Does a company that sells software as a service (SaaS), digital goods, and in-game purchases have to collect Illinois Retailers' Occupation Tax, Use Tax, or Service Occupation Tax?

Plain-English summary

A foreign company that distributes video games and other digital goods (as merchant of record) asked the Illinois Department of Revenue whether ten categories of digital products it sells — in-game purchases, subscriptions, downloadable games with unrestricted access, digital access codes, webinars, pre-recorded courses, streaming media, electronic event tickets, gift cards, and advertising — are subject to Illinois sales tax, and whether it matters if the product reaches the customer through a mobile app or a browser.

The Department responded with a General Information Letter rather than answering each scenario individually, and instead laid out the general framework:

• Illinois' Retailers' Occupation Tax and Use Tax (together, "sales tax") apply only to transfers of tangible personal property. Selling cards or coupons redeemable for property, or merely viewing, downloading, or streaming video, text, and data over the internet, is not a transfer of tangible personal property and is not taxable under these Acts.
• A business that provides services (a "serviceman") is instead subject to the Service Occupation Tax, but only on tangible personal property it transfers incident to the service — not on the service itself.
• A provider of software as a service (SaaS) is acting as a serviceman. If the SaaS transaction does not transfer any tangible personal property to the customer, it generally is not subject to Retailers' Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax.
• However, if the provider gives the subscriber an API, applet, desktop agent, or remote access agent to enable access to the provider's network and services, the subscriber is receiving computer software — which is tangible personal property under Illinois law — and that transfer is generally taxable, even if there's no separate charge for it.
• Canned (prewritten) computer software is taxable tangible personal property regardless of how it's delivered (electronic, disc, etc.). Custom software built to a customer's special order is generally not taxable. A software license can also be non-taxable if it meets all five conditions in 86 Ill. Adm. Code 130.1935(a)(1) — most importantly, a signed written agreement between licensor and customer (clicking "I accept" online does not count).
• Software delivered through a purely cloud-based system, where nothing is ever downloaded to the customer's device and everything is accessed remotely, is not taxed.

What this means for you

SaaS and cloud software providers

If your product is truly a remotely-hosted service with nothing downloaded to the customer, you are acting as a serviceman and generally owe no Retailers' Occupation Tax, Use Tax, or Service Occupation Tax on the subscription itself. But if you push out any API, applet, agent, or similar executable to let customers connect to your service, that piece of software is treated as taxable tangible personal property — even if you don't bill for it separately.

Video game and digital goods distributors

The Department did not individually rule on games, in-game currency, streaming, e-tickets, gift cards, or advertising. Instead, it directed the taxpayer to the general tangible-personal-property/service distinction: purely electronic transmission or streaming isn't a taxable transfer of property, but if a download includes canned software (as opposed to data merely viewed or streamed), taxability analysis under the computer software rules would apply. Whether a good is delivered by mobile app or browser was not treated as changing the analysis — the property-vs.-service question is what controls.

Businesses licensing software to Illinois customers

If you want a software license to be non-taxable, make sure the license agreement (1) is a written agreement signed by both licensor and customer, (2) restricts duplication and use, (3) prohibits sublicensing/transfer to third parties without your permission, (4) includes a policy for replacing lost/damaged copies or allows an archival copy, and (5) requires return or destruction of all copies at the end of the license term. A clickwrap "I agree" checkbox does not satisfy the signed-writing requirement, so a click-through license is taxable if it's canned software.

Accountants and tax professionals

Because this is a GIL, it does not resolve the taxpayer's specific facts (ten types of digital goods, mobile vs. browser delivery) — it only restates the governing framework under the Retailers' Occupation Tax Act, Use Tax Act, and Service Occupation Tax Act, and points to 86 Ill. Adm. Code Parts 130 and 140 for the details. A taxpayer wanting a binding answer to its specific fact pattern would need to request a Private Letter Ruling under 2 Ill. Adm. Code 1200.110.

Common questions

Q: Is a SaaS subscription taxable in Illinois?
A: Generally no, as long as the provider transfers no tangible personal property to the customer. The provider is treated as a serviceman rather than a retailer.

Q: What turns a "service" into a taxable transaction?
A: Providing the customer software — for example an API, applet, desktop agent, or remote access agent used to connect to the provider's network — even without a separate line-item charge for it.

Q: Does streaming or downloading data (video, text, etc.) trigger sales tax?
A: No. The Department does not consider viewing, downloading, or electronically transmitting video, text, and other data over the internet to be a transfer of tangible personal property.

Q: Is canned computer software always taxable?
A: Generally yes, regardless of the medium (tape, disc, card, or electronic transmission), unless it is licensed under an agreement meeting all five non-taxable-license criteria in 86 Ill. Adm. Code 130.1935(a)(1), the most important of which is a signed written agreement (not a clickwrap acceptance).

Q: Does it matter whether the customer accesses a game or app through a mobile app versus a browser?
A: The ruling does not draw a distinction based on delivery channel; the key question is always whether tangible personal property (i.e., software) is transferred to the customer, not how the customer accesses it.

Citations and references

• 35 ILCS 120/2; 86 Ill. Adm. Code 130.101 — Retailers' Occupation Tax imposed on sales of tangible personal property
• 35 ILCS 105/3; 86 Ill. Adm. Code 150.101 — Use Tax imposed on tangible personal property purchased at retail
• 86 Ill. Adm. Code 140.101 — Service Occupation Tax on tangible personal property transferred incident to sales of service
• 86 Ill. Adm. Code 140.101(f) — de minimis serviceman threshold (35% of gross receipts, 75% for pharmacists/graphic arts)
• 86 Ill. Adm. Code 140.108 — de minimis serviceman not required to register, pays Use Tax to suppliers
• 35 ILCS 115/3 — Service Occupation Tax Act imposition, including computer software transferred incident to service
• 86 Ill. Adm. Code 130.2105(a)(3) — electronically transferred/downloaded information or data is not tangible personal property
• 35 ILCS 120/2-25 — statutory definition of "computer software"
• 86 Ill. Adm. Code 130.1935 — taxability of canned vs. custom computer software and the five criteria for a non-taxable software license
• 86 Ill. Adm. Code 130.1935(c)(3) — custom software requires real and substantial changes to canned programs

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2022.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2022/st22-0027-gil.pdf

Original ruling text

ST-22-0027-GIL 12/02/2022 COMPUTER SOFTWARE
A provider of software as a service is acting as a serviceman. If the provider
does not transfer any tangible personal property to the customer, then the
transaction generally would not be subject to Retailers’ Occupation Tax, Use
Tax, Service Occupation Tax, or Service Use Tax. If the provider transfers to the
customer an API, applet, desktop agent, or a remote access agent to enable the
customer to access the provider’s network and services, it appears the
subscriber is receiving computer software that is subject to tax. See 86 Ill. Adm.
Code Parts 130 and 140. (This is a GIL.)
December 2, 2022

COMPANY/ADDRESS
Dear Ms. XXX:
This letter is in response to your letter dated September 13, 2022, 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:

Our FOREIGN company COMPANY is seeking clarification of the issue
which digital goods are taxable with sales tax in Illinois. Our company
would like to receive free legal opinion from Illinois state tax authority to
start our business activity in a right way.
Background:
Our company is a distributer of digital goods, providing video game
developers and publishers with promotional opportunities. In accordance
with concluded distribution agreement with them, we take over the rights
to use and sale their product/development on behalf of our company.
Basically, our company is promoting, distributing and selling game to the

COMPANY/NAME
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December 2, 2022
end user on behalf of it is own name (merchant of record model). Our
company also accounts and collects Sales tax in the country of final user
residence as per international requirements, because we are the final
seller of the goods to end-user. So, when we’ll exceed the threshold, we’ll
have to file sales tax return and remit sales tax. In our case we have no
marketplace platform where end user can choose and buy different
games. Our end user visits the certain game website, play there and buy
in-game purchases there. And when he pays for in-game purchase he
faces our company only on payment page. We sell games of different
game developers and each game has it’s own website where end user
play and buy in-game purchases.
We plan to sell video games with different types of monetization:

1. End user plays videogame for free, but he buys in-game items (coins,
   crystals, swords, etc.) for better results in the game. Our company sells
   additional content on video game website that may include access to payonly portions of the game or digital aid. Examples of a digital aid would
   include additional gasoline for operating a virtual vehicle in a game or
   improved arms or equipment for use in a war game.
2. End user subscribes for access to the game for a certain period.
3. End user downloads the game and has unrestricted access.
4. Digital codes of access. The end user buys digital code which is used
   to download video game to play.
   Game industry is our priority area. But we also consider an opportunity to
   be a distributer of other digital goods (not only game industry):
5. Live webinars or consultations
6. Pre-recorded courses
7. Streaming audio/video services
8. Electronic tickets booking. When the end user buys electronic tickets to
   offline events (football matches, concerts etc.) and when he buys
   electronic tickets to online events.
9. Gift cards
10. Advertising
    Questions:
    1.
    2.

3.

Are above mentioned digital goods (10 types) taxable with
sales tax in Illinois?
Does it make a tax difference whether games are download
through the mobile application or the end user plays browser
game?
Does in-game purchases taxability depend on the fact if the
game is download by mobile app or not?

COMPANY/NAME
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December 2, 2022
4.

5.

Is there local sales tax features (special rates or some other
details) concerning above mentioned digital goods (10 types)
in Chicago?
As well we have a question about online skill-based video
games. For example, game tournament platform lets players
buy in-game currency into their account balance in our
game, and compete against other players of same skill level.
All in-game purchases are made via a virtual currency which
the customer previously bought Each player receives the
same game board, so the final result depends solely on the
players skills. Every tournament has a different number of
participants and a different prize pool distribution. Players
can choose in advance the type of tournament they
preferred, but they cannot choose their opponents. There
are also payouts to end users (winners) in real money.
•
•

Could You clarify, is this case somehow special for
sales tax taxation or not?
Are there some additional taxes for online skill-based
video games in Illinois?

We would highly appreciate to receive your response by email
ADDRESS or by fax.
Thank you in advance for your assistance.
DEPARTMENT’S RESPONSE:
Retailers’ Occupation Tax and Use Tax
The Illinois Retailers' Occupation Tax Act imposes a tax upon persons engaged
in this State in the business of selling tangible personal property to purchasers for use
or consumption. See 35 ILCS 120/2; 86 Ill. Adm. Code 130.101. In Illinois, Use Tax is
imposed on the privilege of using, in this State, any kind of tangible personal property
that is purchased anywhere at retail from a retailer. See 35 ILCS 105/3; 86 Ill. Adm.
Code 150.101. These taxes comprise what is commonly known as "sales" tax in Illinois.
If the purchases occur in Illinois, the purchasers must pay the Use Tax to the retailer at
the time of purchase. The retailers are then allowed to retain the amount of Use Tax
paid to reimburse themselves for their Retailers' Occupation Tax liability incurred on
those sales. If the purchases occur outside Illinois, purchasers must self-assess their
Use Tax liability and remit it directly to the Department.
Persons who are engaged in the business of selling cards or coupons, which
entitle purchasers to the right to redeem those cards for tangible personal property, are
not engaged in selling tangible personal property. Rather, they are making sales of

COMPANY/NAME
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December 2, 2022
intangibles. Such sales are not subject to the Retailers' Occupation Tax. However,
when those cards or coupons are used to purchase tangible personal property, the
retailers transferring that tangible personal property incur Retailers' Occupation Tax
liability based on their gross receipts from those sales.
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) separatelystated selling price of tangible personal property transferred incident to service; (2) 50%
of the serviceman's entire bill; (3) Service Occupation Tax on the serviceman's cost
price if the serviceman is a registered de minimis serviceman; or (4) Use Tax on the
serviceman's cost price if the serviceman is de minimis and is not otherwise required to
be registered under Section 2a of the Retailers' Occupation Tax Act.
Using the first method, servicemen may separately state the selling price of each
item transferred as a result of sales of service. The tax is based on the separately
stated selling price of the tangible personal property transferred. If servicemen do not
wish to separately state the selling price of the tangible personal property transferred,
those servicemen must use the second method where they will use 50% of the entire
bill to their service customers as the tax base. Both of the above methods provide that
in no event may the tax base be less than the cost price of the tangible personal
property transferred. Under these methods, servicemen may provide their suppliers
with Certificates of Resale when purchasing the tangible personal property to be
transferred as a part of sales of service. They are required to collect the corresponding
Service Use Tax from their customers.
The third way servicemen may account for their tax liability only applies to de
minimis servicemen who have either chosen to be registered or are required to be
registered because they incur Retailers’ Occupation Tax liability with respect to a
portion of their business. Servicemen may qualify as de minimis if they determine that
their annual aggregate cost price of tangible personal property transferred incident to
sales of service is less than 35% of their annual gross receipts from service transactions
(75% in the case of pharmacists and persons engaged in graphic arts production). See
86 Ill. Adm. Code 140.101(f). This class of registered de minimis servicemen is
authorized to pay Service Occupation Tax (which includes local taxes) based upon the
cost price of tangible personal property transferred incident to sales of service.
Servicemen that incur Service Occupation Tax collect the Service Use Tax from their
customers. They remit tax to the Department by filing returns and do not pay tax to their

COMPANY/NAME
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December 2, 2022
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. Information or data that is
electronically transferred or downloaded is not considered the transfer of tangible
personal property in this State. See 86 Ill. Adm. Code 130.2105(a)(3).
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

COMPANY/NAME
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December 2, 2022
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)
customer;
B)
C)
software
continued

It is evident by a written agreement signed by the licensor and the

It restricts the customer’s duplication and use of the software;
It prohibits the customer from licensing, sublicensing or transferring the
to a third party (except to a related party) without the permission and
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,
support 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.
Please note that it is very common for software to be licensed over the internet
and the customer to check a box that states that he or she accepts the license terms.
Acceptance in this manner does not constitute a written agreement signed by the
licensor and the customer for purposes of subsection (a)(1)(A) of Section 130.1935. To
meet the signature requirement for an exempt software license, the agreement must
contain the written signature of the licensor and customer.

COMPANY/NAME
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December 2, 2022
A provider of software as a service is acting as a serviceman. As a serviceman,
the seller does not incur Retailers’ Occupation Tax. Service Occupation Tax is imposed
upon all persons engaged in the business of making sales of service on all tangible
personal property transferred incident to a sale of service, including computer software
(35 ILCS 115/3), and is calculated as explained above.
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.
If an Illinois customer downloads computer software for free from an out-of-state
retailer’s web site or server that is also located out of state, the retailer, even though it is
donating tangible personal property to the customer, has exercised no power or control
over the property in Illinois. In this instance, the donor would not have made any
taxable use of the property in Illinois. The customer, the donee, would incur no Use Tax
liability for the retailer to collect and remit to Illinois. Illinois does not tax subscriptions.
The Department does not administer the City of Chicago’s lease or amusement
tax. As a result, the Department cannot speak to the taxability of items under those
taxes. For questions concerning taxes imposed in a municipality or county which are
not administered by the Illinois Department of Revenue, such as a lease or amusement
tax, please contact the county or municipality directly.
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,

Kimberly Rossini
Associate Counsel
KAR:dlb