Is software that guides an entire steel-building fabrication process from design through production — replacing printed blueprints — exempt from Illinois sales and use tax as 'software used to operate exempt manufacturing machinery and equipment'?

Plain-English summary

A company that fabricates and constructs steel buildings asked the Illinois Department of Revenue whether new software it was buying or licensing — software that would guide the entire fabrication and production process on tablets, replacing printed blueprints — would qualify as exempt "software used to operate exempt manufacturing machinery and equipment," and so escape Illinois sales and use tax.

The Department did not answer that specific question. A General Information Letter cannot make a taxability determination based on a taxpayer's particular facts — only a Private Letter Ruling can do that, and it must follow the PLR request procedures in 2 Ill. Adm. Code 1200.110. Instead, the GIL walked through the general legal framework: computer software is broadly defined and generally taxable, but the definition of "computer software" in 35 ILCS 120/2-25 specifically excludes software used to operate exempt manufacturing machinery and equipment. It also explained the separate five-part test in 86 Ill. Adm. Code 130.1935(a) under which a license of canned software escapes tax even if it doesn't fall under the manufacturing exclusion, and noted that cloud-based software accessed remotely (never downloaded to the customer's computer) is not taxed at all.

What this means for you

Manufacturers automating production with software

If your machinery- or equipment-operating software directly replaces a step in manufacturing or assembling tangible personal property for wholesale or retail sale or lease, it may fall within the manufacturing-machinery-and-equipment carve-out in the "computer software" definition — but the Department will not confirm that for your specific software through a GIL. You would need to request a formal Private Letter Ruling under 2 Ill. Adm. Code 1200.110 to get a binding answer on your facts.

Software vendors and licensors

Separate from the manufacturing carve-out, a license of canned (non-custom) software is not a taxable retail sale if it meets all five criteria in 86 Ill. Adm. Code 130.1935(a): a written agreement signed by both licensor and customer, restrictions on the customer's duplication and use, a prohibition on sublicensing or transfer without the licensor's continued control, a policy for replacement or archival copies, and a requirement that the customer destroy or return all copies at the end of the license term. A click-through "I agree" acceptance does not satisfy the written-signature requirement, though a verifiable, authenticable electronic signature can.

Businesses considering cloud-delivered software

If software is delivered only through a cloud-based system — never downloaded onto the customer's computer, only accessed remotely — it is not subject to Illinois sales or use tax at all, regardless of the manufacturing exemption or the license-criteria test.

Accountants and tax professionals

This GIL is a useful map of the relevant authorities (35 ILCS 120/2-25, 86 Ill. Adm. Code 130.1935, and the manufacturing exemption at 35 ILCS 120/2-5(14) and 86 Ill. Adm. Code 130.330(a)) but reaches no conclusion on the taxpayer's actual software. Clients who need a definitive, binding answer on similar facts should be directed toward the PLR process rather than a GIL request.

Common questions

Q: Did the Department rule that this fabrication-guidance software is tax-exempt?
A: No. The Department expressly stated it "cannot provide a determination of the taxability of the computer software in response to a request for a GIL." It only explained the applicable rules.

Q: What makes software "exempt" as used to operate manufacturing machinery and equipment?
A: The statutory definition of "computer software" in 35 ILCS 120/2-25 excludes software used to operate exempt machinery and equipment used in manufacturing or assembling tangible personal property for wholesale or retail sale or lease. Software that operates equipment for electricity generation, gas treatment, or water treatment for wholesale/retail sale delivered through pipes or mains is treated as taxable "computer software," not as exempt manufacturing software.

Q: If the manufacturing exclusion doesn't apply, can a software license still be tax-exempt?
A: Yes, if it is a license of canned software meeting all five criteria in 86 Ill. Adm. Code 130.1935(a): signed written agreement, use/duplication restrictions, no unauthorized sublicensing or transfer, a replacement/archival-copy policy, and destruction or return of copies at the end of the license.

Q: Does clicking "I agree" to accept license terms count as a signed written agreement?
A: No. The Department has held that an electronic "I agree" click-through does not satisfy the written-signature requirement (ST 06-0005-PLR). However, a verifiable, authenticable electronic signature attached to or part of the license can satisfy it (ST 18-0003-PLR; see ST 18-0010-PLR for examples).

Q: Is software delivered through the cloud taxable?
A: No. Computer software delivered only through a cloud-based system, where it is never downloaded onto the customer's computer and is only accessed remotely, is not subject to Illinois sales or use tax.

Q: How can this taxpayer get a binding answer?
A: By requesting a Private Letter Ruling under 2 Ill. Adm. Code 1200.110, which allows the Department to apply the law to the taxpayer's specific facts in a way that is binding on the Department for that taxpayer.

Citations and references

Statutes and regulations:

• 35 ILCS 120/2; 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax on sales of tangible personal property)
• 35 ILCS 105/3; 86 Ill. Adm. Code 150.101 (Use Tax on tangible personal property used in Illinois)
• 35 ILCS 120/2-25 (definition of "computer software," including the manufacturing-machinery-and-equipment exclusion)
• 86 Ill. Adm. Code 130.1935 (five-part test for a non-taxable software license)
• 35 ILCS 120/2-5(14); 86 Ill. Adm. Code 130.330(a) (manufacturing machinery and equipment exemption)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedures)
• 2 Ill. Adm. Code 1200.120 (General Information Letter procedures)

Prior letter rulings cited:

• ST 06-0005-PLR (Dec. 16, 2006) (click-through signature insufficient)
• ST 18-0003-PLR (Feb. 8, 2018) (verifiable electronic signature sufficient)
• ST 18-0010-PLR (Sept. 26, 2018) (examples of acceptable signatures)

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/st21-0050-gil.pdf

Original ruling text

ST 21-0050 11/30/2021 COMPUTER SOFTWARE
This letter discusses the taxability of computer software.
130.1935. (This is a GIL.)

86 Ill. Adm. Code

November 30, 2021
Dear NAME:
This letter is in response to your e-mail dated October 27, 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:
Good afternoon,
I am hoping you can assist me with a sales tax question.
We are looking for guidance regarding Software used to "operate
exempt manufacturing machinery and equipment" is also exempt from
sales tax.
We have a client who is seeking clarification on this subject. This
client fabricates/manufactures steel buildings along with construction
of the buildings. Previously they have used design software and
printed blueprints. The printed blueprints were used to
fabricate/manufacture the pieces of the building. The situation we are
seeking clarification on now is that they are purchasing or licensing
new
software
that
will
actually
guide
the
entire
fabrication/manufacturing process from design all the way through
production. They will no longer be printing blueprints to use during
production because they will have military grade tablets that will be
running this software to utilize throughout the production process.
Do you know if this would be software that would qualify as exempt
from sales tax based on the exemption of "software used to operate
exempt manufacturing machinery and equipment"?

NAME
Page 2
November 30, 2021
Thank you for your assistance!
DEPARTMENT’S RESPONSE:
The Illinois Retailers' Occupation Tax Act imposes a tax upon persons engaged
in this State in the business of selling tangible personal property to purchasers for use
or consumption. See 35 ILCS 120/2; 86 Ill. Adm. Code 130.101. In Illinois, Use Tax is
imposed on the privilege of using, in this State, any kind of tangible personal property
that is purchased anywhere at retail from a retailer. See 35 ILCS 105/3; 86 Ill. Adm.
Code 150.101. These taxes comprise what is commonly known as "sales" tax in Illinois.
If the purchases occur in Illinois, the purchasers must pay the Use Tax to the retailer at
the time of purchase. The retailers are then allowed to retain the amount of Use Tax
paid to reimburse themselves for their Retailers' Occupation Tax liability incurred on
those sales. If the purchases occur outside Illinois, purchasers must self-assess their
Use Tax liability and remit it directly to the Department.
"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 that is held for repeated sale or lease, and
all associated documentation and materials, if any, whether contained on magnetic
tapes, discs, cards, or other devices or media, but does not include software that is
adapted to specific individualized requirements of a purchaser, custom-made and
modified software designed for a particular or limited use by a purchaser, or software
used to operate exempt machinery and equipment used in the process of manufacturing
or assembling tangible personal property for wholesale or retail sale or lease. Software
used to operate machinery and equipment used in (i) the generation of electricity for
wholesale or retail sale; (ii) the generation or treatment of natural or artificial gas for
wholesale or retail sale that is delivered to customers through pipes, pipelines, or mains;
or (iii) the treatment of water for wholesale or retail sale that is delivered to customers
through pipes, pipelines, or mains is considered "computer software". 35 ILCS 120/225; 86 Ill. Adm. Code 1935.
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;

NAME
Page 3
November 30, 2021
C)

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

D)

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

E)

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

If a license of canned computer software does not meet all the criteria the
software is taxable. In order to comply with the requirements as set out in Section
130.1935(a)(1), there must be a written “signed” agreement. A license agreement in
which the customer electronically accepts the terms by clicking “I agree” does not
comply with the requirement of a written agreement signed by the licensor and
customer. The Department previously held that an electronic signature did not comply
with the requirement of Section 130.1935(a)(1)(A) that the license be evidenced by a
written agreement signed by the licensor and the customer. ST 06-0005-PLR
(December 16, 2006). In ST 18-0003-PLR (February 8, 2018), the Department decided
that an electronic license agreement in which the customer accepts the license by
means of a signature in electronic form that is attached to or is part of the license, is
verifiable, and can be authenticated will comply with the requirement of a written
agreement signed by the licensor and customer. See ST 18-0010-PLR (September 26,
2018) for examples of acceptable written signatures.
A license agreement in which the customer electronically accepts the terms by
clicking “I agree” remains unacceptable. Computer software is defined broadly in the
Retailers’ Occupation Tax Act. However, computer software provided through a cloudbased 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.
The Retailers’ Occupation Tax does not apply to sales of machinery and
equipment that will be used by the purchaser, or a lessee of the purchaser, primarily in
the process of manufacturing or assembling tangible personal property for wholesale or
retail sale or lease, whether the sale or lease is made directly by the manufacturer or by
some other person. 35 ILCS 120/2-5(14); 86 Ill. Adm. Code 130.330(a). The
manufacturing machinery and equipment exemption requires that the product produced

NAME
Page 4
November 30, 2021
as a result of the manufacturing or assembling process be tangible personal property for
wholesale or retail sale or lease. Section 130.330(a)(7).
As explained above, there are several situations where the sale of computer
software is not taxable: if it is custom software, is provided pursuant to a license that
meets the requirements of Section 130.1935(a), or is used to operate exempt
machinery and equipment used in the process of manufacturing or assembling tangible
personal property for wholesale or retail sale or lease. However, the Department
cannot provide a determination of the taxability of the computer software in response to
a request for a GIL.
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
RSW:rkn