Is a nonprofit's sale of digital exams, assessments, and study materials to schools, professional associations, and individual students/examinees subject to Illinois sales tax?

Plain-English summary

A nonprofit organization (a 501(c)(3), with no physical presence in Illinois) that creates and administers professional licensing exams and study materials asked the Illinois Department of Revenue whether its Illinois sales are subject to sales tax. Its products include web-based subject exams, customized assessments, self-assessment study materials, and computer-based licensing and certification exams, sold mostly to post-secondary schools, professional associations, and individual students or examinees. Almost everything is delivered digitally; there is little to no physical product involved.

The Department did not issue a binding ruling on the specific facts (that requires a Private Letter Ruling), but it walked through the general framework and reached two conclusions relevant to this taxpayer's situation. First, because the exams, assessments, and study materials are delivered entirely digitally and involve significant human effort (administering, grading, and evaluating), they are personal/professional services, not tangible personal property, and downloaded information/data does not become taxable simply by being transferred electronically. Second, sales to nonprofit-qualifying educational institutions and related professional associations can separately qualify for Illinois's charitable/educational nonprofit exemption under 35 ILCS 105/3-5 and related provisions, subject to the limits in 35 ILCS 120/1 (a nonprofit seller isn't automatically exempt just because it's a nonprofit).

The letter then gives a broader explainer on how Illinois taxes computer software generally: "canned" (prewritten, general-use) software is taxable tangible personal property regardless of delivery method, unless it meets specific written-license criteria in 86 Ill. Adm. Code 130.1935(a)(1); custom software built to a customer's specifications is not taxable; and software delivered only through a cloud-based system, never downloaded to the customer's device, is not taxable at all.

What this means for you

Nonprofits selling digital education, testing, or assessment products

If your organization sells web-delivered exams, assessments, or study materials that primarily involve human service (writing, administering, grading, certifying), the Department treats those sales as non-taxable professional services rather than taxable digital goods or software, even when sold to for-profit-adjacent professional associations. But if you also sell nonprofit-exemption-based products (tangible items, print materials) to non-members of the public, review 35 ILCS 120/1 and Follett's Ill. Book & Supply Store v. Isaacs before assuming automatic exemption.

Educational institutions and professional associations purchasing these products

Purchases of digital exams, assessments, and study materials from a vendor in a similar position generally should not carry Illinois sales tax, because the products are treated as services rather than tangible personal property or taxable digital goods.

Software vendors and SaaS providers

The letter's discussion of computer software is a useful general summary independent of the nonprofit facts: canned software delivered by download, disc, or other media is taxable unless it satisfies all five license conditions in 86 Ill. Adm. Code 130.1935(a)(1) (signed written agreement, use/duplication restrictions, no unauthorized sublicensing, replacement-copy policy, return/destruction at license end); custom software built to a customer's specific requirements is not taxable; and cloud-based software that is only accessed remotely and never downloaded is not taxable, even if delivered through an API, applet, or agent.

Accountants and tax professionals

Note that this is a GIL, not a PLR — the Department explicitly declined to rule on this taxpayer's specific facts because of their complexity, and instead gave general guidance. Any client relying on the reasoning here for their own tax position should still consider requesting a PLR under 2 Ill. Adm. Code 1200.110 for binding certainty.

Common questions

Q: Does Illinois tax a nonprofit's sales of digital exams and study materials to schools and students?
A: Per this letter, no — the Department found these products, being digitally delivered and heavily service-based (grading, administering, certifying), are non-taxable personal/professional services rather than tangible personal property or taxable digital goods.

Q: Is downloaded information or data (like an e-book or exam) automatically taxable in Illinois?
A: No. Illinois has consistently held that information or data downloaded electronically does not constitute a taxable transfer of tangible personal property, per 86 Ill. Adm. Code 130.2105(a)(3)-(4), unless it's "canned" computer software.

Q: Is all computer software taxable in Illinois?
A: No. "Canned" (prewritten, general-use) software delivered to a customer is generally taxable, but custom software built to a customer's specific requirements is not, and software delivered only via cloud access (never downloaded) is not taxable at all. See 86 Ill. Adm. Code 130.1935.

Q: Does being a 501(c)(3) nonprofit automatically exempt a seller's sales from Illinois sales tax?
A: Not automatically. Illinois exempts sales made to qualifying nonprofit charitable/educational/religious organizations under 35 ILCS 105/3-5 and related provisions, but sales made by a nonprofit are exempt only in limited circumstances under 35 ILCS 120/1.

Q: Why didn't the Department give a definitive, binding answer here?
A: Because of the complexity of the taxpayer's business and the need for very specific facts, the Department said the questions couldn't be fully addressed in a General Information Letter, which by definition is non-binding guidance rather than a ruling on particular facts.

Citations and references

Statutes and rules:

• 35 ILCS 105/3-5; 35 ILCS 120/2-5, 100-260; 35 ILCS 110/2; 35 ILCS 115/2 (nonprofit exemptions from ROT, UT, SOT, SUT)
• 86 Ill. Adm. Code 130.120(h); 130.201(a)(3); 130.501(b)(2); 150.325; 140.125(h)(1); 140.201(e)(3); 160.110(e) (implementing nonprofit exemption regulations)
• 35 ILCS 120/1 (limits on nonprofit seller exemption); Follett's Ill. Book & Supply Store Inc. v. Isaacs, 27 Ill. 2d 600 (1963)
• 86 Ill. Adm. Code 130.2105(a)(3)-(4) (electronically downloaded information/data not taxable tangible personal property)
• 35 ILCS 120/2-25 (definition of "computer software")
• 86 Ill. Adm. Code 130.1935 (canned vs. custom computer software; license exemption criteria)
• 35 ILCS 115/3 (Service Occupation Tax on tangible personal property incident to service, including software)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedure); 2 Ill. Adm. Code 1200.120 (General Information Letter procedure)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2023.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2023/ST-23-0002-GIL.pdf

Original ruling text

ST-23-0002-GIL 02/07/2023 COMPUTER SOFTWARE
This letter discusses computer software and digital information. See 86 Ill. Adm.
Code 130.1935 and 86 Ill. Adm. Code 130.2105. (This is a GIL).
February 07, 2023

NAME
COMPANY
ADDRESS1

Via E-mail: ADDRESS2

Dear Ms. XXX:
This letter is in response to your letter dated July 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:
I am writing with a formal request for a General Information letter ruling
on behalf of my client ("Client"), who wishes to remain anonymous at this
time. In accordance with 2 Illinois Administrative Code 1200.120, we
furnish the following information:
(A)

Statement of Relevant Facts

Client is a nonprofit organization organized under I.R.C. §501 (c)(3),
domiciled in a state other than Illinois. In its home state, Client is a
registered exempt organization, exempt from both sales and use taxes as
well as income taxes. Client has no employees, offices, warehouses,
representatives, or inventory in Illinois. In other words, Client has no
physical presence in the state.

COMPANY
Page 2
February 07, 2023
Client specializes in the creation and administration of learning tools and
professional licensing assessments. Client sells assessments, digital and
print textbooks and other exam preparation materials directly to students
and examinees in the majority of its sales transactions. Client also sells
assessments directly to educational institutions, all of which are
registered as non-profit organizations. There are limited to no sales of
physical products, whether to students, examinees, or educational
institutions. All assessments and examinations are distributed digitally;
virtually all textbooks and preparation materials are produced digitally as
well, through [sic] a limited quantity of in-print preparation materials are
available. Assessments are administered in proctored examination
environments (by a third-party organization), yet at the time a test taker
signs up for the assessment the exact location at which the exam will be
administered is not known. Test takers will be assigned to an exam site
some months after purchasing the exam, and may change their
designated test center on more than one occasion before sitting for the
exam.
Illinois specifically exempts sales made to nonprofit organizations from
sales tax under 35 ILCS 105/3-5; 35 ILCS 120/2-5, 100-260; 35 LCS
110/2; 35 ILCS 115/2; 86 Ill. Adm. Code 130.120(h); 86 Ill. Adm. Code
130.201(a)(3); 86 Ill. Adm. Code 130.501(b)(2); 86 Ill. Adm. Code
150.325; 86 Ill. Adm. Code 140.125(h)(1); 86 Ill. Adm. Code
140.201(e)(3); 86 Ill. Adm. Code 160.110(e). Yet Illinois does not
necessarily exempt sales made by a nonprofit organization, but for under
limited circumstances. 35 ILCS 120/1. Client thus seeks to confirm that it
nonetheless qualifies for the available exemptions from sales tax, either
categorically as a seller, based on the entities and individuals to which it
makes sales, or based on the products and services it sells.
These products and services include:
(1)

Subject Examinations: Web-based, standardized examinations
delivered digitally over the Internet, sold primarily to post-secondary
educational institutions for use in accredited courses of study.

(2)

Customized Assessment Services: Web-based, instructor-tailored
examinations delivered digitally over the Internet, sold primarily to
post-secondary educational institutions for use in accredited
courses of study.

(3)

Self-Assessment
Services:
Web-based,
standardized
benchmarking examinations delivered digitally over the Internet,
sold directly to students preparing for licensure, as well as to postsecondary educational institutions in the form of vouchers for such
services that are then distributed to students to be redeemed.

COMPANY
Page 3
February 07, 2023
(4)

Comparative
Examinations:
Computer-based,
standardized
examinations delivered at third-party testing centers, primarily sold
to post-secondary educational institutions and foreign students.

(5)

Licensing
Examinations:
Computer-based,
standardized
examinations delivered at third-party testing centers, sold to
qualified individual applicants seeking U.S. professional licensure in
their field. The licensing examinations are multi-part, and at least
one of the installments of the examination must be taken and
passed as a condition of graduation from the post-secondary
educational institution at which the test-taker is enrolled.

(6)

Post-Licensure Examinations: Computer-based, standardized
examinations delivered at third-party testing centers, sold to current
and previously licensed examinees.

(7)

Specialty Certification Examinations: Web- and computer-based
examinations delivered at third-party testing centers, sold to
organizations for administration to licensed examinees.

(B)

Statements Relating to Request

The issue for which Client requests a general information letter ruling is
not under consideration by the Illinois Department of Revenue in
connection with an audit examination of any type, nor is it connected with
any refund request, voluntary disclosure agreement, administrative
hearing, or litigation. To our knowledge, a request on the same or a
similar issue has not been submitted to the taxing jurisdiction of Illinois.
(C)

Statement of Requested Private Letter Ruling [sic]

Question 1: Are sales of digital assessment and professional licensing
examinations and study materials made by a non-profit organization
registered under I.R.C. 501 (c)(3) exempt from sales tax in Washington
[sic] when sold either to educational institutions or to students enrolled in
those educational institutions?
Analysis: Client is a nonprofit organization organized under I.R.C.
§501(c)(3); organizations defined therein are "organized and operated
exclusively for religious, charitable, scientific, testing for public safety,
literary, or educational purposes [...]" Client makes sales to educational
institutions and professional associations, as well as students enrolled in
accredited courses of study. The educational institutions and professional
associations to which it makes sales are "educational institutions" as

COMPANY
Page 4
February 07, 2023
defined by 35 ILCS 105/2c. Its sales of examinations, assessments, and
self-assessments are professional services critical to enable these
institutions and individuals to provide accredited and credentialed courses
of study, and to ensure individuals can secure statutory-mandated [sic]
professional licensing.
In Illinois, sales of tangible personal property to a business organization
or institution organized and operated exclusively for charitable, religious,
or educational purposes is exempt from retailers' occupation (sales) tax
(ROT) and use tax (UT) and a sale or transfer of tangible personal
property as an incident to the rendering of service for or by such an entity
is exempt from service occupation tax (SOT) and service use tax (SUT).
35 ILCS 105/3-5; 35 ILCS 120/2-5, 100-260; 35 ILCS 110/2; 35 ILCS
115/2; 86 Ill. Adm. Code 130.120(h); 86 Ill. Adm. Code 130.201(a)(3); 86
Ill. Adm. Code 130.501(b)(2); 86 Ill. Adm. Code 150.325; 86 Ill. Adm.
Code 140.125(h)(1); 86 Ill. Adm. Code 140.201(e)(3); 86 Ill Adm. Code
160.110(e).
Ruling: Sales made by the Taxpayer of digital assessment and licensing
materials to post-secondary educational institutions, to professional
associations that govern professional licensing requirements, and
individual students and/or examinees, are exempt from Illinois sales and
use tax.
Question 2: Are sales of digital assessment and professional licensing
examinations and study materials considered tangible personal property?
Analysis: As described above, Client makes sales of subject matter
examinations, custom assessments, comparative examinations,
professional licensing examinations, and other professional credentialing
examinations, all of which are administered digitally at proctored test
location [sic] operated by a third party.
Client also makes sales of self-assessment study materials, all of which
are digital. The self-assessment study materials are designed to simulate
the examination or assessment that the test taker is preparing for,
consisting of practice multiple choice examination questions. The selfassessments can either occur in a simulated proctored environment, to
mimic the testing conditions of the final examination or assessment.
Alternatively, they can be self-paced. As they are exclusively digital, the
examinations, assessments, and self-assessments are not tangible
personal products.

COMPANY
Page 5
February 07, 2023
Professional or personal services that are transmitted electronically are
not tangible personal property. The assessments, examinations, and selfassessment materials more closely fall within the concept of professional
or personal services transmitted in digital format. They are services that
primarily involve the application of human effort by the provider (education
services) to administer, grade, and evaluate the results of the
assessments and examinations, allowing the test taker to pass an
accredited or credentialed course of study, or to secure statutorilymandated professional licensing. The provision of professional services
that do not include the transfer of tangible personal property with the
service does not result in Service Occupation Tax or Use Tax.
Illinois has consistently held that information or data downloaded
electronically does not constitute the taxable transfer of tangible personal
property. Ill. Admin. Code Section 130.2105.
Ruling: Sales made by the Taxpayer of digital assessment and licensing
materials to individual students and/or examinees, to post-secondary
educational institutions, and to professional associations that govern
professional licensing requirements are not considered taxable digital
good [sic] or digital automated services, but rather non-taxable personal
and professional services.
(D)

Statement of Contrary Authorities

Client reviewed the Illinois Tax Code and the rules of the Illinois
Department of Revenue but was unable to locate a definitive contrary
authority on this issue.
DEPARTMENT’S RESPONSE:
Due to the complexity of your client’s enterprise and the necessity for very
specific facts, your questions cannot be addressed in the context of a General
Information Letter. However, this letter will provide you with basic guidelines that may
be used to determine whether your client engages in taxable transactions under Illinois
law.
I.

Retailers’ Occupation 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. 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. 35 ILCS 105/3; 86 Ill. Adm. Code
150.101. These taxes comprise what is commonly known as “sales” tax in Illinois. If the

COMPANY
Page 6
February 07, 2023
purchases occur in Illinois, the purchasers must pay the Use Tax to the retailer at the
time of purchase. 35 ILCS 105/3-45; 86 Ill. Adm. Code 150.401. 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. 86 Ill. Adm. Code 150.130(b).
If the purchases occur outside Illinois, purchasers must self-assess their Use Tax
liability and remit it directly to the Department. See 35 ILCS 105/3-45; 86 Ill. Adm. Code
150.701(a).
II.

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. See 86 Ill. Adm.
Code Sections 140.106; 140.108; and 140.109.
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. See 86 Ill. Adm. Code 140.106.
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). This
class of registered de minimis servicemen is authorized to pay Service Occupation Tax

COMPANY
Page 7
February 07, 2023
(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. See 86 Ill. Adm. Code 140.109.
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.
If an entity 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.
III.

Not-for-profit service enterprises engaged in selling tangible personal
property at retail.

A person whose activities are organized and conducted primarily as a not-forprofit service enterprise, and who engages in selling tangible personal property at retail
(whether to the public or merely to members and their guests) is engaged in the
business of selling tangible personal property at retail with respect to such transactions,
excepting only a person organized and operated exclusively for charitable, religious or
educational purposes either (1), to the extent of sales by such person to its members,
students, patients or inmates of tangible personal property to be used primarily for the
purposes of such person, or (2), to the extent of sales by such person of tangible
personal property which is not sold or offered for sale by persons organized for profit.
The selling of school books and school supplies by schools at retail to students is not
"primarily for the purposes of" the school which does such selling. 35 ILCS 120/1; 86 Ill.
Adm. Code 130.2105(a)(4)-(5); see eg. Follett’s Ill. Book & Supply Store Inc. v. Isaacs,
27 Ill. 2d. 600 (1963).
IV.

Computer software and digital data or information.

COMPANY
Page 8
February 07, 2023
Information or data that is downloaded electronically, such as downloaded books,
musical recordings, newspapers or magazines, does not constitute the transfer of
tangible personal property. These types of transactions represent the transfer of
intangibles and are thus not subject to Retailers' Occupation and Use Tax. However,
downloads of canned software, as defined more fully in 86 Ill. Adm. Code 130.1935, are
subject to Retailers' Occupation and Use Tax. 86 Ill. Adm. Code 130.2105(a)(3).
“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. Computer software
includes all types of software including operational, applicational, utilities, compliers,
templates, shells and all other forms. 86 Ill. Adm. Code 130.1935(a).
Generally, sales or transfers of “canned” computer software intended for general
or repeated use are taxable retail sales in Illinois. 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. The sale or
transfer by a retailer of computer software which is subject to manufacturer licenses
restricting the use or reproduction of the software is also taxable. 86 Ill. Adm. Code
130.1935(a). However, if all of the criteria provided in subsection (a)(1) of Section
130.1935 are met, then neither the sale or transfer of the software nor the subsequent
software updates are subject to Retailers' Occupation Tax. Specifically, a license of
software is not a taxable retail sale if:
A)
customer;

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

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

COMPANY
Page 9
February 07, 2023
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.

86 Ill. Adm. Code 130.1935(a)(1). 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.
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.
Moreover, sales of custom computer programs prepared to the special order of
the customer may not be a taxable sale. 86 Ill. Adm. Code 130.1935(c)(1). Custom
software means the software which results from real and substantial changes to the
operational coding of canned or pre-written software in order to meet the specific
individualized requirements of the purchaser for his limited or particular use. 86 Ill.
Adm. Code 130.1935(c)(2). Custom computer software is not subject to the Retailers'

COMPANY
Page 10
February 07, 2023
Occupation Tax, Use Tax, Service Occupation Tax or Service Use Tax if the following
elements are present:
A)

Preparation or selection of the program for the customer's use requires an
analysis of the customer's requirements by the vendor; and

B)

The program requires adaptation by the vendor to be used in a specific
work environment, e.g., a particular make and model of a computer using
a specified input or output device. 86 Ill. Adm. Code 130.1935(c)(1).

If modified software is held for general or repeated sale or lease, it is canned software.
86 Ill. Adm. Code 130.1935(c)(2). 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. 86 Ill. Adm. Code 130.1935(c)(3). Computer software that is not
custom software is considered to be canned computer software. See 86 Ill. Adm. Code
130.1935.
V.

Remote Retailers

"Remote retailer" means a retailer that does not maintain within this State,
directly or by a subsidiary, an office, distribution house, sales house, warehouse or
other place of business, or any agent or other representative operating within this State
under the authority of the retailer or its subsidiary, irrespective of whether such place of
business or agent is located here permanently or temporarily or whether such retailer or
subsidiary is licensed to do business in this State. 35 ILCS 120/1; 86 Ill. Adm. Code
131.105.
Beginning on January 1, 2021, a remote retailer is engaged in the occupation of
selling at retail in Illinois, if:
1)

the cumulative gross receipts from sales of tangible personal property to
purchasers in Illinois are $100,000 or more; or

2)

the retailer enters into 200 or more separate transactions for the sale of
tangible personal property to purchasers in Illinois.

Remote retailers that meet or exceed the threshold in either paragraph (1) or (2) above
are liable for all applicable State and locally imposed retailers' occupation taxes
administered by the Department on all retail sales to Illinois purchasers. 35 ILCS
120/2(b); 86 Ill. Adm. Code 131.115(a). A remote retailer must apply the provisions in
Section 131.120 in determining whether a transaction should be included or excluded
for purposes of determining if the remote retailer meets either of the thresholds
establishing tax remittance obligations. 86 Ill. Adm. Code 131.120; 35 ILCS 120/2(b-5).

COMPANY
Page 11
February 07, 2023
Remote retailers are deemed to be engaged in the business of selling at the
Illinois location to which the tangible personal property is shipped or delivered or at
which possession is taken by the purchaser. State and local retailers' occupation taxes
are incurred at the rate in effect at this location. 86 Ill. Adm. Code 131.110(b).
Remote retailers are often multichannel retailers. That is, they may also sell their
products through a marketplace and so are considered marketplace sellers.
Marketplace facilitators required to register with the Department, as provided in Section
131.135, incur State and local retailers' occupation taxes on sales made to Illinois
purchasers on behalf of remote retailers making sales over the marketplace. Remote
retailers do not incur tax on these sales. 86 Ill. Adm. Code 131.110(d).
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,

Katarzyna Kowalska
Associate Counsel
KK:rkn