Does licensing software to customers through an end user license agreement (EULA) count as an exempt software license, or is it a taxable retail sale, under Illinois sales tax rules?

Plain-English summary

A software company asked the Illinois Department of Revenue to confirm that its "Continuous Software Release Management" (CSRM) platform subscriptions — licensed to customers through end user license agreements (EULAs), delivered electronically, and sold under five different plans (PLAN1 through PLAN5) — qualify as exempt software licenses rather than taxable retail sales of tangible personal property.

The company had actually asked for a binding Private Letter Ruling (PLR), but the Department declined, explaining that existing regulations already address the question, so it issued this non-binding General Information Letter (GIL) instead.

The GIL walks through Illinois's five-part test at 86 Ill. Adm. Code 130.1935(a)(1) for when a software license escapes sales tax. Generally, "canned" (pre-written, off-the-shelf) computer software is tangible personal property and its sale is a taxable retail sale under the Retailers' Occupation Tax Act, no matter how it's delivered (disc, download, or otherwise). But a license of that software is not a taxable sale if it meets all five criteria:

1. It is evidenced by a written agreement signed by both the licensor and the customer.
2. It restricts the customer's duplication and use of the software.
3. It prohibits the customer from sublicensing or transferring the software to a third party (other than a related party) without the licensor's permission and continued control.
4. The licensor has a policy of replacing lost or damaged copies at little or no cost (stated in the agreement, supported by books and records, or supported by a notarized statement).
5. The customer must destroy or return all copies at the end of the license period — a requirement automatically satisfied if the license is perpetual.

Applying these criteria to the company's EULAs (for PRODUCT1, PRODUCT2, and PLAN5, which together cover all five CSRM plans), the Department agreed that the agreements — which restrict copying and reverse engineering, bar sublicensing/transfer, provide free replacement license keys for failed licenses, and are either perpetual or require destruction of the software on termination — satisfy all five prongs. The Department also confirmed that customer acceptance by verifiable electronic signature (including DocuSign) or a signed quote referencing the EULA satisfies the "written, signed agreement" requirement of prong one, consistent with two prior rulings (ST-18-0003-PLR and ST-18-0010-PLR).

What this means for you

Software companies and SaaS vendors

If you license software in Illinois through a EULA, whether your license is taxable or exempt turns on the text of your agreement, not on how the software is delivered. To stay on the exempt side of the line, your EULA should be signed (electronic signatures like DocuSign count, but a bare "click to accept I Agree" button, standing alone, does not satisfy the written-signature prong), restrict copying/reverse engineering and use, prohibit sublicensing or transfer without your continued control, commit to replacing lost or damaged license keys at little or no cost, and either run perpetually or require the customer to destroy/return the software at termination.

Business owners and accountants

Whether you're buying or selling software licenses in Illinois, don't assume electronic delivery automatically makes a transaction exempt or taxable — "canned" software sold outright is taxable regardless of delivery method, while a properly structured license (meeting all five prongs above) is not. Review the actual EULA language, not just the sales pitch, before deciding how to charge or account for Illinois sales/use tax.

Tax professionals evaluating EULA-based transactions

This GIL is a useful roadmap for applying the 130.1935(a)(1) five-prong test to a real multi-product EULA fact pattern, and it reaffirms that verifiable electronic signatures (including DocuSign) satisfy the "signed agreement" prong. But remember this letter is non-binding — the Department expressly declined to issue a PLR here because it believed the existing regulation was dispositive, so a GIL was issued instead. If you need certainty for your own client's facts, a formal PLR request under 2 Ill. Adm. Code 1200.110 is the more reliable path.

Common questions

Q: Is software delivered electronically automatically exempt from Illinois sales tax?
A: No. Canned (pre-written) computer software is tangible personal property and is a taxable retail sale under the Retailers' Occupation Tax Act "regardless of the form in which it is transferred or transmitted, including tape, disc, card, electronic means, or other media." Delivery method doesn't create an exemption — only a license meeting all five prongs of 130.1935(a)(1) does.

Q: What makes a software license exempt rather than a taxable sale?
A: The license must (1) be evidenced by a written agreement signed by both licensor and customer, (2) restrict the customer's duplication and use of the software, (3) prohibit the customer from sublicensing or transferring the software to a third party without the licensor's permission and continued control, (4) come with a policy of replacing lost/damaged copies at little or no charge, and (5) require destruction or return of the software at the end of the license term (automatically satisfied if the license is perpetual).

Q: Does clicking "I Agree" on a EULA count as a signed written agreement?
A: Not by itself. The Department states that simply clicking "I agree" does not satisfy the written-signature requirement, but a verifiable and authenticable electronic signature — including DocuSign — does satisfy it, as does a signed quote that references or links to the EULA.

Q: What's the difference between "canned" and "custom" software for Illinois tax purposes?
A: Custom computer programs are prepared to the special order of a customer and are not taxable in the same way. Canned software is any computer software that isn't custom — including pre-written packages assembled by vendors — unless real and substantial changes are made to the programs or interfacing logic is created for that customer. The CSRM platforms in this GIL were treated as canned software whose taxability depended on the license terms, not custom development.

Q: Why did the company get a GIL instead of the binding Private Letter Ruling it requested?
A: The Department's regulations let it decline to issue a PLR when existing case law or regulations are already dispositive of the request. Here, the Department decided 86 Ill. Adm. Code 130.1935 already answered the question, declined the PLR, and issued this non-binding GIL instead to help the company apply the existing rule.

Q: Can I rely on this GIL for my own company's software licensing?
A: No. A GIL is not a statement of Department policy and is not binding on the Department for anyone, including the original requester. It only points to the relevant regulations and how the Department has read them in similar circumstances. Apply the five-prong test to your own EULA's actual language, and consider requesting your own ruling if you need certainty.

Citations and references

Statutes and regulations:

• 86 Ill. Adm. Code 130.1935(a)(1) (five-prong test for an exempt software license)
• 86 Ill. Adm. Code 130.1935(c)(3) (custom vs. canned computer software)
• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax imposition)
• 86 Ill. Adm. Code 150.101 (Use Tax imposition)
• 35 ILCS 120/2-25 (statutory definition of "computer software")
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedure and Department's discretion to decline)
• 2 Ill. Adm. Code 1200.120 (General Information Letter procedure)

Related Department rulings referenced in this letter:

• ST-18-0003-PLR (verifiable electronic signatures satisfy the written-signature requirement)
• ST-18-0010-PLR (DocuSign and similar digital signature methods satisfy the written-signature requirement)

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/st21-0008-gil.pdf

Original ruling text

ST-21-0008 01/28/2021 COMPUTER SOFTWARE
This letter discusses computer software. See 86 Ill. Adm. Code 130.1935. (This is a GIL.)
January 28, 2021
Dear Xxxx:
This letter is in response to your letter received December 8 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 Department’s regulation “Public Information, Rulemaking and Organization” provides that
“[w]hether to issue a private letter ruling in response to a letter ruling request is within the discretion of
the Department. The Department will respond to all requests for private letter rulings either by
issuance of a ruling or by a letter explaining that the request for ruling will not be honored.” 2 Ill. Adm.
Code 1200.110(a)(4). Further, the Department’s regulations regarding Private Letter Rulings provide
that “[i]f there is case law or there are regulations dispositive of the subject of the request, the
Department will decline to issue a letter ruling on the subject." 86 Ill. Adm. Code 1200.110(a)(3)(D).
The Department recently met and determined that it would decline to issue a Private Letter Ruling in
response to your request. We hope, however, the following General Information Letter will be helpful
in addressing your questions. In your letter you have stated and made inquiry as follows:
We are writing on behalf of COMPANY. (“Company”) to request a private letter ruling in
accordance with 2 Ill. Adm. Code 1200.110. At the time of this request, the Company is
not under audit by the Illinois Department of Revenue (“the Department”), nor is there
litigation pending between the Company and the Department. To the best of the
Company’s knowledge, the Department has not previously ruled on a similar issue for
the Company, and the Company has never submitted a request for a ruling on a similar
issue.
The Company’s request for ruling relates to whether its licensing of software pursuant to
an end user licensing agreement (“EULA”) qualifies as a license of computer software
under 86 Ill. Adm. Code 130.1935 and as such is not a retail sale of tangible personal
property subject to the Illinois Retailers Occupation Tax. Following is a discussion of
the facts and our understanding of the law as it pertains to the license agreement and
the specific requirements of the regulation.
FACTS:
The Company is the leading provider in Continuous Software Release Management, or
“CSRM.” The CSRM Platform allows the Company’s customers to continuously deliver

ST-21-0008
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January 28, 2021
software updates across any system. The Company currently offers five different
CSRM options delivered to its customers via electronically downloaded software. The
five different CSRM options are PLAN1, PLAN2, PLAN3, PLAN4, and PLAN5. Each
platform offers different software features, with a maximum of six different software
features included in the platform. The six software features are PRODUCT1,
PRODUCT2, PRODUCT3, PRODUCT4, PRODUCT5, and PRODUCT6
PLAN1, PLAN2, and PLAN4 are all licensed to a customer using the standard EULA for
PRODUCT1 and where applicable the PRODUCT2 terms. PLAN5 is licensed to
customers using its own designated EULA. Each EULA consists of clauses typical of
most standard EULAs. In addition to acceptance and termination clauses, each EULA
contains restrictions on duplication and use, license/transfer, copying the software, and
termination. The Company maintains a policy of providing additional license keys to the
customer at no charge if the customer’s current license fails for any reason, so long as
the customer maintains an active subscription with the Company. The EULAs can all
be accessed on the Company’s website at EMAIL.
When a customer makes a purchase of the CSRM, they either certify that they accept
the terms of the EULA by wet or electronic signature, or accept the quote by wet or
electronic signature. The electronic signature includes but is not limit [sic] to DocuSign.
The quote includes a hyperlink to the complete EULA agreement or a reference to the
specific pre-negotiated signed EULA. The licensing agreements for the CSRMs can be
for fixed periods, or for a perpetual license, depending on the product.
PRODUCT1 EULA1
The relevant clauses of the PRODUCT1 EULA provide as follows:
BY CLICKING THE “YES” BUTTON BELOW OR BY DOWNLOADING, INSTALLING
OR USING THE SOFTWARE, YOU ARE ACCEPTING AND AGREEING TO THE
TERMS AND CONDITIONS OF THIS EULA. IF YOU ARE NOT WILLING TO BE
BOUND BY THE TERMS AND CONDITIONS OF THIS EULA, THEN CLICK THE “NO”
BUTTON BELOW TO TERMINATE SOFTWARE OPERATION OR DO NOT USE OR
INSTALL THE SOFTWARE. DO NOT SELECT “I AGREE” OR INSTALL OR USE THE
SOFTWARE UNTIL YOU HAVE CAREFULLY READ, UNDERSTOOD, AND AGREED
TO THE TERMS AND CONDITIONS OF THIS EULA.
LICENSE GRANT

1. Subject to terms and conditions of this EULA, Licensor hereby grants to You, and
   You accept, a perpetual, limited, personal revocable, nontransferable, nonsublicensable, nonexclusive license to make internal use of the Software only in
   binary executable form, for the regular and standard purposes the Software was
   designed for, only as authorized in this EULA (the “License”).

1

See PRODUCT1 EULA, attached as Exhibit B.

ST-21-0008
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January 28, 2021

2. The License allows you to install a single instance of the Software and use the
   Software on a single specific hardware system at any time per License. You may
   install, use, access, display and run one copy of the Software at the time. The
   Software is licensed as a single product. Other than the rights expressly set forth in
   Section 1 above, no other right or interest whatsoever in or relating to the Software
   is transferred or granted to You.
3. The Software should be installed in accordance with the instructions of the Licensor.
   Except as expressly permitted by this EULA, You shall not, nor permit anyone else
   to, directly or indirectly (i) copy, reverse engineer, decompile, or disassemble the
   Software or any part of it or otherwise attempt to reconstruct or discover any source
   code or underlying ideas or algorithms of the Software . . . .
   TERM; TERMINATION
4. Upon termination of this EULA by Licensor pursuant to Section 5.2 above, the
   license granted herein will terminate and You: (i) shall immediately cease to use the
   Software, (ii) shall pay to COMPANY any amounts owed to COMPANY under this
   EULA before such expiration or termination; (ii) shall remove the Software from all
   hard drives, networks and other storage media and destroy all copies of the
   Software in your possession or under your control. Upon COMPANY request You
   shall within three (3) days certify destruction of, all full or partial copies of the
   Software, documentation and related materials provided by COMPANY.
   PRODUCT2 EULA2
   The relevant clauses of the PRODUCT2 EULA provide as follows:
   BY DOWNLOADING, INSTALLING, OPERATING OR OTHERWISE USING THE
   SOFTWARE, YOU ARE EXPRESSLY AND EXPLICITLY ACCEPTING THIS
   AGREEMENT AND AGREEING TO BE BOUND BY ITS TERMS AND CONDITIONS.
   IF YOU DO NOT AGREE TO THIS AGREEMENT DO NOT MAKE ANY USE OF THE
   SOFTWARE.

2

2.

License. Subject to the terms of this Agreement, the Company hereby grants
you, and you accept a limited, non-exclusive, non-sublicensable, nontransferable and fully revocable license to use the Software solely for your
internal business purposes, in accordance with the Software’s documentation.
All other rights in the Software are expressly reserved by the Company.

3.

Prohibited Uses. Except as specifically permitted herein, without the prior
written consent of the Company you agree not to, directly or indirectly: (i) use,
modify, incorporate into or with other software, or create a derivative work or any
part of the Software; (ii) sell, resell, license (or sub-license), lease, assign,
transfer, pledge, or share your rights under this Agreement with or to anyone
else; (iii) copy, distribute, publish or reproduce the Software, including without

See PRODUCT2 EULA, attached as Exhibit C.

ST-21-0008
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January 28, 2021
limitation any databases or reports or generated by the Software; (iv) use or
permit the Software to be use to perform services for third parties, whether on a
service bureau or time sharing basis or otherwise; (v) disclose, publish or
otherwise make publicly available the results of any benchmarking of the
Software, or use such results for your own competing software development
activities; (vi) modify, disassemble, decompile, reverse engineer, revise or
enhance the Software or attempt to reconstruct or discover any source code or
underlying ideas or algorithms of the Software, except to the extent otherwise
permitted under applicable law, in the jurisdiction of use, notwithstanding this
prohibition; (vii) access the underlying databases; (viii) ship, transfer or export the
Software into any country, or make available or use the Software in any manner
which is in violation of applicable export control laws, restrictions or regulations
and/or (ix) disclose, provide or otherwise make available trade secrets contained
within the Software and related documentation in any form to any third party.
You shall implement reasonable security measures to protect such trade secrets
(x) remove or otherwise alter any of the Company’s trademarks, logos,
copyrights, notices or other proprietary notices or indicia, if any, fixed or attached
to the Software as delivered to you.
10.

Term; Termination. This Agreement shall become effective upon downloading,
installing, operating or otherwise using the Software. This Agreement will remain
in force and effect provided that (i) you have an active applicable PRODUCT1
subscription; and (ii) all Fees (as defined below) were timely paid. Provided,
however, that the Company may terminate this Agreement immediately without
notice if you do not comply with or otherwise breach any provision of this
Agreement. Upon termination of this Agreement: (i) any license granted
hereunder shall expire; (ii) you shall discontinue all further use of the Software;
and (iii) you shall promptly remove the Software from all hard drives, networks
and other storage media under your control. The provisions of this Agreement
that, by their nature and content, must survive the termination of this Agreement
in order to achieve the fundamental purposes of this Agreement shall so survive
upon termination of this Agreement for any reason.

PLAN5 EULA 3
The relevant clauses of the PLAN5 EULA provide as follows:
BY DOWNLOADING, INSTALLING OR USING THE SOFTWARE, YOU ARE
ACCEPTING AND AGREEING TO THE TERMS AND CONDITIONS OF THIS
AGREEMENT.
COMPANY AND YOU MAY BE REFERRED TO IN THIS
AGREEMENT, INDIVIDUALLY, AS “PARTY” AND, COLLECTIVELY, AS “PARTIES.”

2. SOFTWARE LICENSE

3

See PLAN5 EULA, attached as Exhibit D.

ST-21-0008
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January 28, 2021

1. Subject to the terms and conditions of this EULA, we hereby grant you, and you
   hereby accept, a perpetual, limited, revocable, nontransferable, nonsublicensable, and nonexclusive license to make internal use of the Software
   only in binary executable form, for the regular and standard purposes the
   Software was designed for, only as authorized in this EULA.
2. RESTRICTIONS ON USE. Except as expressly permitted by this Agreement, you
   shall not, or nor permit anyone else to, directly or indirectly:
3. copy, reverse engineer, decompile, or disassemble the PLAN5 Software or any
   part of it or otherwise attempt to reconstruct or discover any source code or
   underlying ideas or algorithms of the PLAN5 Software;
4. modify, convert, alter, change, manipulate, divide, part or revise the PLAN5
   Software, or any part thereof;
5. assign, sublicense, resell, transfer, distribute, pledge, loan, lease, market, rent, or
   use the PLAN5 Software in any service bureau arrangement, facility
   management or third-party training, or otherwise share your rights under this
   Agreement to any third party;
6. SUBSCRIPTION TERMS; SUBSCRIPTION FEES; MAINTENANCE.
7. You can commence use of the PLAN5 Software by purchasing a subscription
   for such number of licenses and for a certain duration of time as shall be set
   forth in an order form (each a “Subscription” and “Order Form”, respectively).
   A Subscription entitles you to: (i) use the PLAN5 Software under the terms
   and conditions set forth herein; and (ii) receive Maintenance (as defined in
   below) for a certain copy of the PLAN5 Software during the applicable
   Subscription Term. In this Agreement, “Subscription Term” means the period
   specified in the Order Form.
8. Each Subscription expires at the end of the applicable Subscription Term.
   You shall pay the fees for each Subscription as specified at the time of
   purchase of such Subscription in an Order Form. The Subscription fee for
   any additional Subscription will be according to COMPANY’S then-current
   applicable Subscription fee.
9. TERM; TERMINATION.
10. Upon termination of this EULA, all Licenses granted herein will terminate and
    You: (i) shall immediately cease to use the PLAN5 Software, (ii) shall pay to
    COMPANY any amounts owed to COMPANY under any Order Form; (ii) shall
    remove the PLAN5 Software from all hard drives, networks and other storage
    media and destroy all copies of the PLAN5 Software in your possession or
    under your control, and to the extent requested by COMPANY, provide a
    certification to that effect within ten (10) business days.

ST-21-0008
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January 28, 2021

LAW:
According to regulation 86 Ill. Admin. Code 130.1935(a)(1), license fees charged in
association with software may be exempt from sales and use tax in certain instances. A
license of software is not a taxable retail sale if it meets the following five criteria:

1. it is evidenced by a written agreement signed by the licensor and the
   customer;
2. it restricts the licensee’s duplication and use of the software;
3. it prohibits the licensee 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 licensee loses or damages the software, or of permitting the licensee to
   take 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 licensee must destroy all copies of the software or return them to licensor
   at the end of the license period. This provision is deemed to be met if the
   license agreement is a perpetual license. 4
   ANALYSIS
   The EULAs between the Company and their Customers appears to meet the five prong
   test established in 86 Ill. Admin. Code 130.1935(a)(1). We seek your confirmation of
   our understanding.
   The license agreements are evidenced by a written agreement signed by the
   licensor and the customer.
   To qualify as an exempt software license agreement, it must be evidenced by written
   document, signed by both parties. The Company has a written agreement in place for
   each of its platforms and requires acceptance of the written EULAs by electronic
   signature, including but not limited to DocuSign, or wet signature. The customers either
   certify that they accept the terms of the EULA by wet or electronic signature or accept
   the quote by wet or electronic signature. The electronic signature includes but is not
   limit to DocuSign. The quote includes a hyperlink to the complete EULA agreement or a
   reference to the specific pre-negotiated signed EULA. This signed acceptance of the
   written agreement satisfies the first prong of the test.
   The license agreements restrict the licensee’s duplication and use of the
   software.

4

86 Ill. Admin. Code 130.1935(a)(1).

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January 28, 2021
The license agreement must restrict the customer’s duplication and use of the software.
The Company’s EULAs all contain clauses that restrict the customers ability to duplicate
and use the software. The EULAs restrict the customers ability to use and duplicate the
software in at least two different ways. First all the EULAs restrict the ability of the
licensee to copy, reverse engineer, decompile, or disassemble the software. The
PRODUCT1, PRODUCT2, and PLAN5 EULAs all state that a licensee is prohibited
from attempting to “copy, reverse engineer, decompile, or disassemble” the software,
source code, or algorithm. 5 Second the EULAs explicitly prohibit the licensee from
making any modifications to the licensor’s software. Section 3 of the PRODUCT2 and
PLAN3 EULAs explicitly prohibit a licensee’s ability to modify the software, and section
1.2 of the PRODUCT1 EULA restricts the licensee’s use of the software to “install, use,
access, display and run one copy of the Software at a time . . . Other than the rights
expressly set forth . . . no other right or interest whatsoever in or relating to the Software
is transferred or granted to You.” 6 Section 1.2 of the PRODUCT1 EULA further states
that if a right was not expressly granted to the Licensee within the EULA, they cannot
use the software in that specific manner. 7 Here, the licensee was not explicitly given
the right to modify the software, thus their use of the software is restricted by the
Company. All three EULAs restrict the licensee’s duplication and use of the software,
thus the second prong of the test is satisfied.
The license agreements prohibit the licensee 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.
The third prong of the test prohibits the licensee 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. The EULAs for PRODUCT1,
PRODUCT2, and PLAN5 all contain language that prohibit the licensee 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. Section 1.1 of the
PRODUCT1 EULA states, “Subject to terms and conditions of this EULA, Licensor
hereby grants to You, and You accept, a . . . nontransferable, non-sublicensable . . .
license to make internal use of the Software.” 8 Section 1.2 and 1.3 of the PRODUCT2
EULA state, “Subject to the terms and conditions of this Agreement, the Company
hereby grants you, and you accept a limited, non-exclusive, non-sublicensable, nontransferable and fully revocable license to use the Software solely for your internal
business purposes . . . Except as specifically permitted herein, without the prior written
consent of the Company you agree not to, directly or indirectly . . . sell, resell, license
(or sub-license), lease, assign, transfer, pledge, or share your rights under this
Agreement with or to anyone else.”9 Section 2.1 and 3.3 of the PLAN5 EULA state,
“Subject to the terms and conditions of this EULA, we hereby grant you, and you hereby
accept, a perpetual, limited, revocable, nontransferable, non-sublicensable . . . license
See Exhibit B Section 1.3; Exhibit C Section 1.3; Exhibit D Section 3.1.
See Exhibit B Section 1.2; Exhibit C Section 1.3; Exhibit D Section 3.2.
7
See Exhibit B Section 1.2.
8
See Exhibit B Section 1.1.
9
See Exhibit C Section 1.2-1.3.
5
6

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January 28, 2021
to make internal use of the Software . . . Except as expressly permitted by this
Agreement, you shall not, or nor permit anyone else to, directly or indirectly . . . assign,
sublicense, resell, transfer, distribute, pledge, loan, lease, market, rent, or use the
PLAN5 Software in any service bureau arrangement, facility management or third-party
training, or otherwise share your rights under this Agreement to any third party.” 10 All
three EULAs prohibit the licensee from licensing, sublicensing, or transferring the
software to a third party, thus the third prong of the test is satisfied.
COMPANY has a policy of providing another copy at minimal or no charge if the
licensee loses or damages the software, or of permitting the licensee to take 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.
The fourth prong of the test requires the licensor to maintain a policy of providing
additional copies of the software at minimal or no charge to the licensee if the software
becomes lost or damaged. As previously stated above, the Company maintains a
policy of providing another software license to the customer at no charge if the
customer’s current license fails for any reason, so long as the customer maintains an
active subscription with the Company. This policy satisfies the fourth prong of the test.
The license agreements require that the licensee destroy all copies of the
software or return them to COMPANY at the end of the license period. This
provision is deemed to be met if the license agreement is a perpetual license.
The last prong of the test requires the licensor to return or destroy any copies of the
software at the end of the license period. This prong is deemed satisfied if the license is
perpetual. Both the PRODUCT1 and PLAN5 EULA explicitly state that the license
being grated to the licensee is perpetual. 11 Furthermore, all three EULAs contain
terminations clauses which require the licensee to destroy all copies of the software
upon termination of the EULA. Section 5.4 of the PRODUCT1 EULA states, “Upon
termination of this Agreement the license granted herein will terminate and . . . you shall
promptly remove the Software from all hard drives, networks and other storage media
under your control.”12 Section 10 of the PRODUCT2 EULA states, “Upon termination of
this Agreement (i) any license granted hereunder shall expire . . . and (iii)you shall
promptly remove the Software from all hard drives, networks and other storage media
under your control. 13 Section 9.4 of the PLAN5 EULA states, “Upon termination of this
EULA, all Licenses granted herein will terminate and You . . . (ii) shall remove the
PLAN5 Software from all hard drives, networks and other storage media and destroy all
copies of the PLAN5 Software in your possession or under your control, and to the
extent requested by COMPANY, provide a certification to that effect within ten (10)
business days.” 14 For electronic software, removal of the software from the Licensee’s
See Exhibit D Section 2.1 & 3.3.
See Exhibit B Section 1.1. and Exhibit D Section 2.1.
12
See Exhibit B Section 5.4
13
See Exhibit C Section 10.
14
See Exhibit D Section 9.4.
10
11

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January 28, 2021
computer or server is tantamount to destruction. Because each of the relevant EULAs
requires the Licensee to destroy any copies of the software at the end of the license
period, or explicitly states the license is perpetual, the last prong of the test is satisfied.
The provisions of the attached EULAs that are applicable to COMPANY’S
downloadable software satisfy all five prongs as outlined above. Accordingly all sales of
the five platforms – PLAN1, PLAN2, PLAN3, PLAN4, and PLAN5 -- qualify as exempt
licenses of the software and should not be considered retail sales of tangible personal
property subject to the Illinois Retailers Occupation Tax. We are unaware of any
clarifying authority contrary to our understanding of the law. We respectfully request a
ruling from the Department confirming our interpretation.
DEPARTMENT’S RESPONSE:
The Retailers' Occupation Tax Act imposes a tax upon persons engaged in this State in the
business of selling tangible personal property at retail to purchasers for use or consumption. See 86
Ill. Adm. Code 130.101. Use Tax is imposed on the privilege of using, in this State, any kind of
tangible personal property that is purchased anywhere at retail from a retailer. See 86 Ill. Adm. Code
150.101. These taxes comprise what is commonly known as “sales tax” in Illinois.
“‘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 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 canned computer software.
If transactions for the licensing of computer software meet all 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;

ST-21-0008
PAGE 10
January 28, 2021

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 recognizes that electronic signatures, which are verifiable
and can be authenticated, will comply with the requirement of a written agreement signed by the
licensor and customer. See ST-18-0003-PLR. Further, the Department has previously found the use
of “DocuSign” and other methods of executing agreements by digital signature to meet the
requirement for a written signed agreement for purposes of Section 130.1935(a)(1)(A). See ST-180010-PLR.
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,

Alexis K. Overstreet
Associate Counsel
AKO:rkn