We're an out-of-state seller of subscription training software and downloadable video-conferencing software -- does Illinois sales tax apply to either product?

Plain-English summary

An out-of-state remote seller wrote to the Illinois Department of Revenue after the U.S. Supreme Court's South Dakota v. Wayfair decision, asking whether two of its products would be subject to Illinois sales tax:

1. Training software sold to financial institutions so the institutions can train their own staff. The seller's employees do not conduct any training themselves -- they just provide the software. Customers access it over the internet through a monthly subscription; nothing in the letter indicates it is ever downloaded.
2. Video-conferencing-style software (compared to well-known consumer video-call products), which customers download onto their own computer or phone. Customers pay a monthly subscription fee for continued access, and if the subscription lapses, they can no longer use the software they downloaded.

The Department did not tell the requester whether either product is taxable. Instead, it responded with a General Information Letter (GIL) -- a non-binding letter that, by regulation, only directs a taxpayer to relevant statutes and rules rather than deciding the taxpayer's specific situation. The letter recited three separate bodies of general law without ever applying them to product 1 or product 2 by name:

• How Illinois retailers and remote sellers are categorized. An "Illinois Retailer" makes sales of tangible personal property in Illinois and owes Retailers' Occupation Tax (with the triggering activities defined post-Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130, at 86 Ill. Adm. Code 270.115). A "retailer maintaining a place of business in this State" (86 Ill. Adm. Code 150.201) must register to collect and remit Use Tax on behalf of Illinois customers, even without Retailers' Occupation Tax liability of its own (86 Ill. Adm. Code 150.801). An out-of-state retailer with no Illinois nexus owes neither tax itself, but its Illinois customers must self-assess and remit Use Tax on their purchases.
• Post-Wayfair economic nexus. Following Illinois Public Act 100-587 (codified at 35 ILCS 105/2) and South Dakota v. Wayfair, Inc., 585 U.S. ___, 138 S. Ct. 2080 (2018), a remote seller with either $100,000 or more in cumulative Illinois gross receipts, or 200 or more separate Illinois transactions, must register to collect and remit Illinois Use Tax on tangible personal property sold on or after October 1, 2018 (86 Ill. Adm. Code 150.803, an Emergency Rule at the time of this letter).
• Canned vs. custom software, and the license test. "Computer software" is broadly defined at 35 ILCS 120/2-25 to include prewritten/canned software regardless of delivery medium. Canned software is generally taxable tangible personal property regardless of how it is transferred (86 Ill. Adm. Code 130.1935); custom software prepared to a customer's special order may not be taxable, though merely assembling canned programs into a package does not make it "custom" absent real, substantial changes (130.1935(c)(3)). A license of canned software escapes tax only if it satisfies all five conditions of 130.1935(a)(1): (A) a written agreement signed by both licensor and customer, (B) restrictions on duplication and use, (C) a bar on sublicensing or transfer without the licensor's permission and continued control, (D) a policy of replacing lost/damaged copies at minimal or no cost (or allowing an archival copy), and (E) a requirement to destroy or return all copies at the end of the license (automatically satisfied for a perpetual license). A click-to-accept "I agree" does not satisfy the signed-writing element. However, the Department noted it has changed its position on electronic signatures over time: in ST 06-0005-PLR (Dec. 16, 2006), it held an electronic signature did not satisfy the requirement, but in ST 18-0003-PLR (Feb. 8, 2018), it held that a verifiable, authenticatable electronic signature attached to or part of the license does satisfy it (see ST 18-0010-PLR, Sept. 26, 2018, for examples of acceptable signatures).

The letter also states that cloud-based software that is never downloaded to a client's computer -- only accessed remotely -- is not subject to tax. But if a provider gives a subscriber a local component such as an API, applet, desktop agent, or remote access agent, the subscriber is receiving taxable computer software (even without a separate charge for it) unless that transfer independently qualifies as a nontaxable license. Separately, if an Illinois customer downloads software for free from an out-of-state retailer's out-of-state server, the retailer has exercised no power or control over the property in Illinois and made no taxable use of it there, so the customer incurs no Use Tax on that donated copy. The letter closes with a freestanding statement: "Illinois does not tax subscriptions."

What the letter never says: it never states whether product 1 (subscription-only, internet-accessed training software) or product 2 (downloaded, subscription-gated video-conferencing software) is or is not taxable. Reasoning from the rules it did recite -- and this is this summary's own inference, not a Department conclusion -- product 1's description (accessed only over the internet, nothing said about downloading) resembles the cloud-based delivery the letter says is not taxed, while product 2's description (downloaded onto the customer's own computer or phone) resembles a software transfer that would need to satisfy the five-part license test to avoid tax. The Department did not draw either of these conclusions itself.

What this means for you

If you sell subscription software remotely into Illinois

Before worrying about how your software is taxed, first determine whether you have Illinois nexus at all. Under the post-Wayfair economic nexus rule recited in this letter, you must register and collect Illinois Use Tax once you cross $100,000 in cumulative Illinois gross receipts or 200 separate Illinois transactions in a year, for sales made on or after October 1, 2018. Below those thresholds (and without another form of physical presence or nexus-creating activity), your Illinois customers bear the self-assessment burden instead.

If your product is accessed only through the cloud, never downloaded

The letter's general statement is that cloud-based software never downloaded to the client's computer, and only accessed remotely, is not subject to tax. If you provide anything more than that -- an API, applet, desktop agent, or remote access agent -- that component may itself be taxable computer software, regardless of whether you charge for it separately, unless it independently satisfies the five-part nontaxable-license test.

If your product is downloaded onto the customer's device

A downloaded product looks more like a transfer of tangible personal property (canned software) than a pure service, and Illinois generally taxes such transfers unless the arrangement satisfies all five conditions of 86 Ill. Adm. Code 130.1935(a)(1) -- most importantly, a written agreement signed by both parties (a verifiable, authenticatable electronic signature can work; a simple click-to-accept box cannot). A subscription that gates continued access, as described here, does not by itself resolve the taxability question one way or the other under the framework recited in this letter.

If you're relying on this letter for your own facts

This is a GIL, not a PLR: it is expressly non-binding, even on the requester who received it, and it does not resolve any specific transaction. If you want Department certainty for your own product, you would need to request a Private Letter Ruling under 2 Ill. Adm. Code 1200.110, providing your complete facts.

Common questions

Q: Did the Department decide whether the training software or the video-conferencing software is taxable in Illinois?
A: No. The Department responded with a General Information Letter that recites the general nexus and software-taxation rules but never applies them by name to either product described in the request.

Q: When does an out-of-state seller have to start collecting Illinois Use Tax?
A: Once the seller's cumulative Illinois gross receipts reach $100,000 or more, or its separate Illinois transactions reach 200 or more, for sales made on or after October 1, 2018, per Illinois Public Act 100-587 (35 ILCS 105/2) and 86 Ill. Adm. Code 150.803, following South Dakota v. Wayfair, Inc.

Q: Is cloud-based software that a customer only accesses over the internet, and never downloads, taxable in Illinois?
A: The letter states that software provided through a cloud-based delivery system -- never downloaded onto the client's computer, only accessed remotely -- is not subject to tax. It does not say whether this specific requester's training software qualifies; it only recites the general rule.

Q: Is downloaded software taxable even if access requires an ongoing subscription?
A: The letter does not answer this directly for the video-conferencing product. Generally, canned software is taxable tangible personal property regardless of delivery method unless the transaction qualifies as a nontaxable license under the five-part test in 86 Ill. Adm. Code 130.1935(a)(1). The letter separately states, as a freestanding proposition, that "Illinois does not tax subscriptions," without tying that statement to either product.

Q: Can a click-to-accept "I agree" license avoid Illinois software tax?
A: No. The Department has held that a customer's click-to-accept acceptance does not satisfy the written-and-signed-agreement element of the five-part license test. However, the Department has also held (reversing an earlier position) that a verifiable, authenticatable electronic signature attached to or part of the license agreement can satisfy that element.

Citations and references

Statutes and regulations cited:

• 35 ILCS 105/2 (codifies Illinois Public Act 100-587, the post-Wayfair economic nexus statute)
• 86 Ill. Adm. Code 150.803 (Emergency Rule setting the $100,000/200-transaction remote-seller thresholds)
• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax on Illinois retail sales of tangible personal property)
• 86 Ill. Adm. Code 150.101 (Use Tax on the privilege of using tangible personal property in Illinois)
• 86 Ill. Adm. Code 150.201 and 150.801 (retailer maintaining a place of business in Illinois; registration and collection duties)
• 86 Ill. Adm. Code 270.115 (selling activities triggering Illinois Retailer status, post-Hartney Fuel Oil)
• 35 ILCS 120/2-25 (definition of "computer software," including prewritten/canned software, regardless of transmission medium)
• 86 Ill. Adm. Code 130.1935 (canned software taxable as tangible personal property regardless of delivery method; subsection (a)(1) sets the 5-part nontaxable-license test; subsection (c)(3) defines custom software)

Case law cited:

• Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130 (basis for the regulations defining which selling activities create Illinois Retailer status)
• South Dakota v. Wayfair, Inc., 585 U.S. ___, 138 S. Ct. 2080; 201 L. Ed. 2d 403 (2018) (upheld economic nexus for remote sellers)

Prior rulings referenced:

• ST 06-0005-PLR (Dec. 16, 2006) (Department's earlier holding that an electronic signature did not satisfy the written-agreement requirement for a nontaxable software license)
• ST 18-0003-PLR (Feb. 8, 2018) (Department's later holding that a verifiable, authenticatable electronic signature attached to or part of the license does satisfy the requirement)
• ST 18-0010-PLR (Sept. 26, 2018) (cited for examples of acceptable electronic signatures)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2019.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2019/st19-0007-gil.pdf

Original ruling text

ST 19-0007-GIL 03/20/2019 COMPUTER SOFTWARE
This letter discusses computer software. See 86 Ill. Adm. Code 130.1935. (This
is a GIL.)

March 20, 2019

Dear Xxxx
This letter is in response to your letter received March 8, 2019, 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:
In light of the Wayfair vs. South Dakota decision, I am needing some
information on whether a couple of our products would be sales taxable in
your state. We are a remote seller located in the state of STATE. The 2
products are as follows:
1) Our first product is training software provided to financial institutions
for the financial institution to train their own staff. Our employees to
[sic] not train our customer’s employees, we just provide the
software to them. The software is accessed over the internet via a
monthly subscription.
2) Our second product is similar to video conferencing software, like
PRODUCT or PRODUCT1, which our customers would download
onto their computers to be able to use with whomever to have a
video conference call. They pay a monthly subscription fee to have
access to use the software. Although they download the software to

ST 19-0007-GIL
Page 2

their computer or phone, they would no longer be able to use the
software once there [sic] subscription runs out.
Please advise as to the sales tax treatment of both products. If you
could please also send me where this is addressed in your law I would
greatly appreciate it.
DEPARTMENT’S RESPONSE:
The Retailers' Occupation Tax Act imposes a tax upon persons engaged in this
State in the business of selling tangible personal property at retail to purchasers for use
or consumption. See 86 Ill. Adm. Code 130.101. 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. See 86 Ill. Adm. Code 150.101. These taxes comprise what is
commonly known as “sales tax” in Illinois.
An “Illinois Retailer” is one who makes sales of tangible personal property in
Illinois. The Illinois Retailer is then liable for Retailers' Occupation Tax on gross receipts
from sales and must collect the corresponding Use Tax incurred by the purchasers.
Our regulations were amended in response to the Illinois Supreme Court’s decision in
Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130. The regulations specify the selling
activities that trigger Retailers’ Occupation Tax liability in Illinois.
Another type of retailer is a retailer maintaining a place of business in Illinois.
The definition of a “retailer maintaining a place of business in this State” is described in
86 Ill. Adm. Code 150.201. This type of retailer is required to register with the State as
an Illinois Use Tax collector. See 86 Ill. Adm. Code 150.801. The retailer must collect
and remit Use Tax to the State on behalf of the retailer’s Illinois customers even though
the retailer does not incur any Retailers' Occupation Tax liability.
The final type of retailer is the out-of-State retailer that does not have sufficient
nexus with Illinois to be required to submit to Illinois tax laws. A retailer in this situation
does not incur Retailers’ Occupation Tax on sales into Illinois and is not required to
collect Use Tax on behalf of its Illinois customers. However, the retailer’s Illinois
customers will still incur Use Tax liability on the purchase of the goods and have a duty
to self-assess and remit their Use Tax liability directly to the State.
Pursuant to the enactment of Illinois Public Act 100-587, codified at 35 ILCS
105/2, and the subsequent U.S. Supreme Court decision in South Dakota v. Wayfair,
Inc, 585 U.S. ___, 138 S. Ct. 2080; 201 L. Ed. 2d 403 (2018), remote (out-of-state)
sellers with either cumulative gross receipts from Illinois sales of $100,000 or more, or
200 or more separate Illinois transactions, are required to register to collect and remit
Illinois Use Tax for sales of tangible personal property made on or after October 1,
2018. See 86 Ill. Adm. Code 150.803 (Emergency Rule).

ST 19-0007-GIL
Page 3
“‘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;

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.

ST 19-0007-GIL
Page 4

In order to comply with the requirements as set out in Section
130.1935(a)(1), there must be a written “signed” agreement. A license agreement in
which the customer electronically accepts the terms by clicking “I agree” does not
comply with the requirement of a written agreement signed by the licensor and
customer. The Department previously held that an electronic signature did not comply
with the requirement of Section 130.1935(a)(1)(A) that the license be evidenced by a
written agreement signed by the licensor and the customer. ST 06-0005-PLR
(December 16, 2006). In ST 18-0003-PLR (February 8, 2018), the Department decided
that an electronic license agreement in which the customer accepts the license by
means of a signature in electronic form that is attached to or is part of the license, is
verifiable, and can be authenticated will comply with the requirement of a written
agreement signed by the licensor and customer. See ST 18-0010-PLR (September 26,
2018) for examples of acceptable written signatures. A license agreement in which the
customer electronically accepts the terms by clicking “I agree” remains unacceptable.
Currently, computer software provided through a cloud-based delivery system –
a system in which computer software is never downloaded onto a client’s computer and
is only accessed remotely – is not subject to tax.
Computer software is defined broadly in the Retailers’ Occupation Tax Act. If a
provider of a service provides to the subscriber an API, applet, desktop agent, or a
remote access agent to enable the subscriber to access the provider’s network and
services, the subscriber is receiving computer software. Although there may not be a
separate charge to the subscriber for the computer software, it is nonetheless subject to
tax, unless the transfer qualifies as a non-taxable license of computer software.
If an Illinois customer downloads computer software for free from an out-of-state
retailer’s web site or server that is also located out-of-state, the retailer, even though it is
donating tangible personal property to the customer, has exercised no power or control
over the property in Illinois. In this instance, the donor would not have made any
taxable use of the property in Illinois. The customer, the donee, would incur no Use Tax
liability for the retailer to collect and remit to Illinois. Illinois does not tax subscriptions.
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
RSW:rkn