Is a subscription to a health/fitness coaching app (with SaaS-style content, trackers, and a downloadable app) subject to Illinois sales tax?

Plain-English summary

A foreign-based company that sells subscriptions to a health, fitness, mental wellness, and nutrition coaching app asked the Illinois Department of Revenue for a Private Letter Ruling on whether its subscription charges are subject to Illinois sales tax. The company's software is hosted on servers located outside Illinois. Customers ("Members") sign up either on the company's website or by downloading a free app (from the Apple Store or Google Play Store) onto a phone, tablet, or other mobile device, and then pay a recurring subscription charge. With the subscription, the company grants the Member a non-transferable, non-exclusive license (without the right to sublicense) to use the services for the Member's personal use; if the subscription lapses, the Member loses access.

The app itself is Software-as-a-Service: it delivers a health-coaching ecosystem, including body-data insights, personal health coaching, workouts, meal plans, and progress tracking, driven mostly by an algorithm rather than human interaction. It also includes several trackers (Hydration, Fasting, Fitness) available to Members, and some limited features available to non-members for free or during a free trial period, after which continued use of some trackers requires a paid Membership. The Fitness Tracker (which uses phone or wearable data) and pre-recorded, non-personalized workout videos work offline; most other content requires an internet connection. For an added fee, Members can also purchase Personal Training -- live coaching with certified professionals, delivered entirely online.

The Department's response walked through how Illinois's Retailers' Occupation Tax, Use Tax, and Service Occupation Tax apply to computer software and information services. Under 86 Ill. Adm. Code 130.1935 and 35 ILCS 120/2-25, "canned" (prewritten) computer software is taxable tangible personal property in Illinois regardless of how it's delivered, including electronically -- unless it qualifies for the narrow software-license exemption (a written, signed license meeting several specific conditions) or unless it is genuinely custom software written to a customer's specifications. Separately, information that is electronically transferred or downloaded (not itself software) is not treated as a transfer of tangible personal property, so it falls outside these taxes under 86 Ill. Adm. Code 130.2105(a)(3). Software accessed purely through the cloud, and never downloaded onto the customer's device, is likewise not treated as a taxable transfer -- but if a provider gives the subscriber a downloadable app, API, applet, desktop agent, or remote-access agent to reach the provider's network and services, the subscriber IS receiving computer software, and that software is taxable unless it qualifies as a non-taxable license.

Applying this framework to the taxpayer's facts, the Department concluded that, except for the app itself (which customers download for free), Members do not receive any tangible personal property in exchange for their Member Services subscription or their Personal Training fee -- so those charges are not subject to Retailers' Occupation Tax. As for the free app download, because the taxpayer's servers are located outside Illinois and the app is downloaded at no charge from an out-of-state website or server, the Department found the taxpayer exercises no power or control over the property in Illinois and so incurs no Use Tax liability on those downloads either. The same reasoning applied to non-members who download the free Fitness Tracker, Fasting Tracker, or Hydration Tracker (during any free-trial period) on iOS or Android. The Department did not reach a conclusion on the taxability of the Corporate Wellness Program, stating that the taxpayer had not adequately described that product.

What this means for you

SaaS and mobile-app subscription businesses

If your app or platform is delivered as Software-as-a-Service -- hosted on your own (out-of-state) servers, accessed mainly through an internet connection, and offered to customers as a subscription rather than a sale of software -- this ruling illustrates the Department's current reasoning that such subscriptions are not subject to Illinois Retailers' Occupation Tax, Service Occupation Tax, or Use Tax, so long as you are not transferring taxable canned software to the customer. The critical fact pattern the Department focused on: does the customer receive any tangible personal property (including a downloadable app, API, applet, desktop agent, or remote-access agent)? If they do, that downloaded component is itself computer software and is potentially taxable unless it qualifies for the software-license exemption in 86 Ill. Adm. Code 130.1935(a)(1) (a signed written license with specific restrictions) or as custom software under 130.1935(c).

Where you host your servers matters

The Department's no-Use-Tax conclusion here turned in part on the fact that the taxpayer's app was downloaded for free from a server located outside Illinois -- meaning the company exercised no power or control over the property within the state. Businesses whose servers or app-distribution infrastructure sit inside Illinois, or who charge separately for the app download itself, should not assume this same result applies to them; the facts matter.

Accountants and tax professionals

Note that this ruling does not create a blanket "SaaS is never taxable in Illinois" rule. The Department's analysis still requires transferring no taxable tangible personal property; if your client's cloud offering bundles taxable canned software, or charges for a downloaded desktop/mobile client rather than giving it away for free, the outcome could differ. Also flag for clients that this PLR is binding only as to this one taxpayer and only on these specific facts -- it expires 10 years after issuance under 2 Ill. Adm. Code 1200.110(e), or sooner if the law, rules, or facts change.

Common questions

Q: Does Illinois tax SaaS subscriptions?
A: Not automatically. In this ruling, the Department concluded the taxpayer's health-coaching app subscription and add-on Personal Training fee were not subject to Retailers' Occupation Tax because, apart from the free app download itself, Members did not receive any tangible personal property. The content was characterized as Software-as-a-Service or an electronically delivered information service, neither of which was taxed on these facts.

Q: Does downloading a mobile app trigger tax?
A: If a provider gives a subscriber a downloadable app, API, applet, desktop agent, or remote-access agent to access the provider's network and services, the subscriber is receiving computer software, which is potentially taxable -- even if there's no separate charge for the app itself -- unless the transfer qualifies as a non-taxable software license. Here, the Department found no Use Tax was owed because the app was free and downloaded from an out-of-state server, so the taxpayer exercised no power or control over the property in Illinois.

Q: What is "canned" versus "custom" computer software, and why does it matter?
A: Canned (prewritten) computer software intended for general or repeated use is taxable tangible personal property in Illinois no matter how it's delivered, per 86 Ill. Adm. Code 130.1935(a). Custom software -- created through real, substantial changes to meet a specific customer's individualized requirements, per 130.1935(c) -- is not subject to Retailers' Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax. A software license can also be exempt from tax if it meets several specific conditions in 130.1935(a)(1), including a signed written agreement restricting duplication, prohibiting sublicensing, and requiring return or destruction of the software at the end of the license term.

Q: What about information or content delivered electronically, separate from software?
A: Under 86 Ill. Adm. Code 130.2105(a)(3), information or data that is electronically transferred or downloaded is not considered a transfer of tangible personal property in Illinois, so it falls outside Retailers' Occupation Tax, Use Tax, Service Occupation Tax, and Service Use Tax.

Q: Can another company rely on this ruling for its own SaaS product?
A: No. This is a Private Letter Ruling binding on the Department only as to the taxpayer who requested it, and only to the extent the facts recited are correct and complete. It is subject to review during any Department audit, investigation, or hearing, and it expires 10 years after issuance (or sooner if the law or facts change) under 2 Ill. Adm. Code 1200.110(e). Other businesses can look to its reasoning as an illustration of how the Department analyzes SaaS and app-download fact patterns, but they cannot rely on it directly and should seek their own PLR for a binding answer.

Citations and references

Statutes:

• 35 ILCS 120/2 (Retailers' Occupation Tax imposed on retail sales of tangible personal property)
• 35 ILCS 120/2-25 (definition of "computer software")
• 35 ILCS 105/3 (Use Tax on tangible personal property purchased at retail)
• 35 ILCS 105/3-45 (Use Tax remittance; self-assessment for out-of-state purchases)
• 35 ILCS 115/3 (Service Occupation Tax on tangible personal property transferred incident to a sale of service)

Regulations:

• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax imposed on retail sales)
• 86 Ill. Adm. Code 130.1935 (taxability of computer software, licenses, and custom software)
• 86 Ill. Adm. Code 130.2105(a)(3) (electronically delivered information not a transfer of tangible personal property)
• 86 Ill. Adm. Code 140.101 (Service Occupation Tax on property transferred incident to sales of service)
• 86 Ill. Adm. Code 140.105 through 140.109 (Service Occupation Tax calculation methods, cost ratio, de minimis servicemen)
• 86 Ill. Adm. Code 150.101 (Use Tax on tangible personal property purchased at retail)
• 86 Ill. Adm. Code 150.401 (Use Tax paid to retailer at time of purchase)
• 86 Ill. Adm. Code 150.701(a) (self-assessment of Use Tax for out-of-state purchases)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedure and 10-year expiration)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2024.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2024/ST24-0002-PLR.pdf

Original ruling text

ST 24-0002-PLR 09/17/2024 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 PLR.)
September 17, 2024
NAME
TITLE
COMPANY1
ADDRESS
RE: COMPANY2
Dear NAME:
This letter is in response to your letter dated July 3, 2024, in which you
request 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.
Review of your request disclosed that all the information described in
paragraphs 1 through 8 of Section 1200.110 appears to be contained in your
request. This Private Letter Ruling will bind the Department only with respect to
COMPANY2, for the issue or issues presented in this ruling, and is subject to the
provisions of subsection (e) of Section 1200.110 governing expiration of Private
Letter Rulings. Issuance of this ruling is conditioned upon the understanding that

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neither COMPANY2, nor a related taxpayer is currently under audit or involved in
litigation concerning the issues that are the subject of this ruling request. In your
letter you have stated and made inquiry as follows:
To Whom it May Concern:
We respectfully request the issuance of formal written guidance on
behalf of COMPANY2 (the “Company”) for the issues described
below based on the facts contained herein. The Company is located
in CITY, COUNTRY.
Facts
The Taxpayer is a foreign-based company whose headquarters are
located outside of the United States and whose software is hosted
on servers located outside the state of Illinois. The Taxpayer sells
subscriptions to access information hosted in the cloud through a
web portal or by a downloaded application onto mobile cell phones
(i.e., iPhones and Android phones), or other electronic mobile
devices (i.e., iPads or tablets), to customers (“Members”) in the
United States. The Taxpayer engages in providing a health coaching
ecosystem through customized health, fitness, mental wellness, and
nutrition services (“Services”). The Taxpayer provides access to
body data insights, personal health coaching, workouts, meal plans,
and progress tracking. The Taxpayer also has a Corporate Wellness
Program with weekly statistics and detailed data reports, group
challenges, and various self-awareness programs.
The Taxpayer offers these Services to Members along with some
limited services available to non-members free of charge. To
become a Member, a new customer can: 1) create an account on the
Taxpayer’s website and sign up through a subscription charge or 2)
download the free Taxpayer’s application (“App”) via application
marketplaces, such as the Apple Store or Google Play Store
(collectively referred to as the “App Store”) and sign up through a
subscription charge. With the initiation of the subscription charge,
the Taxpayer grants to the Member a non-transferable, nonexclusive, license (without the right to sublicense) to use the
Services, solely for the Member’s personal use. With either option,
the frequency of the subscription charge is selected by the Member.
If the subscription expires, the Member loses access to the
purchased Services. The Services are fundamentally Software as a
Service, and the majority of Services are unattainable without access
to the Internet.

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For Members, all in-app trackers, including the Hydration Tracker
and Fasting Tracker, are available for unlimited use. These trackers
have offline capabilities, allowing users to record and report health
data both when the App is online and with limited reporting
capabilities without an Internet connection, as discussed in greater
detail below.
For non-members, the Fasting Tracker is available for free on iOS
devices. On Android devices, the Fasting Tracker is available for
free during a trial period, but later requires the premium Membership
subscription to continue using. Similarly, on both Android and iOS,
the Hydration Tracker is available for free during a trial period but will
subsequently require a Membership subscription for continued use.
The Fitness Tracker is always free for both Android and iOS users,
regardless of their membership status. Additionally, both Android
and iOS non-members can access downloaded pre-recorded, nonpersonal exercise videos while offline.
Regardless of the method selected to become a Member, the
Member is prompted to answer a series of questions around their
current health/fitness status and their desired future health/fitness
goals. These answers supplied by the Members are utilized by an
algorithm to provide customized and detailed health and fitness
solutions. The health and fitness solutions provided to a Member are
solely determined and delivered by the algorithm and not done with
any human interaction, direction, or involvement. The Services
include compilations (such as access to hundreds of articles that
include tips and tricks on weight loss and dieting) (collectively
referred to hereafter as “Content”) and access to prerecorded video
workouts.
Additional Content includes meal plans, progress
tracking, and holistic guidance catered to the Customer’s fitness,
nutritional, and mental health needs. The Content is proprietary to
the Taxpayer or to third parties.
The information may be
individualized to the Customer and the Customer receives a
personalized daily exercise routine and user-friendly graph to
measure their progress. There is also personalized nutrition and diet
information that may be digitally supplied to the Member. For an
additional fee, Members may obtain personal health coaching with
certified professionals (“Personal Training”) that provide expert
feedback, 24/7 support, regular check-ins, and progress evaluations.
Certified coaches assist members with fitness plans that were initially
generated by the algorithm. Personal Training is wholly provided by
way of an internet connection and is not available offline.

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As previously indicated, the services provided are primarily
Software-as-a-Service, requiring an Internet connection for most of
the App's Content and functionalities with some features available
offline. These features are initially available to Member and nonmembers free of charge and include a fasting tracker,
water/hydration tracker, fitness tracker, and non-personalized, prerecorded workout videos, which can be downloaded. The fasting
tracker allows customers to log their fasting progress and view
automatically compiled statistics, available free of charge for all iOS
and Android users. However, Android users may be prompted to
purchase a subscription if they choose to access app-recommended
training activities which are separate from the fasting tracker and are
provided to Members via the cloud. The app-recommended training
activities require an internet connected device to interact with.
Similarly, the water tracker enables customers to record their
hydration and view online and offline statistics. This feature is free
during a trial period but a Membership subscription is required
thereafter. The fitness tracker, which collects physical activity data
from the user's phone, electronic device, or wearable wristband via
Bluetooth, also functions without an Internet connection. The fitness
tracker records users' physical activities and provides statistics,
accessible offline for both Members and non-members using iOS or
Android. Finally, the App also offers non-personalized, pre-recorded
workout videos that are free and can be downloaded for offline
viewing.
Issues
Would Illinois impose sales tax on the subscription charges for the
customized digital content and subscription service delivered by the
Taxpayer through the Taxpayer’s App on the customer’s device and
website?
Analysis Supporting Taxpayer’s Views
Due to the nature of the personalized health content sold by the
Taxpayer and the delivery of the content through a web browser or
App, the associated subscription fee and resulting content should be
characterized as Software as a Service (“SaaS”) or an electronically
delivered information service. Below we examine the taxability of the
Services under Illinois law.
Illinois imposes a Retailers’ Occupation Tax and Service Occupation
Tax on persons engaged in the business of selling tangible personal

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property, including computer software, at retail 1 and on the transfer
of tangible personal property by a service person in connection with
the rendered services. 2 For the purposes of the Retailers’
Occupation Tax, prewritten computer software is recognized as
tangible personal property. 3
Electronically Delivered Information Service
In Illinois, the downloading of information electronically is not seen
as the transfer of tangible personal property. The state’s stance, as
previously expressed, is that the downloading of digital media
(including videos) is considered an intangible transfer and does not
fall under the Retailers’ Occupation and Use Tax. 4
Software‐as‐a‐Service

Illinois imposes Retailers’ Occupation and use tax on the sale, lease,
or license of prewritten computer software with limited exemption for
software licenses which meet certain criterion. Prewritten computer
software, or “Canned software” is considered tangible personal
property regardless of the form in which it is transferred or
transmitted, including by electronic means. The sale at retail or
transfer of canned software intended for general or repeated use is
also considered taxable. 5
The Illinois Department of Revenue (“The Department”) has
previously advised it does not view software accessed via a cloud‐
based system, where such software is never downloaded, as a
taxable transfer of tangible personal property. It was also advised
that “if an Illinois customer downloads computer software for free
from an out‐of‐state retailer’s website 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.”6 Therefore the customer would incur no use tax
liability for the retailer to collect.
Furthermore, The Department has stated that information or data
which is electronically delivered or downloaded is not considered a
taxable transfer of tangible personal property in the state. Illinois has
35 ILCS 120/2a
35 ILCS 115/3
3
35 ILCS 120.2-25
4
Illinois General Information Letter ST 06-0071-GIL
5
Ill. Admin. Code tit. 86, § 130.1935(a)
6
Illinois General Information Letter ST 20-0018-GIL
1
2

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previously declined to provide additional guidance regarding
transactions involving computer software Application Service
Providers (ASPs), software hosting and web‐based software, citing
these topics as being reviewed for administrative rule. 7
Existing Internal Revenue Service Regulations, § 1.861‐18 8,
provides rules for classifying transactions involving computer
programs. For this purpose, § 1.861‐18(a)(3) defines a computer
program as “a set of statements or instructions to be used directly or
indirectly in a computer in order to bring about a certain result” and
includes “any media, user manuals, documentation, data base or
similar item if the media, user manuals, documentation, data base or
similar item is incidental to the operation of the computer program.”
Furthermore, Section 1.861‐18 generally does not provide a
comprehensive basis for categorizing many common transactions
involving what is commonly referred to as “cloud computing,” which
typically is characterized by on‐demand network access to
computing resources, such as networks, servers, storage, and
software. Cloud computing transactions typically are described for
non‐tax purposes as following one or more of the following three
models: Software as a Service (“SaaS”); Platform as a Service
(“PaaS”); and Infrastructure as a Service (“IaaS”). SaaS allows
customers to access applications on a provider’s cloud infrastructure
through an interface such as a web browser. 9
Other transactions exist that are not solely related to computing but
still involve on‐demand network access to technological resources
(these transactions and cloud computing transactions are collectively
referred to herein as “cloud transactions”). These transactions have
increased in frequency over time and share similarities with the three
cloud computing models described above. Examples include
streaming music and video, transactions involving mobile device
applications (“apps”), and access to data through remotely hosted
software.
Since the user of the Services can get more than just information
services (i.e., meal plan, health plan, workout plan), the state may
classify the Service as Software as a Service (“SaaS”). For instance,
the user can get their heart rate, steps, and other body metrics if they
are using a connected device, all of which is available to members
and non‐members. It is reasonable to conclude that based on Illinois
Illinois General Information Letter ST 10-0113-GIL
Internal Revenue Code § 1.861-18
9
National Institute of Standards and Technology, Special Publication 500-322 (February 2018) ("NIST
Report")
7
8

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law, the subscription should not be subject to tax as it is not
prewritten computer software. Specifically, the subscription is
predominantly for the purchase of the meal and health plan, workout
plan, and workout videos, which are nontaxable electronically
delivered information services. 10 However, should the subscription
be classified as software, it is also nontaxable as it is a SaaS
solution. Specifically, the customer does not pay for the downloaded
App, the Company and servers are located out-of-state,
subscriptions are nontaxable, and the content is generally only
accessible via the internet, which is clearly nontaxable pursuant to
Illinois General Information Letter ST 20-0018-GIL. Further, this
classification aligns with the IRS regulations outlined above whereby
applications that are only functional with the Internet are treated as
SaaS by the IRS.
Moreover, the App’s limited offline features previously discussed
such as the various trackers and pre-recorded videos are initially
provided to the user free of charge upon download of the App. The
Illinois Use Tax does not apply to this donated tangible personal
property (i.e., the App) because the Company does not maintain
servers in Illinois. Furthermore, the various trackers and prerecorded videos are not subject to The Retailers' Occupation Tax, as
the offline features are initially donated when the App is downloaded
with continued access requiring a subscription. When a subscription
is purchased, it includes access to the complete set of in-app
services, which are primarily SaaS. As previously discussed, Illinois
does not impose the Retailers' Occupation Tax on subscriptions,
electronically delivered information services, SaaS or digital
products. For these reasons, we believe the subscription fee is not
taxable in Illinois.
Analysis Contrary to Taxpayer’s Views
There are no statues, regulations, rulings or other state provided
guidance which specifically addresses the presented facts.
Conclusion
Based on the foregoing, the Services should be characterized as an
Information Service or Software as a Service. Regardless of such
classification, the Taxpayer’s Services are ultimately Software as a
Service or an Information Service, neither of which are taxable in the

10

86 Ill. Adm. Code 130.2105(a)(3)

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state when the hosted software is accessed on servers located
outside of Illinois.
The above relates to tax periods May 2020 to present. To the best
of the Taxpayer’s knowledge and ours, the Department has not
previously ruled on the same or a similar issue for the taxpayer or a
predecessor.
Additionally, neither the Taxpayer nor its
representatives have previously submitted the same or a similar
issue to the Department but withdrew it before a letter ruling was
issued.
As you review the above request for guidance, please do not hesitate
to reach out to me with any questions at PHONE or EMAIL. We
kindly request an opportunity to have a conference call to discuss the
above request prior to the Department issuing the formal ruling.
DEPARTMENT’S RESPONSE:
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 two 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. 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. 35 ILCS 105/3-45; 86 Ill. Adm. Code
150.701(a).
Service Occupation Tax
Retailers’ Occupation Tax and Use Tax do not apply to sales of service.
See 35 ILCS 120/2; 35 ILCS 105/3. 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. 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.

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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. 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 (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

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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, selfassess, and remit Use Tax to the Department. The servicemen are considered
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.
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.
Information services
In Illinois, information or data that is electronically transferred or
downloaded is not considered the transfer of tangible personal property in this
State. 86 Ill. Adm. Code 130.2105(a)(3). However, canned computer software is
considered taxable tangible personal property regardless of the form in which it is
transferred or transmitted, including tape, disc, card, electronic means, or other
media. 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 (e.g., medical
records delivered to a customer in a hardcopy version, rather than sent
electronically), such service transactions are generally subject to tax liability.
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.
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

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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:
1.

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

2.

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

3.

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;

4.

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

5.

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 for the customer to check a box that states that the customer 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. An electronic agreement in which the customer accepts the license
by means of an electronic signature that is verifiable and can be authenticated and
is attached to or made part of the license will comply with this requirement. 86 Ill.
Adm. Code 130.1935(a)(1)(i).
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

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sales of service on all tangible personal property transferred incident to a sale of
service, including computer software, and is calculated as explained above.
Computer software is defined broadly in the Retailers’ Occupation Tax Act
and Service Occupation Tax. 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 App, 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 nontaxable license of computer software.
If an Illinois customer downloads computer software for free from an out-ofState 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 as the customer did not acquire the software from
a retail transaction. Illinois generally does not tax subscriptions of software as a
service.
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’ Occupation Tax, Use Tax, Service
Occupation Tax or Service Use Tax if the following elements are present:
1.

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

2.

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

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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.
If an Illinois customer downloads computer software for free (such as an
App, API, applet, desktop agent, or remote access agent) from an out-of-State
serviceman’s web site or server that is also located out of State, the serviceman,
even though it is donating tangible personal property to the customer, has
exercised no power or control over the property in Illinois, and the donor would not
have made any taxable use of the property in Illinois.
Conclusion
According to the Taxpayer, “Taxpayer sells subscriptions to access
information hosted in the cloud through a web portal or by a downloaded
application onto mobile cell phones (i.e., iPhones and Android phones), or other
electronic mobile devices (i.e., iPads or tablets), to customers (“Members”) in the
United States.” “[T]he services provided are primarily Software-as-a-Service,
requiring an Internet connection for most of the App’s Content and functionalities
with some features available offline.” The Taxpayer identifies the following
products: Member Services, including Content; Corporate Wellness Program,
Personal Training; Hydration Tracker; Fasting Tracker; and Fitness Tracker.
To obtain the Member Services, a customer must create an account on the
Taxpayer’s website and sign up through a subscription charge or download an
application, or App, from either the Apple Store or Google Play Store and sign up
through a subscription charge. There is no charge to download the App. If the
subscription expires, access to the Member Services is terminated. For an
additional fee, the Member may obtain Personal Training online by way of an
internet connection. Members receive use of all the in-app trackers: Hydration
Tracker, Fasting Tracker, and Fitness Tracker. Based on descriptions of the
products contained in the Taxpayer’s letter, except for the App downloaded to
Members’ phones, Members do not receive any tangible personal property in
consideration for the subscription paid by them for Member Services and the
additional fee paid by them for Personal Training. The Department concludes that
the subscription paid for Member Services (including the Content, Hydration
Tracker, Fasting Tracker) and the fee paid for Personal Training are not subject to
Retailers’ Occupation Tax. The Taxpayer does not adequately describe the
Corporate Wellness Program for the Department to render any conclusion on the
taxability of this program.
As noted above, if a provider of a service provides to the subscriber an App,
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

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computer software, it is nonetheless subject to tax, unless the transfer qualifies as
a non-taxable license of computer software. Taxpayer has not demonstrated that
the transfer qualifies as a non-taxable license of computer software. Taxpayer
states that its servers are located outside of Illinois. Because the customer
downloads the App for free from an out-of-State web site or server that is also
located out of State, Taxpayer incurs no Use Tax liability.
Non-members may download Fitness Tracker for free on iOS and Android
devices. Non-members may download Fasting Tracker for free on iOS devices;
on Android devices there is a free trial period, after which non-members must apply
for and pay for Member subscriptions. Non-members may download Hydration
Tracker on iOS devices and Android devices for a free trial period, after which nonmembers using iOS devices and Android devices must apply for and pay for
Member subscriptions. Except for the App downloaded to non-members’ phones,
non-members do not receive any tangible personal property when the Fitness
Tracker, Fasting Tracker, and Hydration Tracker are initially downloaded on iOS
and Android devices. Nor do non-members receive any tangible personal property
when they pay for a subscription after the trial period to continue receive Fasting
Tracker and Hydration Tracker. The Department concludes that subscriptions paid
for Hydration Tracker and Fasting Tracker are not subject to Retailers’ Occupation
Tax. Because the customer downloads the App for free from an out-of-State web
site or server that is also located out of State, Taxpayer incurs no Use Tax liability
when the Apps are downloaded.
The factual representations upon which this ruling is based are subject to
review by the Department during the course of any audit, investigation, or hearing
and this ruling shall bind the Department only if the factual representations recited
in this ruling are correct and complete. This Private Letter Ruling is revoked and
will cease to bind the Department 10 years after the date of this letter under the
provisions of 2 Ill. Adm. Code 1200.110(e) or earlier if there is a pertinent change
in statutory law, case law, rules or in the factual representations recited in this
ruling.

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I hope this information is helpful. If you have further questions concerning
this Private Letter Ruling, you may contact me at (217) 782-2844. If you have
further questions related to the Illinois sales tax laws, please visit our website at
www.tax.illinois.gov or contact the Department’s Taxpayer Information Division at
(217) 782-3336.
Very truly yours,

Samuel Moore
Chairman
Private Letter Ruling Committee
SM:RSW:slc