What does Illinois General Information Letter ST 20-0032-GIL conclude about Computer Software?

Plain-English summary

This Illinois General Information Letter answers a question from a business that sells internet fitness guides and exercise programs: should its email-marketing vendor and its video-conferencing/desktop-sharing vendor be charging it Illinois sales tax on their service fees? The Department's answer turns on a core distinction in Illinois sales tax law: providers of services (called "servicemen") are only taxed when they transfer tangible personal property — including computer software — to the customer as part of that service. Pure services, like sending marketing emails or hosting a video meeting, are not taxable by themselves.

The Department explains that a company providing "software as a service" (SaaS) is acting as a serviceman. If nothing more than the online service itself changes hands — no downloaded program, no physical media — the transaction is generally not subject to Retailers' Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax. Viewing, downloading, or electronically transmitting video, text, or data over the internet is not, by itself, treated as a transfer of tangible personal property.

However, the analysis changes if the provider gives the subscriber something like an API, applet, desktop agent, or remote access agent to let them connect to the provider's network and services. The Department treats that as a transfer of "computer software" to the customer, which is taxable tangible personal property under 86 Ill. Adm. Code 130.1935 — even if there's no separate line-item charge for it — unless the arrangement qualifies as a non-taxable software license under the five-part test in 130.1935(a)(1) (written and signed agreement, restrictions on duplication and third-party transfer, a replacement/archival-copy policy, and a requirement to return or destroy the software at the end of the license).

The letter also walks through the mechanics of the Service Occupation Tax for servicemen who do transfer tangible personal property incident to a service: they can calculate tax on the separately stated selling price of the property transferred, on 50% of the entire bill, or — if they qualify as a "de minimis" serviceman (generally, less than 35% of gross receipts from cost of property transferred, 75% for pharmacists and graphic arts producers) — on the cost price of the property under a registered or self-assessed method.

What this means for you

Businesses buying SaaS or online services

If you're purchasing software as a service, cloud-based tools, or online services (like email marketing or video conferencing) and the vendor never gives you a downloadable program, an API, an applet, or an access agent — just access to their hosted platform — the vendor generally should not be charging Illinois sales tax on that charge. If your invoices show tax and you believe no software or tangible property changed hands, this GIL is a starting point for questioning the charge, though it is not binding on the Department for your specific facts.

SaaS providers and software vendors

If your service requires the customer to install or run any client-side component — an API, applet, desktop agent, or remote access agent — the Department views that as a transfer of computer software, which is presumptively taxable even without a separate software charge. To avoid tax, the arrangement would need to satisfy all five criteria for a non-taxable license under 86 Ill. Adm. Code 130.1935(a)(1), including a written agreement signed by both parties (a simple "I agree" click-through does not qualify, though a verifiable electronic signature can, per ST-18-0010-PLR).

Accountants and tax professionals

This GIL is useful for distinguishing canned software (generally taxable, regardless of delivery method) from custom software prepared to a customer's special order (generally not taxable retail sales, per 86 Ill. Adm. Code 130.1935(c)(3)), and for walking clients through the four Service Occupation Tax calculation methods for servicemen who do transfer tangible personal property. Remember this is a GIL, not a PLR — it is not binding on the Department and does not resolve the specific facts of any one taxpayer's situation.

Common questions

Q: Does Illinois tax sales tax on services performed by an out-of-state or in-state vendor for an Illinois business?
A: Pure services are not subject to Retailers' Occupation Tax or Use Tax. But if the "service" comes bundled with a transfer of tangible personal property — including computer software — that transfer can be taxed under the Service Occupation Tax or Service Use Tax framework.

Q: Is video conferencing or web-based email marketing software taxable in Illinois?
A: Based on the facts described in the letter, if the provider only grants access to an online platform without transferring any downloadable software, API, applet, or access agent, the charges generally are not subject to Illinois sales/use tax. The Department did not issue a definitive ruling on the two specific named providers because a GIL does not resolve particular facts the way a PLR does.

Q: What is the difference between "canned" and "custom" computer software for Illinois tax purposes?
A: Canned (prewritten) computer software is taxable tangible personal property regardless of the medium used to deliver it, per 86 Ill. Adm. Code 130.1935 and 35 ILCS 120/2-25. Custom software prepared to the special order of a customer is generally not a taxable retail sale, unless it's just a pre-written package with only minor modifications — see 86 Ill. Adm. Code 130.1935(c)(3).

Q: Can a software license avoid sales tax even if the software is "canned"?
A: Yes, if it meets all five requirements of 86 Ill. Adm. Code 130.1935(a)(1): a written agreement signed by both the licensor and customer, restrictions on the customer's duplication and use, a prohibition on sublicensing/transfer without the licensor's continued control, a replacement/archival-copy policy, and a requirement that the customer destroy or return all copies at the end of the license term (a requirement deemed satisfied automatically for perpetual licenses).

Q: Does clicking "I agree" to online terms count as a signed license agreement?
A: No. The letter states that simply clicking "I agree" does not satisfy the written, signed agreement requirement. However, the Department has recognized that a verifiable, authenticated electronic signature attached to or part of the license can satisfy that requirement — see ST-18-0010-PLR (Sept. 26, 2018).

Citations and references

Statutes and regulations:

• 35 ILCS 120/2 (Retailers' Occupation Tax Act imposition of tax)
• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax on tangible personal property)
• 35 ILCS 105/3 (Use Tax Act imposition of tax)
• 86 Ill. Adm. Code 150.101 (Use Tax on tangible personal property)
• 86 Ill. Adm. Code 150.130 (Use Tax credit for Retailers' Occupation Tax paid)
• 86 Ill. Adm. Code 140.101 (Service Occupation Tax on servicemen)
• 86 Ill. Adm. Code 140.101(f) (de minimis serviceman threshold)
• 86 Ill. Adm. Code 140.108 (de minimis servicemen not required to be registered)
• 35 ILCS 120/2-25 (definition of computer software)
• 86 Ill. Adm. Code 130.1935 (taxation of computer software, including canned vs. custom)
• 86 Ill. Adm. Code 130.1935(c)(3) (custom vs. canned software distinction)
• 86 Ill. Adm. Code 130.1935(a)(1) (criteria for a non-taxable license of computer software)
• ST-18-0010-PLR (Sept. 26, 2018) (examples of acceptable electronic signatures for license agreements)

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/st20-0032-gil.pdf

Original ruling text

ST 20-0032-GIL 11/09/2020 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.)

November 9, 2020

Dear Xxxxx:
This letter is in response to your letter received February 10, 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:
My name is NAME from ABC aka DEF. FEID ####. DEF sells internet electronic
fitness guides and exercise programs, and manages an internet based interactive
community of DEF followers.
Two of our service providers, PROVIDER 1 and PROVIDER 2., are adding Il sales tax
to their services. I was under the impression that Il. does not tax services performed for
Il. businesses. Would you please check this out for me, and If I am correct that Il. tax
should not be added, please send me written documentation that I can send to these
companies.
PROVIDER 1 is a web-based email marketing service. It helps you design email
newsletters, share them on social networks, integrate with services you already use,
and track your results.

ST 20-0032-GIL
Page 2
PROVIDER 2. created and marketed a service called, SERVICE, which DEF use. It is
an online meeting, desktop sharing, and video conferencing software package that
enables the user to meet with other computer users, customers, clients, or colleagues
via the internet in real time.
I appreciate you looking into this for me. You can reach me by email or by phone. Our
business address is ADDRESS.
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 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
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.

ST 20-0032-GIL
Page 3
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
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

ST 20-0032-GIL
Page 4
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 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. However, 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. 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.

ST 20-0032-GIL
Page 5
I hope this information is helpful. If you require additional information, please visit our website
at www.tax.illinois.gov or contact the Department’s Taxpayer Information Division at (217) 782-3336.

Very truly yours,

Debra M. Boggess
Associate Counsel

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