What does Illinois General Information Letter ST 20-0002-GIL conclude about Computer Software?

Plain-English summary

An out-of-state company running an online file storage (cloud) service asked the Illinois Department of Revenue whether it needed to collect and remit Illinois sales tax, citing the South Dakota v. Wayfair decision on out-of-state seller obligations. The company explained that it sells no tangible personal property — it just provides secure cloud storage — and wanted official confirmation of how Illinois sales tax rules would apply.

The Department's answer: it depends on whether the service transfers computer software to the customer. Illinois taxes retail sales of tangible personal property under the Retailers' Occupation Tax and Use Tax, and taxes servicemen (businesses that sell services) under the Service Occupation Tax and Service Use Tax only to the extent they transfer tangible personal property incident to the service. Simply letting customers view, download, or transmit data over the internet is not, by itself, a transfer of tangible personal property. So a pure cloud storage service that hands over no software generally owes no Retailers' Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax.

However, "computer software" is defined broadly under Illinois law, and if the provider gives the customer an API, applet, desktop agent, or remote access agent so the customer can reach the provider's network and services, the Department treats that as a transfer of computer software — even if there's no separate charge for it. That transfer is taxable unless it satisfies the specific criteria for a non-taxable software license (a signed written agreement, restrictions on duplication/transfer, a replacement-copy policy, and a return/destroy-at-end-of-license requirement). The GIL also notes that computer software delivered through a cloud-based system that is never downloaded to the customer's computer — only accessed remotely — is not currently subject to tax.

What this means for you

SaaS and cloud storage providers

If your service involves nothing more than customers viewing or storing data through your infrastructure, with no software, app, API, or access agent installed on or downloaded to their side, Illinois generally does not tax that as a retail sale or as a taxable service transaction. The moment you provide an API, applet, desktop agent, or remote access agent to let customers connect to your systems, the Department views that as a software transfer that is presumptively taxable — you'd need to structure it as a compliant software license (in a signed written agreement meeting all the criteria in 86 Ill. Adm. Code 130.1935(a)(1)) to avoid the tax.

Out-of-state sellers evaluating Illinois nexus

This letter doesn't resolve Wayfair-style economic nexus questions (whether you must register at all) — it only addresses whether your particular transaction is taxable once you're subject to Illinois tax. The Department did not answer the taxpayer's specific questions about identifying Illinois customers by zip code or finding applicable tax rates; it focused on the threshold taxability issue.

Accountants and tax professionals

The line the Department draws is the transfer of tangible personal property (specifically, computer software). Watch for API keys, downloadable agents, browser plug-ins, or desktop clients bundled with an otherwise service-only offering — these can convert an exempt service into a taxable software transaction unless the license exemption criteria are met.

Common questions

Q: Does an online file storage/cloud service have to charge Illinois sales tax?
A: Not if the provider transfers no tangible personal property (including computer software) to the customer. In that case, the transaction generally isn't subject to Retailers' Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax.

Q: What if customers need to install something to use the service?
A: If the provider gives the customer an API, applet, desktop agent, or remote access agent to access the provider's network and services, the Department treats that as a transfer of computer software, which is subject to tax unless it qualifies as a non-taxable license under 86 Ill. Adm. Code 130.1935(a)(1).

Q: Can a software license avoid tax even if something is transferred?
A: Yes, if it meets all five criteria: a signed written agreement, restrictions on the customer's duplication/use, a bar on sublicensing/transfer without the licensor's continued control, a replacement-copy or archival-copy policy, and a requirement to destroy or return all copies at the end of the license. A click-to-accept "I agree" license does not satisfy the signed-writing requirement, though a verifiable electronic signature can (see ST-18-0010-PLR).

Q: Is purely cloud-based (never downloaded) software taxed?
A: The GIL states that computer software delivered through a cloud-based system, where it is never downloaded onto the client's computer and is only accessed remotely, is not currently subject to tax.

Q: Is this letter binding on the Department?
A: No. It's a General Information Letter, which directs the taxpayer to relevant regulations and general principles but is not a statement of Department policy and is not binding, unlike a Private Letter Ruling.

Citations and references

• 35 ILCS 120/2 (Retailers' Occupation Tax Act — imposition of tax)
• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax — nature of tax)
• 35 ILCS 105/3 (Use Tax Act — imposition of tax)
• 86 Ill. Adm. Code 150.101 (Use Tax — nature of tax)
• 86 Ill. Adm. Code 150.130 (Use Tax — credit for Retailers' Occupation Tax paid)
• 86 Ill. Adm. Code 140.101 (Service Occupation Tax — nature of tax)
• 35 ILCS 120/2-25 (Retailers' Occupation Tax Act — definition of "computer software")
• 86 Ill. Adm. Code 130.1935 (Retailers' Occupation Tax — computer software)
• 86 Ill. Adm. Code 130.1935(c)(3) (custom computer programs)
• 86 Ill. Adm. Code 130.1935(a)(1) (non-taxable software license criteria)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedures)
• 2 Ill. Adm. Code 1200.120 (General Information Letter procedures)
• ST-18-0010-PLR (Sept. 26, 2018) (electronic signature examples for software licenses)

Subject

Computer Software

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2020.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2020/st20-0002-gil.pdf

Original ruling text

ST 20-0002-GIL 01/21/2020 COMPUTER SOFTWARE
A provider of software as a service is acting as a serviceman. If the provider does not transfer
any tangible personal property to the customer, then the transaction generally would not be
subject to Retailers’ Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax. If
the provider transfers to the customer an API, applet, desktop agent, or a remote access agent
to enable the customer to access the provider’s network and services, it appears the subscriber
is receiving computer software that is subject to tax. See 86 Ill. Adm. Code Parts 130 and 140.
(This is a GIL.)
January 21, 2020
Dear Xxxx:
This letter is in response to your letter dated December 24, 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:
I had contacted NAME from DEPARTMENT on 12/13/2019 and she suggested we send
question to DEPARTMENT for a response.
There have been some recent charges in sales tax for out of state sellers based on the “United
States Supreme Court Ruling” of South Dakota v. Wayfair, Inc.
https://en.wikipedia.org/wiki/South_Dakota_v._Wayfair%2C_Inc.
We would like to find out if our type of online File Storage service is eligible to collect and pay
Sales Tax in Illinois.
BUSINESS is a STATE “C” Corporation with a single office in CITY, STATE. BUSINESS is a
secure cloud platform for Online File Storage services. We do not sell any tangible personal
property. More information about our cloud service can be found at:
E-MAIL
Some of the states I have called have told me that online data storage is not taxable for Sales &
use Tax. However, I would like an official confirmation on this.

ST 20-0002-GIL
Page 2

We would like to get clarity on the below questions:
Is our type of online file storage service required to collect Sales & use tax from our Illinois
Customers and pay Sales Tax in Illinois?
If we are eligible to collect/pay sales Tax:
Is it OK to identify our Illinois customers from their Zipcode?
What is the sales tax percentage for Illinois for our kind of service? Is this a Fixed value for the
entire state or differs by Zipcode? Where can I find this information online?
We await your response to this matter so we can make necessary changes for compliance.
DEPARTMENT’S RESPONSE:
Sales Tax
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 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. See 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 reduce the amount of Use Tax they must remit by
the amount of Retailers' Occupation Tax liability which they are required to and do pay to the
Department with respect to the same sales. See 86 Ill. Adm. Code 150.130.
Service Transactions
Retailers' Occupation Tax and Use Tax do not apply to sales of service. Under the Service
Occupation Tax Act, businesses providing services (i.e., servicemen) are taxed on tangible personal
property transferred as an incident to sales of service. See 86 Ill. Adm. Code 140.101. The purchase
of tangible personal property that is transferred to the service customer may result in either Service
Occupation Tax liability or Use Tax liability for the servicemen depending upon his activities. The
serviceman’s liability may be calculated in one of four ways:
1)

separately-stated selling price of tangible personal property transferred incident to
service;

2)

50% of the serviceman's entire bill;

3)

Service Occupation Tax on the serviceman's cost price if the serviceman is a registered
de minimis serviceman; or

ST 20-0002-GIL
Page 3
4)

Use Tax on the serviceman's cost price if the serviceman is de minimis and is not
otherwise required to be registered under Section 2a of the Retailers' Occupation Tax
Act.

The Department does not consider the viewing, downloading or electronically transmitting of
video, text and other data over the internet to be the transfer of tangible personal property. However,
if a company provides services that are accompanied with the transfer of tangible personal property,
including computer software, such service transactions are generally subject to tax liability under one
of the four methods set forth above.
If a transaction does not involve the transfer of any tangible personal property to the customer,
then it generally would not be subject to Retailers’ Occupation Tax, Use Tax, Service Occupation Tax,
or Service Use Tax.
Computer Software
“‘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:
1)

It is evidenced by a written agreement signed by the licensor and the customer;

2)

It restricts the customer’s duplication and use of the software;

3)

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;

4)

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

ST 20-0002-GIL
Page 4

5)

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 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 recently decided 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 (Sept. 26, 2108) for examples
of acceptable electronic signatures. A license agreement in which the customer electronically accepts
the terms by clicking “I agree” remains unacceptable.
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.
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.
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:ter