If a company bundles hardware and a required software subscription into one price and doesn't separately state what part of the charge is for the tangible property, how is Illinois Service Occupation Tax calculated?

Plain-English summary

A company that sells internet-connected hardware (cameras, GPS fleet trackers, temperature monitors, driver ID tokens, plus cables and accessories) asked Illinois whether its business is taxed as a sale of goods (Retailers' Occupation Tax) or as a sale of service (Service Occupation Tax), given that the hardware only works with the company's own required software/cloud-service "License" subscription. The company bundles the hardware and the subscription into one price and does not separately state what portion of that price is for the physical hardware -- except when it sells replacement hardware, cables, or accessories on their own to replace lost or damaged items, which it does list at a separate list price.

The Department agreed with the company that it is acting as a "serviceman" for Service Occupation Tax purposes, not a straightforward retailer, because the hardware is not incidental to the sale of the subscription service -- the two are integrated and neither works without the other. The software and firmware transferred to customers do not qualify for Illinois's narrow software-license tax exemption (the terms of service don't require customers to destroy or return the hardware/firmware at the end of the contract, among other gaps), so the property transferred incident to the service is taxable tangible personal property.

Because the company does not separately state the price of that tangible personal property, it cannot use the first (and most common) of Illinois's four Service Occupation Tax calculation methods. Instead, it must use 50% of its entire bill to customers as the tax base -- unless it separately registers and qualifies as a "de minimis serviceman" (under the 35%-of-gross-receipts cost-price threshold), in which case it may instead pay tax on its cost price for the transferred property. Either way, the tax base can never be less than the company's own cost price for the hardware and software. Separately, when the company sells replacement hardware, cables, or accessories on their own at list price, those are ordinary retail sales subject to Retailers' Occupation Tax (with the customer owing Use Tax), because at that point the price for tangible personal property IS separately stated.

What this means for you

Bundled hardware-plus-subscription (IoT / connected-device) sellers

If your product only functions with your own mandatory software or cloud subscription, and you charge one combined price, Illinois will likely treat you as a "serviceman" subject to Service Occupation Tax on the hardware/software bundle rather than as a plain retailer. If you don't separately state a price for the tangible hardware component, you're pushed into the 50%-of-entire-bill tax base (or the cost-price method if you qualify and register as de minimis) -- you don't get to choose a lower ad hoc allocation. If you want the potentially lower separately-stated-price method, you need to actually break out and state that price to customers.

SaaS and software companies bundling hardware or firmware

Illinois's cloud-based SaaS exemption (no tax if software is only accessed remotely and never downloaded) does not rescue a bundle where tangible hardware is essential to the offering. Likewise, the narrow non-taxable software-license exemption under 86 Ill. Adm. Code 130.1935(a)(1) requires meeting ALL five conditions, including that the customer must destroy or return the software/hardware at the end of the license term -- a common gap for hardware-embedded firmware, as it was here.

Accountants and tax professionals advising on Illinois sales/use tax

This ruling is a clean illustration of the four Service Occupation Tax base-calculation methods under 86 Ill. Adm. Code 140.106/140.108/140.109, and of how failing to separately state a tangible-property price forces a client into the 50%-of-bill default. It also confirms that companies already on a monthly Retailers' Occupation Tax filing schedule (including one that completed a Voluntary Disclosure Agreement) can still be recharacterized as Service Occupation Tax filers going forward for the same product line, and that maintenance/warranty charges bundled into the price are taxed the same way as the underlying property.

Common questions

Q: What was the company's voluntary disclosure agreement (VDA) history, and did it affect the ruling?
A: The company stated it had completed a Voluntary Disclosure Agreement with Illinois covering tax periods from October 1, 2018 through August 31, 2019, and had since been filing as a monthly out-of-state/remote Retailers' Occupation Tax filer. The ruling notes this history as background but the Department's conclusion did not turn on it -- the Department still separately analyzed the current bundled-product fact pattern and concluded it is properly taxed under the Service Occupation Tax (not simply continued as Retailers' Occupation Tax), based on how the hardware and subscription are sold together today.

Q: Which of the four Service Occupation Tax base-calculation methods applies here, and why?
A: Illinois allows a serviceman to calculate its Service Occupation Tax base one of four ways: (1) the separately-stated selling price of the tangible personal property transferred; (2) 50% of the serviceman's entire bill; (3) cost price, if registered as a de minimis serviceman; or (4) cost price under the Use Tax, if de minimis and not otherwise required to register. Because the company does not separately state a price for the hardware/firmware component of its bundled offering, it cannot use method (1). Unless it qualifies and registers as de minimis (method 3), it must use method (2) -- 50% of its entire bill to customers -- as the tax base, and in no event may that base be less than the company's own cost price for the property transferred.

Q: Does the company's software qualify for Illinois's non-taxable software-license exemption?
A: No. Under 86 Ill. Adm. Code 130.1935(a)(1), a software license escapes tax only if it meets all five conditions: a signed written agreement, restrictions on duplication/use, a ban on sublicensing/transfer, a policy of free replacement copies for lost/damaged software, and a requirement that the customer destroy or return all copies at the end of the license. The company's terms of service satisfied the first four elements but failed the fifth -- customers are not required to return or destroy the hardware (which embeds the firmware) when the subscription ends -- so the exemption does not apply and the software/firmware is taxable tangible personal property.

Q: Is the cloud-based Software-as-a-Service (SaaS) exemption available instead?
A: No. Illinois does not tax software delivered purely through a cloud-based system that a customer never downloads and only accesses remotely. But that exemption did not help this company because its offering is inseparable from physical hardware -- the sensors, trackers, monitors, and tokens -- and the subscription itself pushes firmware updates onto that hardware. Since tangible personal property (the hardware and its embedded, updated firmware) is transferred to the customer, the transaction falls outside the "no tangible personal property transferred" SaaS carve-out.

Q: How are the company's warranty/maintenance charges and its separate sales of replacement hardware taxed?
A: Because the company's mandatory warranty is built into the single bundled purchase price rather than charged separately, the warranty charges are part of the taxable gross receipts along with everything else in the bundle. By contrast, when the company sells replacement hardware, cables, or accessories separately (to replace lost, damaged, or worn items) at a stated list price, those are ordinary retail sales: the company owes Retailers' Occupation Tax and the customer owes the corresponding Use Tax, because in that scenario the price for the tangible personal property is, in fact, separately stated.

Citations and references

Statutes and rules:

• 35 ILCS 120/2 (Retailers' Occupation Tax Act)
• 35 ILCS 105/3 (Use Tax Act)
• 35 ILCS 115/3 (Service Occupation Tax Act)
• 35 ILCS 110/3 (Service Use Tax Act)
• 35 ILCS 120/2-25 (definition of "computer software")
• 86 Ill. Adm. Code 140.101, 140.106, 140.108, 140.109 (Service Occupation Tax base calculation methods and de minimis serviceman rules)
• 86 Ill. Adm. Code 140.301(b)(3) (maintenance agreements)
• 86 Ill. Adm. Code 130.1935 (computer software taxability and license exemption)
• 86 Ill. Adm. Code 130.1501 (claims for credit)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedure and binding effect)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2021.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2021/st21-0006-plr.pdf

Original ruling text

ST-21-0006 09/09/2021 SERVICE OCCUPATION TAX
This letter discusses the application of Service Occupation Tax when a
serviceman does not separately state the price for tangible personal property
transferred incident to service. 86 Ill. Adm. Code 140.106. (This is a PLR.)

September 9, 2021
Dear: NAME
This letter is in response to your letter dated June 3, 2021, 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.
Review of your request disclosed that all the information described in paragraphs
1 through 8 of Section 1200.110 appears to be contained in your request. This Private
Letter Ruling will bind the Department only with respect to COMPANY for the issue or
issues presented in this ruling, and is subject to the provisions of subsection (e) of
Section 1200.110 governing expiration of Private Letter Rulings. Issuance of this ruling
is conditioned upon the understanding that neither COMPANY, nor a related taxpayer is
currently under audit or involved in litigation concerning the issues that are the subject
of this ruling request. In your letter you have stated and made inquiry as follows:
Pursuant to Ill. Admin. Code tit. 2, § 1200.110 the Company
respectfully submits this request for formal written and binding
guidance from the Illinois Department of Revenue ("Department") on
the proper application of Retailers' Occupation Tax and/or Service
Occupation Tax pertaining to the Company's offering.
The Company is currently registered for Illinois sales and use tax
purposes. The Company completed a voluntary disclosure agreement
with the State of Illinois for the tax periods between October 1, 2018 to
August 31, 2019 and has since been a monthly out-of-state/remote
sales tax filer of the Retailers' Occupation Tax. To the best of the
Company's knowledge, the Department has not previously ruled on the
same or similar issue for the Company, nor has the Company or any

COMPANY
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representative previously submitted the same or similar issue to the
Department, withdrawing it before a ruling was issued.
The Company shall present the information in the following format:
I.
II.
Ill.
IV.
V.

Facts
Issue
Pertinent Authority
Discussion
Ruling Request

I.
Facts
The Company is a BUSINESS C-corporation headquartered in CITY,
STATE. The Company sells hardware and corresponding software
subscriptions. To enter into a contract with the Company for the
Company’s products and services, the Customer must sign an Order
Form, see Sample Company Agreement, attached as Exhibit A. The
provided Company agreement references the Company's full terms of
service found online at WEB PAGE-1 attached as Exhibit B.
The hardware products are internet connected sensors including
cameras, GPS fleet trackers, temperature monitors, and driver ID
tokens. Cables and other hardware accessories are also included. For
hardware products to function, they require an active subscription of a
COMPANY "License". The "License" represents a subscription to
online cloud services that are enabled by the hardware and firmware as
well as the hardware and embedded firmware itself. This includes
hosted cloud service, support, software and firmware updates, and
cellular connectivity. This includes embedded technology that is
unique to the hardware that allows it to store and collect data, that data
is captured and sent in real time to an online dashboard. Customers
access
this
online
dashboard
electronically
through
computers/tablets/smart phones.
The Company's hardware products do not function with non-Company
subscriptions, without both aspects of the sale, the Company is not
able to satisfy its performance obligation. Each piece of hardware has
firmware (software embedded in or otherwise running on the
hardware) embedded on it which is updated regularly by downloads
and updates provided as a part of the subscription. These updates
significantly impact the functionality of the hardware. The hardware is
not useful without the subscription and is not sold without the
subscription.

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The customer owns the hardware; however, the Company retains
ownership of the firmware. Customers cannot install, download, or
transfer the firmware or hosted software to their own computers. The
subscription has a term of service generally between 3-5 years in
length. The customer is not required to return the hardware to the
Company once the subscription has expired.
The Company sells the noted products in a bundled offering inclusive
of the necessary hardware, cables, and accessories. The hardware is
not incidental to the sale, it is a necessary component of our offering.
The purchase price is listed next to our license products, but the price
is inclusive of the cost of hardware (including warranty) and
subscription. Replacement hardware, cables and accessories can be
sold separately as needed at list price. COMPANY only separately
charges for hardware, cables, and accessories when it is to replace
existing items due to damage, loss, etc. In all other instances, the
price is listed in total with the license subscription. See sample
material on the Company's product offering:
-

WEBPAGE-2
Models & Specs page gives the high level overview with
downloadable data sheets on each product.
WEBPAGE-3
Overall, we do not charge separately for hardware components. At
original purchase the pricing is viewed as bundled so there may not be
a separate charge, but just one singular price charged for the whole
purchase. We also have a mandatory warranty built into that purchase
price, so warranty replacements are also covered in the purchase price.
This can be found in our COMPANY Terms of Service as noted above.
Our Terms of Service states a charge for "License," this is
representing a subscription to online cloud services that are enabled
by the hardware and firmware as well as the hardware and embedded
firmware. This then also includes any subsequent updates to the
firmware and software. There is no separate subscription charge, the
"License" charge is the subscription and hardware charges.
.
II.
Issue
Whether the Company's provision of hardware and software subscriptions
as presented are subject to Illinois' Retailers' Occupation Tax, Use Tax,
Service Occupation Tax or Service Use Tax.
III.

Pertinent Authorit y

COMPANY
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Illinois Sales and Use Tax
The Retailers' Occupation Tax (ROT) imposes a tax upon persons
engaged in Illinois in the business of selling tangible personal property
to purchasers for use or consumption. 1 The Use Tax (UT) is a
complementary privilege tax imposed on the privilege of using tangible
personal property in Illinois, which is purchased at retail. 2 "Sale at
retail" means "any transfer of the ownership of or title to tangible
personal property to a purchaser, for the purpose of use or
consumption." 3
The Service Occupation Tax (SOT) imposes a tax upon persons
engaged in Illinois in the business of making sales of service, based on
tangible personal property transferred incident to sales of service. 4
The purchase of tangible personal property that is transferred to the
service customer may result in either Se r vice Occupation Tax liability
or Use Tax liability for the servicemen depending upon his activities. 5
The serviceman's liability may be calculated in one of four ways:
1)
2)
3)
4)

separately-stated selling price of tangible personal
property transferred incident to service;
50% of the serviceman's entire bill;
Service Occupation Tax on the serviceman's cost price if
the serviceman is a registered de minim is serviceman; or
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 Retailer s' Occupation
Tax Act. 6

The Service Use Tax (SUT) is a complementary privilege tax imposed
on the privilege of using in Illinois real or tangible personal property that
is acquired as an incident to the purchase of a service. 7
Computer Software
In Illinois, computer software (other than custom software) is included
within the statutory definition of "tangible personal property" and its
sale or use is taxable. 8 Canned software is considered to be tangible
35 ILCS 120/2.
35 ILCS 105/3
3
35 ILCS 120/1
4
35 ILCS 115/3; 86 Ill. Admin. Code § 140.l0l (a).
5
Ill. Priv. Ltr. Rul. ST 17-0006 -PLR (8/14/ 2017) at p. 11.
6
Id.
7
35 ILCS 110/3.
8
35 ILCS 120/1; 35 ILCS 1 20/2; 35 ILCS 115/3; 35 ILCS 110/3; 86 Ill. Admin. Code § 140.125(x).
1
2

COMPANY
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personal property "regardless of the form in which it is transferred or
transmitted, including tape, disc, card, electronic means or other
media.” 9 The sale at retail, or transfer, of canned software intended for
general or repeated use is taxable, including the transfer by a retailer
of software which is subject to manufacturer licenses restricting the
use or reproduction of the software." 10
However, 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 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

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 11

If a transaction does not involve the transfer of any tangible personal
property to the customer, then it generally would not be subject to the
ROT, UT, SOT or SUT. 12
Application Service Providers

9

Id.
Id.; 86 Ill. Admin. Code § 130.1935(a).
11
86 Ill. Admin. Code § 130.1935(a) (l).
12
Ill. Priv. Ltr. Rul. ST 17-0006-PLR (8/14/2017).
10

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In Illinois, the provision of Software as a Service ("SaaS"), also known
as an Application Service Provider ("ASP"), is not taxable: "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." 13
A provider of SaaS is acting as a serviceman and the transaction
would not be subject to tax in Illinois where no tangible personal
property is transferred to the customer. 14 If a SaaS provider provides
to its subscribers an API, applet, desktop agent or a remote access
agent to enable the subscriber to access the provider's network and
services, the Department has held that the subscriber is receiving
computer software.15
IV.
Discussion
The Company's provision of hardware and software subscriptions as
presented are subject to Illinois' Retailers' Occupation Tax. Given
the interconnectivity and necessity of both the hardware and the
subscription, along with the delivery of portions of firmware via the
software subscription, the Company has applied Illinois state sales
tax to all hardware and subscription sales and views the sales as
bundled hardware and SaaS. The hardware and subscription
components of the sale are subject to ROT, rather than Service
Occupation Tax, because the tangible personal property is not
incidental to the sales of service and is not separated from the
offered pricing.
Application Service Providers
The Company understands that Illinois has taken the position that
software as a service delivered via a cloud-based system that does
not include a transfer of tangible personal property is not a taxable
transaction. As described in this offering noted above, for the
software subscription to have value, tangible personal property is
also obtained by the purchaser. This comes in the form of the noted
hardware (cameras, GPS fleet trackers, temperature monitors, and
driver ID tokens) as well as the software updates that are
continually pushed to that hardware via the software subscription.
While portions of the offering are inclusive of cloud-hosted software,
the offering does not meet the criteria of exempt SaaS/ASP.
See Ill. Gen. Info. Letter No. ST 19-0007-GIL (3/20/2019) at p. 4; Ill. Priv. Ltr. Rul. ST 17-0006-PLR
(8/14/2017); Ill. Gen. Info. Letter No. ST 16-0038-GIL (8/18/2016).
14
See, e.g., Ill. Priv. Ltr. Rul. ST 17-0007-PLR (3/2/2017) at p. 5.
15
Il. Gen. Info Letter No. ST 19 -0007- GIL (3/20/2019) at p. 4
13

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The hardware is not incidental to the sale, it is an integral component
of the Company's service offering, and the software cannot function
without the specific Company hardware.
Computer Software
The Company's software is generally not custom to any contract and
customers are purchasing a prewritten program that may be updated
for all customers simultaneously from time to time.
Additionally, under Illinois law a software license is considered not
taxable when the following criteria is met:
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 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

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. 16

The Company's offering is not that of a traditional software license, but
as a hybrid software as a service subscription. Components of the
offering include firmware embedded on a tangible personal property,
which is restricted per our terms of service (Sections 4 &5) in line with
86 Ill. Admin. Code § 130.1935(a)(l)(A)-(D). However, the subscription
16

86 Ill. Admin. Code § 130.193S(a) (l).

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includes hosted software only available via the Company's web-based
platform.
Additionally, the Company's terms of service do not meet 86 Ill. Admin.
Code § 130.1935(a)(l)(E). The customer is not required to destroy or
return the hardware at the end of the contract.
V.

Ruling Request

Based on the foregoing, the Company respectfully requests the that
the Department provide a ruling on the accuracy of the conclusion that
the Company's presented offering of hardware and software
subscriptions is taxable as noted in the Discussion. In the event that
the Department determines that the Company's conclusion is not
accurate, the Company respectfully requests an opportunity to discuss
this matter with the Department before a final letter ruling is issued.
There is no specific trade secret information in either this letter or the
attached exhibits that must be redacted prior to public dissemination.
The only redactions are those that will be made by the Department
pursuant to 2. Ill. Adm. Code 120.ll0(c), including the name and
address of the Company, as well as the noted website links and
Exhibits that include the Company's name.
Thank you again for your consideration of this matter. If you have any
questions, please do not hesitate to call me at (###) ###-####.
DEPARTMENT’S RESPONSE:
Retailers’ Occupation Tax and Use 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 retain the amount of Use Tax
paid to reimburse themselves for their Retailers' Occupation Tax liability incurred on
those sales. If the purchases occur outside Illinois, purchasers must self-assess their
Use Tax liability and remit it directly to the Department.
Service Occupation Tax

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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) separatelystated 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 (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.
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.
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

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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 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

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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

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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. 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

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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,
consultation, or other maintenance agreement charges, then the whole agreement is
taxable as a sale of canned software.
Refunds and Claims
If a taxpayer pays an amount of tax under the Retailers' Occupation Tax Act that
is not due, either as a result of a mistake of fact or an error of law, the taxpayer may file
a claim for credit with the Department. See 86 Ill. Adm. Code 130.1501. Please note
that only persons who have actually paid tax to the Department can file a claim for
credit. The retailer will be considered to have satisfied the unconditional repayment
requirement where it provides its purchaser with an instrument upon which the
purchaser can make a demand upon the retailer/claimant for payment of the tax
recovered if the claim is allowed. The retailer's provision of unconditional promissory
notes or irrevocable credit memoranda to its purchasers who paid tax in error would
satisfy this requirement. No credit shall be given the taxpayer unless the taxpayer
shows that he or she has borne the burden of the tax or has unconditionally repaid the
amount of the tax to the purchaser from whom it was collected. In other words, if a
purchaser has paid tax to his supplier, only that supplier/retailer can file a claim for
credit.
Retailers filing such claims must comply with all requirements of 86 Ill. Adm.
Code 130.1501. The retailer must first refund tax money paid by the purchaser before
proceeding with the claim. Once the retailer has done this, he or she must apply for the
credit in the manner described in the regulation. Retailers are not required by law to
apply for such credits; rather, this procedure is voluntary.
Analysis
It is the Department’s conclusion that the Company is acting as a serviceman
when it provides its cloud-based services. The Company states that “[t]he Company
sells the subscriptions in a bundled offering inclusive of the necessary hardware, cables,
and accessories.”

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The computer software and firmware transferred incident the to the service do
not meet the license requirements of Section 130.1935(a)(1), and the Company admits
it is not custom to any particular customer. Therefore, the computer software and
firmware transferred to the customer incident to the service is tangible personal property
and subject to tax. The charges for software and firmware updates transferred incident
to the service also are not separately stated and are part of gross receipts and subject
to tax.
The Company also provides a warranty or maintenance agreement. Because
the charges for the warranty are included in the subscription price, the charges for the
warranty are part of the gross receipts and are subject to tax.
The Company is registered with the Department for sales and use taxes.
Because the Company does not wish to separately state the selling price of the tangible
personal property transferred incident to the service it provides, it must use 50% of the
entire bill to its service customers as the tax base, unless the Company is a de minimis
serviceman, in which case it may pay Service Occupation Tax based upon the cost
price of tangible personal property transferred incident to sales of service. In no event,
however, may the tax base be less than the cost price of the tangible personal property
transferred. The Company may provide its suppliers with Certificates of Resale when
purchasing the tangible personal property to be transferred as a part of sales of service.
The Company is required to collect the corresponding Service Use Tax from its
customers. See 86 Ill. Adm. Code 140.106 and 140.109.
The Company is not required to determine whether it is a de minimis serviceman.
The Department’s regulations state that “[e]ven though a serviceman meets the de
minimis threshold and is otherwise eligible to pay Service Occupation Tax on his cost
price, he can nevertheless opt to pay Service Occupation Tax on the selling price of the
tangible personal property transferred to service customers as explained in Section
140.106.” See 86 Ill. Adm. Code 140.109(b).
The Company is liable for Retailers’ Occupation Tax on sales of replacement
hardware, cables and accessories that are sold separately as needed at list price.
Customers are liable for Use Tax on these sales.
Whether the Company refunds tax paid and files a claim for credit with the
Department is a private matter between the Company and its customers. Only the
Company can file a claim for credit or refund. The Company’s customers cannot file
claims for credit or refund directly with the Department based upon tax that was paid by
customers to the Company. No mechanism exists under Illinois sales tax laws for
customers to make such claims directly with the Department unless the customer
remitted the tax directly to the Department.

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The factual representations upon which this ruling is based are subject to review
by the Department during the course of any audit, investigation, or hearing and this
ruling shall bind the Department only if the factual representations recited in this ruling
are correct and complete. This Private Letter Ruling is revoked and will cease to bind
the Department 10 years after the date of this letter under the provisions of 2 Ill. Adm.
Code 1200.110(e) or earlier if there is a pertinent change in statutory law, case law,
rules or in the factual representations recited in this ruling.
I hope this information is helpful. If you have further questions concerning this
Private Letter Ruling, you may contact me at (217) 782-2844. 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
Chairman, Private Letter Ruling Committee
RSW:rkn