smart contracts has created a whole new set of challenges for regulatory
bodies within the United States. New and unique business models such as ours have
yet to be fully understood, evaluated, and/or have legal precedent and standards of
operations set by the appropriate regulatory and governmental bodies. In addition to
the business objectives I have set forth herein, our goal is to conduct business in a
professional manner and in accord with the laws of the State of Illinois.
Please respond at your earliest convenience. Thank you in advance for your
anticipated courtesy and cooperation in this manner.

ST 18-0025-GIL
Page 3

DEPARTMENT’S RESPONSE:
See the Department’s regulation at 86 Ill. Adm. Code 130.120 that states that intangible
personal property is not subject to tax. Sales of the tokens described in your letter are sales of
intangible personal property. Since the Illinois sales tax laws are triggered upon the transfer of
tangible personal property, no sales tax liability attaches to the sale of those tokens.
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,

Debra M. Boggess
Associate Counsel

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