How does Illinois sales, use, and service occupation tax apply to open-source software licenses and to paid software subscriptions?

Plain-English summary

This GIL responds to an inquiry from a global provider of open-source software (things like operating systems, virtualization, middleware, and cloud/storage software) that distributes its products under standard open-source licenses (like the GNU General Public License) at no charge, but sells paid annual or multi-year subscriptions that bundle technical support, security updates, bug fixes, feature upgrades, a customer support portal, account-management tools, and intellectual-property infringement protection. The company asked the Department to confirm how Illinois Retailers' Occupation Tax ("ROT"), Use Tax, Service Occupation Tax ("SOT"), and Service Use Tax apply to (1) the free open-source licenses and (2) the paid subscriptions. Because the inquiry required general guidance rather than a ruling on a fully documented, binding fact pattern, the Department answered with a GIL rather than a Private Letter Ruling (PLR).

On the open-source licenses, the Department explained that Illinois generally taxes "canned" (prewritten) computer software as tangible personal property, and that a software license escapes tax only if it satisfies a strict five-part test in 86 Ill. Admin. Code 130.1935(a)(1) (written and signed agreement, restrictions on duplication/use, restrictions on sublicensing, a replacement-copy policy, and a return/destroy-at-end-of-term requirement). Open-source licenses by design cannot meet several of those prongs — they explicitly permit free redistribution and modification — so, on paper, they'd be taxable retail sales. But because the company gives the software away for no consideration, there is no taxable "selling price" to tax under ROT, and because the company also obtained the open-source code for free, it has no cost basis on which to accrue Use Tax either. The bottom line: no ROT, no Use Tax, on the free open-source distribution itself.

On the paid subscriptions, the Department found the subscription fee relates to services (support, maintenance, updates, portal access, IP protection) rather than to the software license itself, so the subscription charge is not subject to ROT. However, because the company still transfers some tangible personal property (software and its updates) incident to those services, it is treated as a "serviceman" under the Service Occupation Tax Act. Since the cost of the open-source software it incorporates is zero (it was acquired for free), the company's "cost ratio" of materials to service receipts is zero, making it a "de minimis serviceman" — but with no taxable cost basis, there is likewise no SOT actually due.

Beyond the specific facts, the GIL also lays out Illinois' general framework for computer software taxability that applies well beyond open source: the difference between taxable "canned" software and exempt custom software, the mechanics of cloud-based/SaaS delivery, the requirements for a valid written/signed software license (including what counts as an acceptable electronic signature), and how maintenance and update agreements are taxed.

What this means for you

Software companies distributing free/open-source code

If you give away software under a standard open-source license with no license fee, you generally owe no ROT on that transfer and no Use Tax on the code itself, because there is no price paid on either side of the transaction. This holds even though open-source licenses don't satisfy Illinois' five-prong "nontaxable license" test, because the tax is based on price, and the price is zero.

SaaS and subscription-based software providers

Bundling software access with support, maintenance, updates, and portal/account-management tools into one service fee can keep the whole charge out of ROT, provided the underlying software itself is not being separately sold or licensed for a fee. But if you transfer any tangible personal property (physical media, on-premises installations, non-open-source updates, etc.) as part of delivering that service, you may still be a "serviceman" subject to SOT/Service Use Tax on the cost or value of that property — the rate and method depend on whether you separately state materials charges and whether your cost-of-materials ratio makes you a regular serviceman or a "de minimis serviceman." Purely cloud-delivered software that is never downloaded to the customer's computer is not taxed at all, but providing an API, applet, desktop agent, or remote-access agent to the subscriber does count as delivering computer software, and it can be taxable unless it independently qualifies for the nontaxable-license exclusion.

Accountants and tax professionals structuring software license agreements

If you want a canned software license to be nontaxable, all five prongs of 86 Ill. Admin. Code 130.1935(a)(1) must be met, including a signed written agreement — a simple "click to accept" checkbox does not satisfy the signature requirement (per ST 06-0005-PLR), though a verifiable, authenticatable electronic signature attached to or part of the agreement can qualify (per ST 18-0003-PLR and ST 18-0010-PLR). Separately stated maintenance/support/training/installation charges are generally nontaxable services, but charges for software updates/new versions bundled into a maintenance agreement are taxable as sales of canned software unless separately stated and distinguished from the nontaxable service charges.

Common questions

Q: Do I owe Illinois sales tax on open-source software I give away for free?
A: No. If there is no charge for the software, there is no taxable selling price, so Retailers' Occupation Tax does not apply, even though open-source licenses typically fail the state's five-prong test for a nontaxable software license (because they permit free redistribution, modification, and no requirement to return/destroy copies).

Q: Do I owe Use Tax on open-source software I distribute?
A: If you acquired the open-source software for free and are also giving it away for free, there is no cost price to serve as a Use Tax base, so no Use Tax is due. (Note: if a company takes open-source code and builds it into a finished product it then gives away, the company — not the recipient — is treated as the "end user" for Use Tax purposes, and Use Tax would be based on the company's own cost price of any materials it purchased and incorporated.)

Q: Is my software subscription fee taxable?
A: A subscription fee covering support, security updates, feature upgrades, portal access, and similar services is treated as a nontaxable service (not subject to ROT), as long as no part of the charge relates to a separate software license fee and any software provided is distributed under an open-source license at no charge. Service Occupation Tax can still apply separately to any tangible personal property transferred as part of delivering the service.

Q: How does Illinois generally distinguish taxable "canned" software from exempt "custom" software?
A: Canned (prewritten) computer software is taxable tangible personal property regardless of delivery method (disc, download, etc.). Custom software prepared to a customer's special order can be exempt, but merely assembling or lightly configuring prewritten/canned components does not make it "custom" — there must be real and substantial changes to the programs or creation of program interfacing logic under 86 Ill. Admin. Code 130.1935(c)(3).

Q: What makes a software license agreement "signed" for purposes of the nontaxable-license test?
A: A license accepted merely by clicking "I agree" online does not satisfy the written-and-signed requirement (ST 06-0005-PLR). However, an electronic signature that is attached to or made part of the license, and that is verifiable and can be authenticated, does satisfy the requirement (ST 18-0003-PLR); see ST 18-0010-PLR for examples of acceptable signature formats.

Q: Is cloud-based (SaaS) software taxed the same as downloaded software?
A: No. Software delivered through a cloud-based system where it is never downloaded to the customer's computer and is accessed only remotely is not subject to tax. But if the provider furnishes an API, applet, desktop agent, or remote-access agent to enable that access, that item is itself treated as computer software delivered to the subscriber, and it can be taxable (even with no separate charge) unless it independently qualifies for the nontaxable-license exclusion. Illinois generally does not tax pure subscription/access fees on their own.

Citations and references

• 35 ILCS 120/1 (Retailers' Occupation Tax Act, definitions)
• 35 ILCS 120/2 (imposition of Retailers' Occupation Tax)
• 35 ILCS 120/2-25 (definition of computer software)
• 35 ILCS 105/2 (Use Tax Act, definitions)
• 35 ILCS 105/3 (imposition of Use Tax)
• 35 ILCS 105/3-25 (Use Tax Act, computer software)
• 86 Ill. Admin. Code 130.1935 (taxation of computer software, including the five-prong nontaxable license test and custom-vs-canned distinction)
• 86 Ill. Admin. Code 130.101 (Retailers' Occupation Tax generally)
• 86 Ill. Admin. Code 140.101 (Service Occupation Tax generally)
• 86 Ill. Admin. Code 140.105 (serviceman and de minimis serviceman defined)
• 86 Ill. Admin. Code 140.106 (serviceman tax base calculation methods)
• 86 Ill. Admin. Code 140.108 (de minimis serviceman not required to register as a retailer)
• 86 Ill. Admin. Code 140.109 (de minimis serviceman required to register as a retailer)
• 86 Ill. Admin. Code 140.301(b)(3) (taxation of maintenance agreements under the Service Occupation Tax Act)
• 86 Ill. Admin. Code 150.101 (Use Tax generally)
• 86 Ill. Admin. Code 150.130 (Use Tax credit for Retailers' Occupation Tax paid)
• 86 Ill. Admin. Code 150.305(b), (c) (Use Tax on property purchased and given away)
• Illinois Department of Revenue ST 13-0027-GIL (May 28, 2013)
• Illinois Department of Revenue ST 06-0005-PLR (December 16, 2006)
• Illinois Department of Revenue ST 18-0003-PLR (February 8, 2018)
• Illinois Department of Revenue ST 18-0010-PLR (September 26, 2018)

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/st20-0009-gil.pdf

Original ruling text

ST 20-0009-GIL 06/09/2020 COMPUTER SOFTWARE
This letter discusses open source software. 35 ILCS 120/2-25. (This is a GIL.)

June 9, 2020
Re: Private Letter Ruling Request – Retailers’ Occupation Tax, Use Tax, Service Occupation
Tax, Service Use Tax as applied to Open Source Software Licenses and Subscription
Services
Dear Xxxx:
This letter is in response to your letter dated February 19, 2020, 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:
On behalf of our client, COMPANY, (FEIN – [XX-XXXXXXX]/ IBT – [XXXX-XXXX])
(COMPANY or the “Company”), please allow this to serve as a request for a Private
Letter Ruling as authorized by the Illinois Department of Revenue (the “Department”)
per 2 Ill. Admin. Code 1200.110 with respect to the inquiry detailed below. If the
Department has any questions relating to the facts described, please contact the
undersigned.
The firm of REPRESENTATIVE (the “Representative”) is authorized to request the
Private Letter Ruling on behalf of the Company. An executed power of attorney is
attached. Taxpayer identifying information is set out as follows:
COMPANY
ADDRESS
Statement of Facts
Taxpayer Information
This Private Letter Ruling (“PLR”) is requested to determine the Retailers’ Occupation
Tax, Use Tax, Service Use Tax consequences of actual business practices of the
Company. The Company is not currently the subject of litigation or audit regarding the
matters discussed in this PLR relating to Illinois transactions. To the best of the

ST 20-0009-GIL
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knowledge of both the Company and Representative, the Department has not
previously ruled on this or a similar issue for the taxpayer or any predecessor. The
Company, and any of its representatives, have not previously submitted the same or
similar issue to the Department and withdrawn before a letter ruling was issued. The
Company is a registered retailer with the Department.
Description of Company’s Business Operations
The Company is leading global provider of open source software solutions, using a
community-powered approach to develop and offer a reliable and high-performing
operating system, virtualization, management, middleware, cloud, mobile, and storage
software under a subscription model.
The Company employs an open source development model. The open source
development model allows the Company to use the collective input, resources, and
knowledge of a global community of contributors who collaborate to develop, maintain,
and enhance the software. The collaboration is possible because the human-readable
source code for that software is publicly available and licenses permit modification.
The Company provides value to its customers through the aggregation, integration,
testing, certification, delivery, maintenance, enhancement, and support of software, and
by providing a level of performance, scalability, flexibility, reliability, and security for the
technologies it packages and distributes.
Material Facts Relating to PLR request
Open Source Software
To better understand the business model, it is important to define and establish the
differences between open source software and proprietary software.
Open source software is an alternative to proprietary software and represents a different
model for the development and licensing of commercial software code than that typically
used for proprietary software. Because open source software code is often freely
shared, there are customarily no licensing fees for the use of open source software.
Open source software is software licensed under an open source license as approved
by the Open Source Initiative (WEBSITE), which allows software to be freely used,
modified, and shared. The distribution terms of open source software must comply with
certain criteria: (i) free redistribution, the license shall not require a royalty or other fee
for such transaction: (ii) available source code, program must allow distribution in
source code which can be compiled; and (iii) other criteria provided by open source
community. The relevant common Open Source Initiative “Open Source Definition”
provisions are reproduced below:

1. Free Redistribution – The license shall not restrict any party from selling or
   giving away the software as a component of an aggregate software
   distribution containing programs from several different sources. The license
   shall not require a royalty or other fee for such sale.
2. Source Code – The program must include source code and must allow
   distribution in source code as well as compiled form. Where some form of a

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product is not distributed with source code, there must be a well-publicized
means of obtaining the source code for no more than a reasonable
reproduction cost, preferably downloading via the Internet without charge.
The source code must be in the preferred form in which a programmer would
modify the program. Deliberately obfuscated source code is not allowed.
Intermediate forms such as the output of a preprocessor or translator are not
allowed.

3. Derived Works – The license must allow modification and derived works, and
   must allow them to be distributed under the same terms as the license of the
   original software.
   The Company takes open source software in the form of source code, vets it for security
   issues, creates machine-readable executable files with Company branding, and tests it
   with customers and partners.
   The Company collaborates with a multitude of
   contributors and projects to produce enterprise-ready, stable products such as
   COMPANY PRODUCT 1, COMPANY PRODUCT 2 Application Platform, and
   COMPANY PRODUCT 3 Platform.
   The Company distributes its software subject to the original, third-party open source
   licenses. The most popular open source license, the GNU General Public License
   (“GPL”) is intended to guarantee a user’s freedom to share and modify the program and
   to make sure the software, including modifications, remains free for all its users. These
   licenses provide broad rights for recipients of the software to use, copy, modify, and
   redistribute the software without a license fee. These rights afford significant latitude
   for recipients to inspect, suggest changes to, customized and enhance the software.
   Through this model, recipients can develop their own programs and solutions.
   On the other hand, proprietary software refers to software that is solely owned by the
   individual or the organization that developed it, who holds the legal property rights, and
   only the owner or publisher can access the source code. The open source licensing
   model provides an inherent level of transparency and choice that contrasts with
   proprietary software licensing models. Under the proprietary software model, a
   software vendor generally develops the software itself or acquires components from
   other vendors, without the input from a wider community of participants.
   The open source subscription model also contrasts with the typical proprietary software
   license model from a U.S. GAAP revenue recognition perspective. Under a proprietary
   software license model, the vendor typically recognizes license revenue in the period
   that the software is initially licensed. In contrast, under COMPANY’s subscription
   model, it generally defers revenue when it bills the customer and recognizes revenue
   ratably over the life of the subscription term.
   Subscription Model
   The Company provides its software and support offerings primarily under annual or
   multi-year subscriptions. Subscriptions are marketed and sold to customers directly
   and indirectly through business partners. The Company provides a subscriber with the
   original, perpetual, non-exclusive open source licenses for free. Recipients retain the
   right to use the software under the applicable license terms. The term of the license is

ST 20-0009-GIL
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perpetual; only the subscription is time-based. The Company does not charge a license
fee with respect to the Company software but does charge a fee for subscriptions.
Clients pay the Company a fee for the services in the form of a subscription that
provides customers with a comprehensive software solution for the duration of the
subscription. A subscription generally entitles a customer to a specified level of support,
as well as access to the software, software maintenance in the form of security updates,
fixes, functionality enhancements, upgrades to the software, on an if and when available
basis, and a partner ecosystem of certified, supported hardware and software. A
subscription also includes access to the COMPANY Customer Portal, which provides
customers with services such as its support knowledge base, product usage
documentation, and account management tools. The support knowledge base is the
cumulative documentation of support cases over the years that may be searched by
customers. The Customer Portal also provides account management tools to assist
system administrators with organizational and user-based actions such as adding,
changing or deleting organizations (e.g., divisions) as well as individuals users and
groups. The Company offers customers subscription options that provide varying levels
of customer support, including self-support, standard support, and premium support.
Hours of coverage, the available support channel(s), and response times depend upon
the level of support purchased.
In addition, the Company’s customers are eligible to participate in the CAPITAL
program, which provides certain protections in the event of an intellectual property (“IP”)
infringement claim made against a customer and based on the Company’s software
offerings. CAPITAL program also provides customers with the Company’s obligation
during the term of the subscription to: (i) repair or replace the infringing portion of the
software; (ii) modify the software so that its use becomes non-infringing; or (iii) obtain
the rights necessary for a customer to continue its use of the software.
If a customer already has an open source license for the software, it may still choose to
purchase a subscription for the support and added comfort it provides regarding
functionality and access to security and bug fixes, in addition to the protection afforded
by the PROGRAM Agreement offered only during the term of a subscription. The price
of a subscription is the same regardless of whether the customer already has a license.
The Company offers compiled and branded products to subscribers and nonsubscribers through an evaluation program that provides access to the software,
governed by the open source licenses. Evaluations are not intended for production
environments. The Company also maintains an “upstream first” engineering strategy
whereby engineers collaborate with the various upstream communities to get source
code changes (e.g. features, functions, fixes, patches, etc.) accepted in the applicable
open source community before adding such changes to the Company product. Not only
does this upstream first engineering approach drive collaboration with other developers,
it also makes the source code available to both subscribers and non-subscribers.
Pricing
The Company’s commercial contracts establish the basis of the fee for the subscription
services to be the total number and capacity of units (e.g. physical and virtual instances,

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cores, sockets, etc.) and supported use case for each Company product that a
customer deploys. This combination of units and use cases is a good indicator of the
size, scope and complexity of the anticipated services workload for a given client
deployment.
The Company does not allocate any of the transaction price to the functional IP given
the relative fair value is effectively zero (that is, it is available for free). Therefore,
although the Company deems the delivery of the functional software code a distinct
performance obligation within the context of the contract, the estimated relative fair
value is deemed to be zero.
Requested Ruling
The Company requests that the Department rule on the Company’s providing (1) open
source software licenses, and (2) subscription services as follows:

1. The Company’s providing access to open source software licenses for no
   consideration is not subject to the Retailers’ Occupation Tax. Use Tax may
   be due on the cost price of the software.
2. The Company’s subscription services are non-taxable services and not
   subject to the Retailers’ Occupation Tax. Service Occupation Tax may be
   due on the cost price of the software or other tangible property transferred as
   part of the service.
   Statement of Law
   Statues, Rules, and Rulings:
   35 ILCS 120/1
   35 ILCS 120/2
   35 ILCS 120/2-25
   35 ILCS 105/2
   35 ILCS 105/3
   35 ILCS 105/3-25
   86 Ill. Admin. Code 130.1935
   86 Ill. Admin. Code 140.105
   86 Ill. Admin. Code 140.106
   86 Ill. Admin. Code 140.108
   86 Ill. Admin. Code 140.109
   Illinois Department of Revenue ST 13-0027-(GIL) (May 28, 2013)
   Law Relevant of Open Source Software
   Illinois generally subjects canned software to Retailers’ Occupation Tax (“ROT”) and Use Tax
   (“UT”), while sales of custom software are exempt per 35 ILCS 120/2(a); 35 ILCS 120/2-25; 35
   ILCS 105/3; 35 ILCS 105/3-25; and 86 Ill. Admin. Code 130.1935(a), (c)(1). However, a
   license of software, whether canned or custom, is not a taxable retail sale under ROT or UT if

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it meets the Illinois five prong test for a non-taxable software license under 86 Ill. Admin. Code
130.1935(a)(1), if the following conditions are met:

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 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; and
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 for the in the license agreement.
   A transfer of ownership or title to tangible personal property, including software, without a
   charge or other consideration from a retailer to a customer is not subject to ROT or UT per 35
   ILCS 120/1 and 35 ILCS 105/2. However, in such a case the would-be retailer is deemed the
   ultimate purchaser or user of the tangible personal property, including software and must remit
   UT on the cost price of any property transferred per 35 ILCS 120/1; 35 ILCS 105/2; and 35
   ILCS 105/3.
   Law Relevant to Subscription Service
   Illinois generally subjects software maintenance and upgrades sold as part of a software
   license to tax under ROT and UT as part of the underlying taxable software license per 86 Ill.
   Admin. Code 130.1935(a), (b). However, separately stated software maintenance including
   software bug fixes, training, telephone assistance, installation and consultation is a nontaxable service per 86 Ill. Admin. Code 130.1935(b); 86 Ill. Admin. Code 140.301(b)(3); and
   Illinois Department of Revenue ST 13-0027-GIL (May 28, 2013). As a serviceman, sellers of
   separately provided software maintenance services must pay the applicable tax on the
   materials transferred under the maintenance agreement per 86 Ill. Admin. Code 130.1935(b).
   Service providers transferring tangible personal property to service customers will incur either
   Service Occupation Tax (“SOT”) or UT liability upon the property transferred. Depending upon
   whether a service provider is deemed a “serviceman” or “de minimis serviceman,” whether the
   customer separately billed for materials, and whether the service provider is registered to
   collect ROT or is required to be. Depending upon the aforementioned factors, a service
   provider may incur tax liability on the material transferred incident to their service in one of four
   methods.
   If a service provider is deemed a “serviceman,” it will incur SOT based upon either the
   separately states [sic] sales price of materials to the customer or based upon 50% of the total
   lump sum charge for service and materials to the customer depending upon the method of
   billing. A service provider transferring tangible personal property is considered a “serviceman”
   if the ratio between the cost of tangible personal property transferred incident to sales of
   service and the “serviceman’s” total annual gross receipts from all sales of service is 35% or

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greater per 86 Ill. Admin. Code 140.105(a). If deemed a “serviceman” and the price of
materials to the customer is separately stated from the service charges, the SOT liability is
based on the sales price of the tangible personal property sold per 86 Ill. Admin. Code
140.106(a)(1). If the “serviceman” does not separately state the price of materials to the
customer, the SOT liability is based upon 50% of the entire customer charge per 86 Ill. Admin.
Code 140.106(a)(2). The “serviceman” may then bill Service Use Tax (“SUT”) to its customer
in the amount of the SOT liability to recover the cost of the SOT remitted to Illinois per 86 Ill.
Admin. Code 140.106(e).
A service provider transferring tangible personal property is considered a “de minimis
serviceman” if the serviceman’s cost ratio is less than 35% per 86 Ill. Admin. Code 140.105(b).
If a “de minimis serviceman” is required to be registered as a retailer under Section 2a of the
Retailers’ Occupation Tax Act, the “de minimis serviceman” incurs SOT liability on the cost
price materials provided to the customer, and may bill SUT to the customer for this amount to
recover the cost of SOT remitted to Illinois per 86. Ill. Admin. Code 140.109(a), (a)(4).
However, if a “de minimis serviceman” is not required to be registered as a retailer under
Section 2a of the Retailers’ Occupation Tax Act, the “de minimis serviceman” incurs UT liability
on the cost price of the materials per 86 Ill. Admin. Code 140.108(a), (a)(1).
Analysis of Grounds for Requested Ruling
We have examined the relevant statues, regulations, and guidance issued by the Department.
Unfortunately, the Department has not issued any letter rulings or guidance on this topic within
the last 10 years that the taxpayer or state can rely on.
Open Source Software
Generally, Illinois subjects canned software to ROT and UT regardless of the method of
delivery. In order to qualify for the license of software retail sale exclusion, the software
license must satisfy the five-prong test provided by Illinois regulation. The Company’s
software licenses are subject to the open source license provisions and are provided at no
charge. As the software licenses are distributed under the open source license provisions, the
licenses specifically cannot (1) restrict the duplication and use of the software, (2) prohibit the
licensing or transfer of software to third-parties, or (3) require the destruction or return of
software. Therefore, the license of the Company’s software would be a taxable sale at retail
since it does not satisfy the second, third, and fifth prongs of the exclusion. However, the
Company’s software licenses are provided at no charge, and there is no taxable base upon
which to impose ROT.
As the Company’s software licenses are provided at no charge, the Company is required to
accrue UT on the cost of materials relating to the software licenses. However, since the
Company’s software licenses are provided at no charge there is no taxable base upon which to
impose UT.
Subscription Service
The Company’s subscription service constitutes the sale of non-taxable services. As
described above, the subscription services include a number of elements including: (1) access
to the software, (2) support services; (3) software maintenance in the form of security updates,

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fixes, functionality enhancements, and upgrades; (4) access to the COMPANY Customer
portal providing access to a knowledge base and documentation; (5) account management
tools; and (6) participation in the CAPITAL Program to provide IP infringement protection.
No portion of the subscription service charge is related to the open source software license.
Further, the open source software upgrades and fixes are derivative works and modifications
to open source software, which under the aforementioned “Open Source Definition” fall under
the original open source software license. Per the Company’s Enterprise Agreement, the
subscription services are described as a “service offering.” As no portion of the subscription
services charges relate to the software license, and the software, upgrades and fixes fall under
the open source software license, the Company’s provision of subscription services are nontaxable services not subject to ROT.
As the Company provides services, it will be considered a service provider under SOT and
SUT and may incur tax liability on the materials provided to its customers as part of the
subscription services. The Company’s cost of materials in providing its services relates to
open source software do not include the payment by the Company of any licensee fees for the
open source software as the software is freely available from the open source community.
Therefore, the cost ratio between the cost of tangible personal property transferred incident to
sales of service and compared to the total annual gross receipts from all sales of service is
zero and the Company will be considered a “de minimis serviceman.” The Company is a
registered retailer with the Department, it must incur SOT on the cost price of the tangible
personal property transferred incidental to its services. The Company may then bill SUT to its
customer in the amount of the SOT liability to recover the cost of the SOT remitted to Illinois.
However, as noted above, the Company’s cost of materials in providing its services relates to
open source software where no fee or royalty was paid by COMPANY, and therefore there is
no taxable base upon which to impose SOT.
Authorities Contrary to Requested Ruling
As mentions previously, Illinois has not issued any letter ruling or guidance on this topic with
the last 10 years that the taxpayer or state can rely on.
Conclusion
The Company’s providing access to open source software licenses is not subject to ROT as
there is no consideration charged for the software. Furthermore, the Company does not owe
UT on the cost of the software transferred for no consideration as the software was also
acquired by the Company for no consideration under the open source license provisions.
The Company’s subscription services are non-taxable services not subject to ROT. While
there are software licenses and software upgrades and fixes transferred as part of the
subscription, the subscription fee relates to the service component and not to the open source
software licenses. Therefore, the charges for the subscription service relates to non-taxable
services. Furthermore, the Company does not owe SOT on the cost price of the software
transferred as a “de minimis serviceman” as the software was acquired by the Company for no
consideration under the open source license provisions.

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We respectfully request a letter ruling on the issue presented in this letter. Thank you for your
time and consideration in this matter. If you have any questions, or require additional
information, please feel free to contact me.
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.
When property is purchased and then given away, the donor has made a taxable use of the
property by making such gift. Therefore, it is the donor of the gift who is deemed the end user of the
property and who is subject to the Use Tax, rather than the donee. See 86 Ill. Adm. Code 150.305(c).
The donor’s Use Tax liability is calculated on the cost price of the property given away. When
the property is purchased at retail, the base for calculating Use Tax is the purchase price of the
property. If, however, the property given away is a finished product produced by the donor, the
donor’s Use Tax liability is calculated on the donor’s cost price of the materials and products
purchased and incorporated into the finished product. See 86 Ill. Adm. Code Section 150.305(b) and
(c).
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 transfer
of tangible personal property to service customers may result in either Service Occupation Tax
liability or Use Tax liability for servicemen, depending upon which tax base they choose to calculate
their liability.
Servicemen may calculate their tax base in one of four ways: (1) separately stated selling
price; (2) 50% of the entire bill; (3) Service Occupation Tax on cost price if they are registered de
minimis servicemen; or (4) Use Tax on cost price if the servicemen are de minimis and are not
otherwise required to be registered under Section 2a of the Retailers’ Occupation Tax Act.
Using the first method, servicemen may separately state the selling price of each item
transferred as a result of sales of service. The tax is based on the separately stated selling price of
the tangible personal property transferred. If servicemen do not wish to separately state the selling
price of the tangible personal property transferred, those servicemen must use the second method
where they will use 50% of the entire bill to their service customers as the tax base. Both of the
above methods provide that in no event may the tax base be less than the cost price of the tangible

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personal property transferred. Under these methods, servicemen may provide their suppliers with
Certificates of Resale when purchasing the tangible personal property to be transferred as a part of
sales of service. They are required to collect the corresponding Service Use Tax from their
customers.
The third way servicemen may account for their tax liability only applies to de minimis
servicemen who have either chosen to be registered or are required to be registered because they
incur Retailers’ Occupation Tax liability with respect to a portion of their business. Servicemen may
qualify as de minimis if they determine that their annual aggregate cost price of tangible personal
property transferred incident to sales of service is less than 35% of their annual gross receipts from
service transactions (75% in the case of pharmacists and persons engaged in graphic arts
production). See 86 Ill. Adm. Code 140.101(f). This class of registered de minimis servicemen is
authorized to pay Service Occupation Tax (which includes local taxes) based upon the cost price of
tangible personal property transferred incident to sales of service. Servicemen that incur Service
Occupation Tax collect the Service Use Tax from their customers. They remit tax to the Department
by filing returns and do not pay tax to their suppliers. They provide suppliers with Certificates of
Resale for the tangible personal property transferred to service customers.
The final method of determining tax liability may be used by de minimis servicemen that are
not otherwise required to be registered under Section 2a of the Retailers' Occupation Tax Act.
Servicemen may qualify as de minimis if they determine that the annual aggregate cost price of
tangible personal property transferred as an incident of sales of service is less than 35% of the
servicemen's annual gross receipts from service transactions (75% in the case of pharmacists and
persons engaged in graphic arts production). Such de minimis servicemen handle their tax liability by
paying Use Tax to their suppliers. If their suppliers are not registered to collect and remit tax, the
servicemen must register, self-assess, and remit Use Tax to the Department. The servicemen are
considered to be the end-users of the tangible personal property transferred incident to service.
Consequently, they are not authorized to collect a "tax" from the service customers. See 86 Ill. Adm.
Code 140.108.
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

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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.
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.
Computer software is defined broadly in the Retailers’ Occupation Tax Act. However,
computer software provided through a cloud-based delivery system – a system in which computer

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software is never downloaded onto a client’s computer and is only accessed remotely – is not subject
to tax. 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. Illinois generally does not tax subscriptions.
Maintenance Agreements
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,

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consultation, or other maintenance agreement charges, then the whole agreement is taxable as a
sale of canned software.
A company that distributes computer software free of charge that is acquired and transferred
subject to original, third-party open source licenses, the GNU General Public License (“GPL”), does
not incur Retailers’ Occupation Tax liability on the transfer of the software to its customers. If a
company obtains open source computer software free of charge, the company does not incur any
Use Tax liability.
A company that takes open source software in the form of source code and creates computer
software that it subsequently gives to its clients is deemed the end user of the software and incurs
Use Tax liability, rather than the client. The company’s Use Tax liability is calculated on the cost price
of the property given away to the client. The company’s Use Tax liability is calculated on the
company’s cost price of the tangible personal property purchased and incorporated into the finished
product.
A fee charged by a company for the services in the form of a subscription that provides
customers with support, access to the software, software maintenance in the form of security
updates, fixes, functionality enhancements, upgrades to the software, access to services such
as its support knowledge base, product usage documentation, and account management tools
is not subject to Retailers’ Occupation Tax or Service Occupation Tax, as long as any
additional software provided pursuant to the subscription is distributed under open source
license provisions and is provided at no charge. Service Occupation Tax may be due on any
other tangible property transferred as part of the service.
I hope this information is helpful. 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
Associate Counsel
RSW:bkl