Does a company that resells hosted phone system licenses have to collect and remit Illinois telecommunications tax or sales tax on those licenses?

Plain-English summary

A company that resells hosted phone system licenses wrote to the Illinois Department of Revenue after calling the Department's help line and being told to put its question in writing. The company resells a monthly user license from another company that lets customers use a browser-based phone, mobile app, or physical phone to access a hosted phone system. That hosted system runs on a third party's platform, and a separate entity handles the SIP trunks and collects telecommunications taxes directly from the customer on its own bill. The reselling company also separately sells phone hardware and already collects and remits tax on those hardware sales. It asked: if it buys a monthly license for one price and resells it to a customer for another price, what (if anything) should it collect and remit on that resale?

Because the question was general rather than tied to one fully described transaction, the Department answered with a General Information Letter (GIL) rather than a binding Private Letter Ruling (PLR), and it walked through the several tax regimes that could apply depending on exactly what is being sold:

• Sales/Use Tax and Service Occupation Tax apply only when tangible personal property (or property transferred incident to a service) changes hands. Merely viewing, downloading, or streaming data over the internet is not a transfer of tangible personal property.
• Computer software is generally taxable as tangible personal property when "canned" (pre-written and not custom-built for the customer), but a license of that software can be sold tax-free if it meets five specific conditions in 86 Ill. Adm. Code 130.1935(a)(1) — including a signed written agreement (clicking "I agree" doesn't count) and restrictions on duplication, transfer, and return/destruction of the software at the end of the license.
• Telecommunications Excise Tax applies at 7% of the "gross charge" for originating or receiving telecommunications in Illinois, and the statutory definition of "telecommunications" is broad enough to include hosted/VoIP-style phone services. A reseller can avoid the tax on its own purchases only by obtaining an active Illinois resale number from the Department and giving that number to its supplier.

The Department noted it could not give a more specific answer because the description of the services and how they are "provisioned" was too limited — a recurring theme in Illinois GILs, which direct taxpayers to the relevant rules rather than resolve a single set of facts the way a PLR would.

What this means for you

Telecommunications and VoIP/hosted-service resellers

If you resell hosted phone system access, the underlying telecommunications service is generally subject to the 7% Telecommunications Excise Tax on the gross charge to your customer. If you want to buy that service tax-free as a reseller, you must apply for and hold an active Illinois resale number and furnish it to your supplier — otherwise you (or your supplier) may owe the tax on the purchase in addition to whatever your downstream provider is separately collecting from the end customer.

Software resellers and license bundlers

If part of what you're selling is really a software license (rather than pure telecommunications service), it escapes sales/use tax only if the license agreement is a genuinely signed written agreement (not a clickwrap "I agree") and meets all of the other conditions in 86 Ill. Adm. Code 130.1935(a)(1) — restrictions on copying and transfer, a policy for replacing lost/damaged copies, and a requirement to destroy or return the software at the end of the license. Cloud-based software that's never downloaded to the customer's computer is generally not taxed as computer software at all.

Accountants and tax professionals advising resellers of bundled tech/telecom products

This letter is a good illustration of how the Department separates overlapping tax regimes — Retailers' Occupation/Use Tax, Service Occupation Tax, and the Telecommunications Excise Tax — based on exactly what is transferred and how. Because the taxpayer's letter described a layered arrangement (a third party billing the customer directly for telecom taxes, while the reseller marks up a software-style "license"), the Department couldn't say definitively which regime governs the resale markup without more detail on how the service is provisioned. When advising a client in a similar arrangement, get precise facts about what money changes hands for what (license vs. service vs. hardware) before relying on this letter.

Common questions

Q: Does this letter say whether the reseller owes tax on its markup?
A: No. The Department explained the general rules for Sales/Use Tax, Service Occupation Tax, computer software licensing, and the Telecommunications Excise Tax, but said it "cannot provide any further explanation with the limited description of the services you provide and the manner in which those services are provisioned." This is a GIL, not a binding ruling on this taxpayer's specific facts.

Q: What's the difference between a GIL and a PLR here, and why does it matter?
A: A Private Letter Ruling (PLR) is binding on the Department as to the specific taxpayer, but only if the taxpayer follows the PLR request procedures in 2 Ill. Adm. Code 1200.110 and the facts recited are complete and correct. A GIL, issued under 2 Ill. Adm. Code 1200.120, merely points the taxpayer to the relevant regulations and is not binding on the Department. This letter is a GIL because the inquiry wasn't specific enough for a PLR.

Q: How can a reseller buy telecommunications service tax-free for resale?
A: Under 35 ILCS 630/8, a person who originates or receives telecommunications and claims to resell it must apply to the Department for a resale number, showing why they aren't liable for the tax on their purchases. Without an active resale number furnished to the retailer, the resale exemption doesn't apply.

Q: Is a hosted phone system license taxed like software or like telecommunications?
A: It can be either, depending on what's actually being provided. If it's genuinely a license to software delivered in a way that meets all five conditions of 86 Ill. Adm. Code 130.1935(a)(1) (signed written agreement, use/duplication restrictions, no unauthorized sublicensing, replacement policy, and return/destruction at the end), the license itself isn't a taxable retail sale. But if what's really being sold is telecommunications service (originating or receiving communications), the 7% Telecommunications Excise Tax applies to the gross charge instead.

Q: Does a "clickwrap" agreement (clicking "I agree") satisfy the written-signature requirement for a tax-exempt software license?
A: No. The Department has repeatedly held that electronically accepting terms by clicking "I agree" does not satisfy the requirement of a written agreement signed by both the licensor and the customer, citing its earlier rulings ST 06-0005-PLR and ST 18-0003-PLR (which allows verifiable, authenticated electronic signatures, but not simple click-acceptance).

Citations and references

Statutes and rules:

• 35 ILCS 630/3, 630/4 (Telecommunications Excise Tax Act — imposition and 7% rate on gross charges)
• 35 ILCS 630/8 (Telecommunications Excise Tax Act — resale number required for resale exemption)
• 35 ILCS 120/2; 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax Act — imposition on retail sales)
• 35 ILCS 105/3; 86 Ill. Adm. Code 150.101 (Use Tax Act — imposition on use of property purchased at retail)
• 86 Ill. Adm. Code 140.101 (Service Occupation Tax Act — tax on property transferred incident to service)
• 35 ILCS 120/2-25; 86 Ill. Adm. Code 130.1935 (canned vs. custom computer software)
• 2 Ill. Adm. Code 1200.110, 1200.120 (Private Letter Ruling vs. General Information Letter procedures)

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/st21-0011-gil-.pdf

Original ruling text

ST 21-GC-0011 03/11/2021 TELECOMMUNICATIONS
This letter discusses telecommunications services. 35 ILCS 630/. (This is a
GIL.)
March 11, 2021
Dear Xxxx:
This letter is in response to your letter dated February 10, 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.
The nature of your inquiry and the information you have provided require that we
respond with a GIL. In your letter you have stated and made inquiry as follows:
I called the IDOR help line and they suggested we get something in
writing. We resell hosted phone system licenses on a monthly
basis to our customers. We resell a license from a company
named COMPANY. The user license supports a person's ability to
use a browser based phone, mobile app, and physical phone to
access the hosted phone system on COMPANY 2 WEB SERVICES. The
phone system in the COMPANY 2 WEB SERVICES platform has
SIP trunks that are provided by a third party. The entity, COMPANY 3
collects the telecommunications taxes directly from the customer on
a direct bill. We also sell customers COMPANY hardware, and we
collect and remit tax on those parts. If we purchase a license from
COMPANY, say for $$$ per month, and sell it to customer for $$$ a
month, what, if anything should we collect and remit?
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

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or consumption. See 35 ILCS 120/2; 86 Ill. Adm. Code 130.101. In Illinois, Use Tax is
imposed on the privilege of using, in this State, any kind of tangible personal property
that is purchased anywhere at retail from a retailer. See 35 ILCS 105/3; 86 Ill. Adm.
Code 150.101. These taxes comprise what is commonly known as “sales” tax in Illinois.
If the purchases occur in Illinois, the purchasers must pay the Use Tax to the retailer at
the time of purchase. The retailers are then allowed to reduce the amount of Use Tax
they must remit by the amount of Retailers' Occupation Tax liability which they are
required to and do pay to the Department with respect to the same sales. See 86 Ill.
Adm. Code 150.130.
When property is purchased and then given away, the donor has made a taxable
use of the property by making such gift. Therefore, it is the donor of the gift who is
deemed the end user of the property and who is subject to the Use Tax, rather than the
donee. See 86 Ill. Adm. Code 150.305(c).
The donor’s Use Tax liability is calculated on the cost price of the property given
away. When the property is purchased at retail, the base for calculating Use Tax is the
purchase price of the property. If, however, the property given away is a finished
product produced by the donor, the donor’s Use Tax liability is calculated on the donor’s
cost price of the materials and products
purchased and incorporated into the finished product. See 86 Ill. Adm. Code Section
150.305(b) and (c).
Service Transactions
Retailers' Occupation Tax and Use Tax do not apply to sales of service. Under
the Service Occupation Tax Act, businesses providing services (i.e., servicemen) are
taxed on tangible personal property transferred as an incident to sales of service. See
86 Ill. Adm. Code 140.101. The transfer of tangible personal property to service
customers may result in either Service Occupation Tax liability or Use Tax liability for
servicemen, depending upon which tax base they choose to calculate their liability.
Servicemen may calculate their tax base in one of four ways: (1) separately
stated selling price; (2) 50% of the entire bill; (3) Service Occupation Tax on cost price if
they are registered de minimis servicemen; or (4) Use Tax on cost price if the
servicemen are de minimis and are not otherwise required to be registered under
Section 2a of the Retailers’ Occupation Tax Act.
Using the first method, servicemen may separately state the selling price of each
item transferred as a result of sales of service. The tax is based on the separately
stated selling price of the tangible personal property transferred. If servicemen do not
wish to separately state the selling price of the tangible personal property transferred,
those servicemen must use the second method where they will use 50% of the entire
bill to their service customers as the tax base. Both of the above methods provide that

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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
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.

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Computer Software
“‘Computer software’ means a set of statements, data, or instructions to be used
directly or indirectly in a computer in order to bring about a certain result in any form in
which those statements, data, or instructions may be embodied, transmitted, or fixed, by
any method now known or hereafter developed, regardless of whether the statements,
data, or instructions are capable of being perceived by or communicated to humans,
and includes prewritten or canned software.” 35 ILCS 120/2-25. Generally, sales of
“canned” computer software are taxable retail sales in Illinois. Canned computer
software is considered to be tangible personal property regardless of the form in which it
is transferred or transmitted, including tape, disc, card, electronic means, or other
media. 86 Ill. Adm. Code 130.1935. However, if the computer software consists of
custom computer programs, then the sales of such software may not be taxable retail
sales. Custom computer programs or software are prepared to the special order of the
customer. The selection of pre-written or canned programs assembled by vendors into
software packages does not constitute custom software unless real and substantial
changes are made to the programs or creation of program interfacing logic. See 86 Ill.
Adm. Code 130.1935(c)(3). Computer software that is not custom software is
considered to be canned computer software.
If transactions for the licensing of computer software meet all of the criteria
provided in subsection (a)(1) of Section 130.1935, neither the transfer of the software
nor the subsequent software updates will be subject to Retailers' Occupation Tax. A
license of software is not a taxable retail sale if:
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

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met, in the case of a perpetual license, without being set forth in the
license agreement.
If a license of canned computer software does not meet all the criteria the software is
taxable.
In order to comply with the requirements as set out in Section 130.1935(a)(1),
there must be a written “signed” agreement. A license agreement in which the
customer electronically accepts the terms by clicking “I agree” does not comply with the
requirement of a written agreement signed by the licensor and customer. The
Department previously held that an electronic signature did not comply with the
requirement of Section 130.1935(a)(1)(A) that the license be evidenced by a written
agreement signed by the licensor and the customer. ST 06-0005-PLR (December 16,
2006). In ST 18-0003-PLR (February 8, 2018), the Department decided that an
electronic license agreement in which the customer accepts the license by means of a
signature in electronic form that is attached to or is part of the license, is verifiable, and
can be authenticated will comply with the requirement of a written agreement signed by
the licensor and customer. See ST 18-0010-PLR (September 26, 2018) for examples of
acceptable written signatures. A license agreement in which the customer electronically
accepts the terms by clicking “I agree” remains unacceptable.
Computer software is defined broadly in the Retailers’ Occupation Tax Act.
However, computer software provided through a cloud-based delivery system – a
system in which computer 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.
Telecommunications
The Telecommunications Excise Tax is imposed upon the act or privilege of
originating or receiving intrastate or interstate telecommunications in Illinois at the rate
of 7% of the gross charges for such telecommunications purchased at retail from
retailers. 35 ILCS 630/3 and 630/4.
“Gross charge" means the amount paid for the act or privilege of originating or
receiving telecommunications in this State and for all services and equipment provided
in connection therewith by a retailer, valued in money whether paid in money or
otherwise, including cash, credits, services and property of every kind or nature, and
shall be determined without any deduction on account of the cost of such
telecommunications, the cost of materials used, labor or service costs or any other

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expense whatsoever. In case credit is extended, the amount thereof shall be included
only as and when paid.
"Telecommunications", in addition to the meaning ordinarily and popularly
ascribed to it, includes, without limitation, messages or information transmitted through
use of local, toll and wide area telephone service; private line services; channel
services; telegraph services; teletypewriter; computer exchange services; cellular
mobile telecommunications service; specialized mobile radio; stationary two-way radio;
paging service; or any other form of mobile and portable one-way or two-way
communications; or any other transmission of messages or information by electronic or
similar means, between or among points by wire, cable, fiber-optics, laser, microwave,
radio, satellite or similar facilities.
If a person who originates or receives telecommunications in this State claims to
be a reseller of such telecommunications, the person shall apply to the Department for a
resale number. The applicant shall state facts which will show the Department why the
applicant is not liable for telecommunications tax on any of his purchases. Upon
approval of the application, the Department will assign a resale number to the applicant.
35 ILCS 630/8.
Except as provided in Section 8, the act or privilege of originating or receiving
telecommunications in this State cannot be made tax-free on the ground of being a sale
for resale unless the person has an active resale number from the Department and
furnishes that number to the retailer in connection with certifying to the retailer that any
sale to such person is nontaxable because of being a sale for resale.
The Department cannot provide any further explanation with the limited
description of the services you provide and the manner in which those services are
provisioned.
I hope this information is helpful. If you require additional information, please
visit our website at www.tax.illinois.gov or contact the Department’s Taxpayer
Information Division at (217) 782-3336.
Very truly yours,
Richard S. Wolters
Associate Counsel
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