Is a software company's canned software, hardware, installation/training services, support, and hosting taxable when sold and delivered to Illinois customers, and when does an out-of-state seller have to start charging Illinois sales/use tax?

Plain-English summary

An employee in the finance department of an out-of-state media software company (COMPANY) wrote to the Illinois Department of Revenue asking how Illinois sales and use tax applies to several separately-invoiced items COMPANY sells and delivers to its Illinois customers: pre-written ("canned") software that may or may not be customized to a client's needs; hardware; remote or onsite services (installation, project management, solution architecture); remote or onsite training and coaching; remote or onsite hardware support; remote or onsite non-hardware (software) support; and hosting. COMPANY said it does not sell through a marketplace and has no presence in Illinois, and asked what gross-receipts threshold triggers a duty to start charging tax, what the applicable tax rate is, and when local tax applies.

Because the request was too general to resolve COMPANY's specific facts, the Department responded with a GIL that lays out the governing framework rather than a fact-specific ruling. The Retailers' Occupation Tax taxes retail sales of tangible personal property in Illinois (86 Ill. Adm. Code 130.101), and Use Tax (86 Ill. Adm. Code 150.101) taxes the privilege of using tangible personal property in Illinois that was purchased at retail anywhere -- together these make up what's commonly called Illinois "sales tax." "Computer software" is defined at 35 ILCS 120/2-25 to include prewritten or canned software, and canned software is taxable tangible personal property regardless of the medium used to transfer or transmit it (tape, disc, card, electronic means, etc.), per 86 Ill. Adm. Code 130.1935. Custom computer programs prepared to a customer's special order, by contrast, may not be taxable -- but merely selecting and assembling pre-written/canned components into a package does not make it "custom" unless real and substantial changes are made or program-interfacing logic is created (130.1935(c)(3)).

A license of canned software escapes Retailers' Occupation Tax only if it meets all five criteria in 130.1935(a)(1): (A) a written agreement signed by both licensor and customer; (B) restrictions on the customer's duplication and use of the software; (C) a prohibition on the customer sublicensing or transferring the software to third parties without the licensor's continued control; (D) a licensor policy of replacing lost/damaged copies at minimal or no cost, or letting the licensee keep an archival copy; and (E) a requirement that the customer destroy or return all copies at the end of the license period (deemed satisfied for a perpetual license without being stated). A license that fails any one of these is a taxable sale. The Department also flagged that a mere "I agree" click-through does not satisfy the written, signed-by-both-parties requirement, but an electronic signature that is verifiable and authenticated does.

On the threshold question, the Department explained that under the Leveling the Playing Field for Illinois Retail Act (enacted by Public Acts 101-31 and 101-604), beginning January 1, 2021 a "remote retailer" (35 ILCS 120/1) must collect state and local Retailers' Occupation Tax once, in the preceding four calendar quarters, it has either (A) cumulative gross receipts of $100,000 or more from Illinois sales of tangible personal property, or (B) 200 or more separate Illinois transactions (86 Ill. Adm. Code 131.115(a)). Separately, the GIL notes that COMPANY's onsite hardware/software support and training activities, if performed in Illinois on a repetitive basis, can themselves create physical nexus -- citing Brown's Furniture v. Wagner, 171 Ill. 2d 410 (1996), where the Illinois Supreme Court held repetitive delivery and installation triggers Use Tax collection duties -- separately from the economic-nexus thresholds. An out-of-state seller with Illinois selling activity or Illinois-located inventory is treated as an Illinois retailer for that transaction, taxed at the local rate where the selling activity occurs or the inventory sits (86 Ill. Adm. Code 270.115). Finally, separately-stated charges for training, telephone assistance, installation, and consultation are not taxable when billed apart from the software's selling price (130.1935(b)), whether the software is canned (with the license/support charges broken out) or exempt custom software.

What this means for you

Software and SaaS companies selling into Illinois

If you sell pre-written/canned software, the sale is taxable tangible personal property unless it's licensed under a written agreement meeting all five criteria in 86 Ill. Adm. Code 130.1935(a)(1) -- duplication/use restrictions, a no-sublicense/no-transfer clause, a lost-copy replacement or archival-copy policy, and a destroy-or-return-at-end-of-term obligation (automatically satisfied for perpetual licenses). Click-wrap "I agree" acceptance does not count as the required signed written agreement; a verifiable, authenticated electronic signature does. If any one criterion is missing, the whole license is taxable. Custom software built to a client's specifications is not taxable, but merely tweaking a canned package doesn't make it custom -- the changes need to be real and substantial.

Out-of-state and remote sellers

You must start collecting Illinois Retailers'/Use Tax once, in the trailing four quarters, you hit $100,000 in cumulative gross receipts from Illinois sales of tangible personal property or 200 separate Illinois transactions (86 Ill. Adm. Code 131.115(a)). Note the GIL's own text describes this $100,000/200-transaction test as measured against sales "of tangible personal property" specifically -- the letter does not itself resolve whether services, training, support, or hosting charges count toward the threshold, since it says COMPANY's general description "does not allow for a more specific response." Separately, watch for physical nexus: performing onsite installation, training, or support in Illinois on a repetitive basis can trigger Use Tax collection duties under Brown's Furniture v. Wagner regardless of whether you cross the economic-nexus thresholds.

Structuring invoices for hardware, training, and support

Always separately state charges for training, telephone assistance, installation, and consultation from the software's or hardware's selling price -- 86 Ill. Adm. Code 130.1935(b) exempts those separately-stated service charges from tax, whether they accompany taxable canned software, exempt custom software, or a qualifying software license. Hardware itself remains taxable tangible personal property.

Accountants and tax professionals

This GIL is useful for the legal framework (definitions, licensing criteria, economic-nexus thresholds, and the Brown's Furniture physical-nexus rule) but does not resolve COMPANY's specific product mix because the Department found the facts as described too general. Clients with the same fact pattern (canned software, hardware, remote/onsite services, training, support, hosting sold to Illinois customers by a remote seller) would need a Private Letter Ruling under 2 Ill. Adm. Code 1200.110 for a binding, fact-specific answer.

Common questions

Q: Is canned (pre-written) computer software taxable in Illinois?
A: Yes. Canned computer software is considered tangible personal property regardless of the medium (tape, disc, card, electronic means, etc.) and its sale is generally a taxable retail sale under 86 Ill. Adm. Code 130.1935.

Q: Is custom software taxable?
A: Generally not. Custom computer programs prepared to a customer's special order may not be taxable retail sales. But assembling pre-written/canned components into a package is not "custom" unless real and substantial changes are made to the programs or program-interfacing logic is created (86 Ill. Adm. Code 130.1935(c)(3)).

Q: When is a software license not a taxable sale?
A: When it meets all five criteria in 86 Ill. Adm. Code 130.1935(a)(1): a written agreement signed by licensor and customer; restrictions on duplication/use; a ban on sublicensing/transfer without the licensor's continued control; a policy of replacing lost/damaged copies (or allowing an archival copy); and a requirement to destroy or return copies at the end of the license term (automatically met for perpetual licenses). Missing any one criterion makes the license taxable. A click-through "I agree" does not satisfy the written-and-signed requirement, though a verifiable electronic signature does.

Q: When must an out-of-state seller start charging Illinois sales tax?
A: Once, over the preceding four quarters (ending the last day of March, June, September, or December), it has either $100,000 or more in cumulative gross receipts from Illinois sales of tangible personal property, or 200 or more separate Illinois transactions (86 Ill. Adm. Code 131.115(a)), per the Leveling the Playing Field for Illinois Retail Act (Public Acts 101-31 and 101-604), effective January 1, 2021.

Q: Can onsite services alone create an Illinois tax obligation even without crossing the $100,000/200-transaction thresholds?
A: Potentially yes. The Department noted that a vendor's repetitive delivery and installation in Illinois can trigger Use Tax collection responsibilities, citing Brown's Furniture v. Wagner, 171 Ill. 2d 410 (1996). The GIL assumed, based on COMPANY's onsite hardware/software support and training activities, that physical nexus with Illinois had been established, though it didn't have enough detail on frequency/duration to say so definitively.

Q: Are training, installation, and support charges taxable?
A: Not if they are separately stated from the selling price of the software (or hardware). Per 86 Ill. Adm. Code 130.1935(b), separately-stated charges for training, telephone assistance, installation, and consultation are not subject to tax, whether provided alongside taxable canned software or exempt custom/licensed software.

Citations and references

Statutes:

• 35 ILCS 120/2-25 (definition of "computer software")
• 35 ILCS 120/1 (definition of "remote retailer")

Regulations:

• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax imposition)
• 86 Ill. Adm. Code 150.101 (Use Tax imposition)
• 86 Ill. Adm. Code 130.1935 (computer software, canned vs. custom, licensing criteria, separately-stated training/support charges)
• 86 Ill. Adm. Code 131.105 (definition of "Out-of-State Seller")
• 86 Ill. Adm. Code 131.110 (remote retailer liability and applicable rate)
• 86 Ill. Adm. Code 131.115 (economic nexus thresholds: $100,000 gross receipts or 200 transactions)
• 86 Ill. Adm. Code 270.115 (sourcing/rate rules where an out-of-state seller has Illinois selling activity or inventory)

Case law:

• Brown's Furniture v. Wagner, 171 Ill. 2d 410 (1996) (repetitive delivery/installation triggers Use Tax collection duty)

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-23-0011-GIL.pdf

Original ruling text

ST-23-0011-GIL 05/08/2023 COMPUTER SOFTWARE
This letter discusses computer software. See 86 Ill. Adm. Code 130.1935. (This
is a GIL.)
May 8, 2023

NAME
COMPANY
ADDRESS
Dear NAME:
This letter is in response to your letter dated December 19, 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 work within COMPANY finance department. We are a STATE-based
media software company with clients in Illinois. We don't sell through a
marketplace, are an out of state seller with no presence in Illinois.
Regarding the sales and use tax, I would like to confirm if the following
items sold by COMPANY and delivered to our customers in Illinois are
taxable. Each item is separately stated on our invoices.
Pre-written Software - canned software that may or may not be
customized to the client's needs.
Hardware -such as PRODUCT and miscellaneous hardware
Services (Remote or Onsite) - including installation, project management,
solution architecture, etc for the software or/and hardware
Training (Remote or Onsite) - training and coaching of the customers on
how to use COMPANY products.

COMPANY/NAME
Page 2
May 8, 2023
Hardware Support (Remote or Onsite) - PRODUCT and miscellaneous
hardware support
Non-hardware support (Remote or Onsite) - COMPANY or Third-Party
software support
*Hosting
In addition, I would like to confirm what the threshold is to start charging
tax? What is the tax rate for taxable sales and use items? When is local
tax applicable? Is the threshold for charging tax and local tax based on
$100,000 gross receipts on tangible items or $100,000 gross receipts for
all items sold (including services, training. support, hosting, etc.)?
Please let me know if you need further information. Thank you in advance.
DEPARTMENT’S RESPONSE:
The Retailers' Occupation Tax Act imposes a tax upon persons engaged in this
State in the business of selling tangible personal property at retail to purchasers for use
or consumption. See 86 Ill. Adm. Code 130.101. 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 86 Ill. Adm. Code 150.101. These taxes comprise what is
commonly known as “sales tax” in Illinois.
Although, the general description of COMPANY’s products and services provided
in your letter does not allow for a more specific response, an explanation regarding the
taxation of these types of products and services should provide the information you
seek.
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 tangible personal property regardless of the form in which it is
transferred or transmitted, “…including tape, disc, card, electronic means, or other
media.” See 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.

COMPANY/NAME
Page 3
May 8, 2023
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;

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

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 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 the customer. However, an electronic 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 in Section 130.1935(a)(1)(A).
Public Acts 101-31 and 101-604 amended the Retailers' Occupation Tax Act and
Use Tax Act, as well as enacted the Leveling the Playing Field for Illinois Retail Act.
These changes are intended to “level the playing field” between Illinois-based retailers
and remote retailers. As a result, beginning January 1, 2021, a remote retailer as
defined in [35 ILCS 120/1], is liable for all applicable State retailers' and locally imposed
retailers' occupation taxes, if either of the following thresholds was met during the

COMPANY/NAME
Page 4
May 8, 2023
preceding four quarterly periods ending on the last day of March, June, September, and
December:
A)

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

B)

The remote retailer enters into 200 or more separate transactions for the
sale of tangible personal property to purchasers in Illinois. 86 Ill. Adm.
Code 131.115(a).

A remote retailer meeting either of these thresholds is liable for all applicable
State and local retailers' occupation taxes administered by the Department on all retail
sales shipped or delivered to Illinois purchasers. See 86 Ill. Adm. Code 131.110(a).
See also Sections 131.110(c), 131.115 and 131.120, which discuss how to determine
whether a retailer meets either of these thresholds.
An Out-of-State Seller is defined as: “A seller located outside Illinois but that has
or maintains within Illinois, 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 seller or its subsidiary, irrespective
of whether such place of business or agent or other representative is located here
permanently or temporarily…”. See 86 Ill. Adm. Code 131.105.
In your statement of facts, you state that COMPANY has no presence in Illinois,
but does perform various on-site services for its Illinois customers. The listed services
include hardware and software support as well as training and coaching. Although your
letter does not provide any details as to the frequency or duration of these activities in
Illinois, for purposes of this letter, it will be assumed that COMPANY has established
physical nexus with Illinois. In 1996, the Illinois Supreme Court ruled a vendor’s
delivery and installation of its product on a repetitive basis, will trigger Use Tax
collection responsibilities. See Brown's Furniture v. Wagner, 171 Ill. 2d 410 (1996).
An out-of-state seller incurs a Use Tax (6.25%) collection obligation for sales
made to Illinois purchasers when both its selling activities occur outside Illinois and the
inventory used to fill purchases for Illinois purchasers is located outside Illinois.
However, for a sale made to an Illinois purchaser, if either the selling activities occur in
Illinois or the inventory is located in Illinois, the out-of-state seller is considered an
Illinois retailer for that transaction and is subject to State and local retailers' occupation
taxes at the rate at the location at which the selling activities occur or at which the
inventory is located. See 86 Ill. Adm. Code 270.115(b);(c) and (d) for factors used to
make this determination as well as the applicable local rate. These provisions would
apply to the retail sales of computer hardware and canned software which are taxable
as tangible personal property.

COMPANY/NAME
Page 5
May 8, 2023
Charges for training, telephone assistance, installation and consultation are not
subject to tax if they are separately stated from the selling price of canned software.
See 86 Ill. Adm. Code 130.1935(b). Likewise, if computer software training or other
support services are provided in conjunction with a sale of exempt custom computer
software or a license of computer software, the charges for that training are not subject
to tax.
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,

Thomas Grudichak
Associate Counsel
TG:bf