Is a company's bundled sale of hardware (sensors, GPS trackers) plus a required software subscription subject to Illinois sales and use tax, and does the software license exclusion or the SaaS exemption apply?

Plain-English summary

A company that sells internet-connected hardware (cameras, GPS fleet trackers, temperature monitors, driver ID tokens) bundled with a required software subscription asked Illinois to confirm, in a binding Private Letter Ruling, that its bundled sales were taxable. The Department declined to issue a binding PLR because the request didn't explain how the company actually bills for the different pieces of the offering — but it issued this General Information Letter (GIL) walking through the relevant rules, which is not binding on the Department but does lay out how it is likely to analyze the facts.

The hardware only works with the company's own subscription: the subscription delivers hosted cloud services, firmware/software updates, and cellular connectivity, and the company keeps ownership of the embedded firmware even though the customer owns the physical hardware. Because tangible personal property (the hardware, plus firmware pushed to it) is transferred as part of every sale, the offering does not qualify for Illinois's exemption for pure cloud-based Software-as-a-Service (SaaS), which only applies when nothing tangible ever changes hands. The company is instead acting as a "serviceman" providing property incident to a service, so it owes Service Occupation Tax or Use Tax on the hardware and software components (calculated under one of four statutory methods), plus Retailers' Occupation Tax on any replacement hardware, cables, or accessories it sells separately at list price.

The letter also independently addresses the company's software license: computer software in Illinois (other than custom software) is generally taxable tangible personal property, but a "license" of software escapes tax if it meets five specific criteria — including a signed written agreement and a requirement that the customer destroy or return all copies at the end of the license period. This company's terms failed that last requirement, because customers were not required to return or destroy the hardware/firmware after the subscription ended.

What this means for you

Software and hardware-plus-subscription companies

If your product only works when bundled with your own hardware (or any tangible personal property), don't assume the "cloud SaaS is exempt" rule saves you. Illinois's SaaS exemption applies only when computer software is delivered purely through a cloud-based system with no transfer of tangible personal property. The moment your subscription is inseparable from hardware you sell (or firmware embedded on it), the Department will treat the whole bundle as a taxable sale of tangible personal property incident to a service, and you'll need to work out Service Occupation Tax/Use Tax on a cost-price or bill-percentage basis.

Software licensors

To keep a software license out of Retailers' Occupation Tax, your agreement must satisfy all five conditions in 86 Ill. Adm. Code 130.1935(a)(1): a signed written agreement, restrictions on duplication/use, a bar on sublicensing without your consent, a replacement-copy/archival-copy policy, and a requirement that the customer destroy or return all copies at the end of the license (waived only for perpetual licenses). Missing even one condition — as happened here with the return/destroy requirement for embedded firmware — makes the whole license taxable. Also note: an electronic "I agree" click-through does not satisfy the signed-written-agreement requirement.

Accountants and tax professionals advising servicemen

When a client is a "serviceman" transferring tangible personal property incident to a service, remind them there are four statutory ways to compute Service Occupation Tax/Use Tax liability: (1) separately-stated selling price of the property transferred; (2) 50% of the entire bill; (3) Service Occupation Tax on cost price if registered as a de minimis serviceman; or (4) Use Tax on cost price if de minimis and not required to register. The Department could not tell this company which method applied because its letter didn't disclose enough billing detail — a reminder that PLR/GIL requests need to spell out exactly how charges are itemized. Also flag maintenance-agreement nuance: bug-fix "patches" follow ordinary maintenance-agreement rules, but charges for new canned-software version upgrades are separately, fully taxable under 86 Ill. Adm. Code 130.1935(b), even when bundled into a maintenance agreement.

Common questions

Q: Is Software-as-a-Service (SaaS) taxable in Illinois?
A: Generally no — the Department treats cloud-based software that is never downloaded and only accessed remotely as an exempt service, not a sale of tangible personal property. But if the SaaS provider also gives the subscriber an API, applet, desktop agent, or remote access agent, the subscriber is considered to be receiving computer software, which is potentially taxable unless it separately qualifies as a non-taxable license. In this case, the subscription was also bundled with tangible hardware, which took it out of the SaaS exemption entirely.

Q: Why didn't the company get a binding ruling?
A: The Department can decline to issue a Private Letter Ruling under 2 Ill. Adm. Code 1200.110(a)(4) when the request doesn't give it enough information — here, the letter didn't explain how the company bills for hardware versus the subscription, so the Department couldn't determine which of the four Service Occupation Tax/Use Tax calculation methods applied. It issued this non-binding GIL instead.

Q: When is a software license NOT subject to Illinois sales tax?
A: Only when the license meets all five criteria in 86 Ill. Adm. Code 130.1935(a)(1): (A) a written agreement signed by both licensor and customer; (B) it restricts the customer's duplication and use; (C) it bars the customer from sublicensing or transferring the software to third parties without the licensor's continued control; (D) the licensor has a policy of providing free/low-cost replacement or archival copies; and (E) the customer must destroy or return all copies at the end of the license period (this last condition is automatically satisfied for perpetual licenses). If any one condition fails, the transfer is a taxable sale of canned software.

Q: What's the difference between canned and custom software for Illinois tax purposes?
A: Canned (prewritten) computer software is tangible personal property and its sale is generally taxable, regardless of the medium used to transfer it. Custom computer programs — prepared to the customer's special order — are not taxed the same way. Simply selecting and assembling prewritten/canned modules into a package does not make it "custom" unless the vendor makes real and substantial changes to the programs or creates custom interfacing logic (86 Ill. Adm. Code 130.1935(c)(3)).

Q: How are maintenance and update agreements for software taxed?
A: It depends on what's actually delivered. A "patch" or "bug fix" inserted into existing software to correct an error is taxed under the ordinary maintenance-agreement rules (taxable only if bundled into the original selling price; separately-sold maintenance agreements themselves aren't taxed, though the servicer owes Use Tax on parts used). But charges for genuine new-version updates of canned software (new releases with enhancements) are fully taxable as sales of software under 86 Ill. Adm. Code 130.1935(b) — and if those update charges aren't separately stated from other maintenance-agreement charges like training or phone support, the entire agreement becomes taxable as a sale of canned software.

Q: What does it mean to be treated as a "serviceman" instead of a retailer?
A: A serviceman is a business that transfers tangible personal property incident to providing a service. Instead of collecting Retailers' Occupation Tax on the full sale price, a serviceman owes Service Occupation Tax or Use Tax computed on the property transferred, using one of four methods (separately-stated price; 50% of the bill; or, for qualifying de minimis servicemen, cost price under Service Occupation Tax or Use Tax). The Department concluded this company is acting as a serviceman for its bundled hardware/software offering, but couldn't specify which of the four cost bases applied without more billing information.

Citations and references

Statutes and rules:

• 35 ILCS 120/2 (Retailers' Occupation Tax)
• 35 ILCS 105/3 (Use Tax)
• 35 ILCS 120/2-25 (statutory definition of "computer software")
• 35 ILCS 115/3; 86 Ill. Adm. Code 140.101 (Service Occupation Tax)
• 86 Ill. Adm. Code 140.101(f) (de minimis serviceman test)
• 86 Ill. Adm. Code 140.108 (Use Tax for unregistered de minimis servicemen)
• 86 Ill. Adm. Code 140.301(b)(3) (maintenance/repair agreement taxability)
• 86 Ill. Adm. Code 130.1935 (canned vs. custom software; license exclusion criteria; updates)
• 2 Ill. Adm. Code 1200.110 (PLR procedure, including discretion to decline a request)
• 2 Ill. Adm. Code 1200.120 (GIL procedure)
• Referenced prior rulings: Ill. Priv. Ltr. Rul. ST 17-0006-PLR (8/14/2017); Ill. Priv. Ltr. Rul. ST 17-0007-PLR (3/2/2017); Ill. Gen. Info. Letter No. ST 19-0007-GIL (3/20/2019); Ill. Gen. Info. Letter No. ST 16-0038-GIL (8/18/2016); ST 06-0005-PLR (12/16/2006); ST 18-0003-PLR (2/8/2018); ST 18-0010-PLR (9/26/2018)

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/st21-0022-gil.pdf

Original ruling text

ST-02-0022 05/06/2021 COMPUTER SOFTWARE
This letter discusses computer software. 86 Ill. Adm. Code 130.1935. (This is a
GIL.)

May 6, 2021
Dear: NAME
This letter is in response to your letter received March 2, 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:
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
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.

Facts
Issues

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III.
IV.
V.

Pertinent Authority
Discussion
Ruling Request

I.
Facts
The Company is a STATE 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 E-MAIL1, 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 that
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.
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 purchase price
includes the cost of hardware (including warranty) and subscription.
Replacement hardware, cables and accessories can be sold separately as

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needed at list price.
offering:

See sample material on the Company's product

-

E-MAIL2 - Models & Specs page gives the high level overview with
downloadable data sheets on each product.
EMAIL3
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.
Ill. Pertinent Authority
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 Service 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 minimis serviceman; or
Use Tax on the serviceman's cost price if the serviceman is
de minimis and is not otherwise required to be registered

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.
1
2

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under Section 2a of the Retailers' 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
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)
B)
C)

D)

E)

6

it is evidenced by a written agreement signed by the licensor
and the customer;
it restricts the customer' s duplication and use of the
software;
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;
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
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

Id.
35 ILCS 110/ 3.
8
35 ILCS 120/1; 35 ILCS 120/2; 35 ILCS 115/3; 35 ILCS 110/3; 86 Ill. Admin. Code § 140.125{x).
9
Id.
10
Id.; 86 Ill. Admin. Code § 130.1935(a)
11
86 Ill. Admin. Code § 130.1935(a)(1).
7

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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
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
VI.
Discussion
The Company's provision of hardware and software subscriptions as
presented are subject to Illinois' Retailers' Occupation Tax. Given the
inter connectivity of 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.
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

Ill. Priv. Ltr. Rul. ST 17-0006-PLR (8/14/2017).
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 190007-GIL (3/20/2019 at p.4.
12
13

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offering are inclusive of cloud-hosted software, the offering does not
meet the criteria of exempt SaaS/ASP.
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)
B)
C)

D)

E)

it is evidenced by a written agreement signed by the
licensor and the customer;
it restricts the customer’s duplication and use of the
software;
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;
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
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.

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
includes hosted software only available via the Company's web-based
platform.

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Addition ally, 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. 111. Adm. Code 120.l l0(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:
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). Your
letter provides insufficient information regarding the manner of charging for the various
services to enable the Department to render a private letter ruling. Therefore, it is the
Department’s position that we must decline to issue a Private Letter Ruling. However,
we hope the following will be helpful in addressing your question.
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

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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
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 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

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suppliers. They provide suppliers with Certificates of Resale for the tangible personal
property transferred to service customers.
The final method of determining tax liability may be used by de minimis
servicemen that are not otherwise required to be registered under Section 2a of the
Retailers' Occupation Tax Act. Servicemen may qualify as de minimis if they determine
that the annual aggregate cost price of tangible personal property transferred as an
incident of sales of service is less than 35% of the servicemen's annual gross receipts
from service transactions (75% in the case of pharmacists and persons engaged in
graphic arts production). Such de minimis servicemen handle their tax liability by
paying Use Tax to their suppliers. If their suppliers are not registered to collect and
remit tax, the servicemen must register, self-assess, and remit Use Tax to the
Department. The servicemen are considered to be the end-users of the tangible
personal property transferred incident to service. Consequently, they are not authorized
to collect a "tax" from the service customers. See 86 Ill. Adm. Code 140.108.
The Department does not consider the viewing, downloading or electronically
transmitting of video, text and other data over the internet to be the transfer of tangible
personal property. However, if a company provides services that are accompanied with
the transfer of tangible personal property, including computer software, such service
transactions are generally subject to tax liability under one of the four methods set forth
above.
If a transaction does not involve the transfer of any tangible personal property to
the customer, then it generally would not be subject to Retailers’ Occupation Tax, Use
Tax, Service Occupation Tax, or Service Use Tax.
Computer Software
“‘Computer software’ means a set of statements, data, or instructions to be used
directly or indirectly in a computer in order to bring about a certain result in any form in
which those statements, data, or instructions may be embodied, transmitted, or fixed, by
any method now known or hereafter developed, regardless of whether the statements,
data, or instructions are capable of being perceived by or communicated to humans,
and includes prewritten or canned software.” 35 ILCS 120/2-25. Generally, sales of
“canned” computer software are taxable retail sales in Illinois. Canned computer
software is considered to be tangible personal property regardless of the form in which it
is transferred or transmitted, including tape, disc, card, electronic means, or other
media. 86 Ill. Adm. Code 130.1935. However, if the computer software consists of
custom computer programs, then the sales of such software may not be taxable retail
sales. Custom computer programs or software are prepared to the special order of the
customer. The selection of pre-written or canned programs assembled by vendors into
software packages does not constitute custom software unless real and substantial
changes are made to the programs or creation of program interfacing logic. See 86 Ill.

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Adm. Code 130.1935(c)(3). Computer software that is not custom software is
considered to be canned computer software.
If transactions for the licensing of computer software meet all of the criteria
provided in subsection (a)(1) of Section 130.1935, neither the transfer of the software
nor the subsequent software updates will be subject to Retailers' Occupation Tax. A
license of software is not a taxable retail sale if:
A)

It is evidenced by a written agreement signed by the licensor and the
customer;

B)

It restricts the customer’s duplication and use of the software;

C)

It prohibits the customer from licensing, sublicensing or transferring the
software to a third party (except to a related party) without the permission
and continued control of the licensor;

D)

The licensor has a policy of providing another copy at minimal or no
charge if the customer loses or damages the software, or permitting the
licensee to make and keep an archival copy, and such policy is either
stated in the license agreement, supported by the licensor’s books and
records, or supported by a notarized statement made under penalties of
perjury by the licensor; and

E)

The customer must destroy or return all copies of the software to the
licensor at the end of the license period. This provision is deemed to be
met, in the case of a perpetual license, without being set forth in the
license agreement.

If a license of canned computer software does not meet all the criteria the software is
taxable.
In order to comply with the requirements as set out in Section 130.1935(a)(1),
there must be a written “signed” agreement. A license agreement in which the
customer electronically accepts the terms by clicking “I agree” does not comply with the
requirement of a written agreement signed by the licensor and customer. The
Department previously held that an electronic signature did not comply with the
requirement of Section 130.1935(a)(1)(A) that the license be evidenced by a written
agreement signed by the licensor and the customer. ST 06-0005-PLR (December 16,
2006). In ST 18-0003-PLR (February 8, 2018), the Department decided that an
electronic license agreement in which the customer accepts the license by means of a
signature in electronic form that is attached to or is part of the license, is verifiable, and
can be authenticated will comply with the requirement of a written agreement signed by
the licensor and customer. See ST 18-0010-PLR (September 26, 2018) for examples of

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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.
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

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into an executable program that is a current or prior release or version of its software
product to correct an error or defect in software or hardware that causes the program to
malfunction, the tangible personal property transferred incident to providing the patch or
bug fix is taxed in accordance with the provisions discussed above. In contrast to a
patch or bug fix, if the sale of a maintenance agreement by a software provider includes
charges for updates of canned software, which consist of new releases or new versions
of the computer software designed to replace an older version of the same product and
which include product enhancements and improvements, the general rules governing
taxability of maintenance agreements do not apply. This is because charges for
updates of canned software are fully taxable as sales of software under Section
130.1935(b). (Please note that if the updates qualify as custom software under Section
130.1935(c) they may not be taxable). Therefore, if a maintenance agreement provides
for updates of canned software, and the charges for those updates are not separately
stated and taxed from the charges for training, telephone assistance, installation,
consultation, or other maintenance agreement charges, then the whole agreement is
taxable as a sale of canned software.
The Company states that “[t]he Company sells the noted products in a bundled
offering inclusive of the necessary hardware, cables, and accessories. The purchase
price includes the cost of hardware (including warranty) and subscription. Replacement
hardware, cables and accessories can be sold separately as needed at list price.”
Moreover, “[e]ach 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.” The payment
terms in the order form states that the “order form includes a license fee for the
Samsara Software associated with the Hardware to be paid monthly and, if
applicable, a one-time Hardware cost to be paid upfront. The sample invoices
reflect a license fee but no cost for the subscription. Your letter does not indicate
whether or not the Company is a de minimis serviceman.
The Department has made several unsuccessful attempts to obtain
additional information. Due to the lack of information, the Department cannot
state the precise method for taxing each of the items provided by the Company to
its customers. However, it is clear the Company is acting as a serviceman and
must pay Service Occupation Tax or Use Tax on the hardware and computer
software using one of the four methods described above. The Company owes
Retailers’ Occupation Tax on the replacement tangible personal property it sells at
list price.
I hope this information is helpful. If you have further questions related to the
Illinois sales tax laws, please visit our website at www.tax.illinois.gov or contact the
Department’s Taxpayer Information Division at (217) 782-3336.
Very truly yours,

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Richard S. Wolters
Associate Counsel
RSW:rkn