IL ST 24-0003-PLR Sales & Use Tax 2024-09-26

We provide cloud-based data-processing services that translate and relay medical lab test results to physician practices and patients (some of whom can also download free mobile apps), and we've recently crossed Illinois's $100,000 economic-nexus threshold -- do any of our fees trigger Illinois Retailers' Occupation Tax, Use Tax, Service Occupation Tax, Service Use Tax, or the Telecommunications Excise Tax, and do we have to register and collect?

Short answer: No on all counts, on these specific facts. The Department ruled the company's Monthly Data Processing Fees and Initial Setup Fees are not taxable because the company acts as a "serviceman" providing true data-processing services and never transfers computer software to its lab, physician-practice, or patient customers through its EMR or cloud-portal connections -- the software is only accessed remotely and never downloaded. The company's free physician and patient mobile apps ARE computer software transfers, but because they're downloaded for free from the company's out-of-state server, no Illinois Retailers' Occupation Tax, Use Tax, or Service Occupation Tax applies to them or to the related setup/monthly app fees. None of the services counts as taxable telecommunications, because the charges are for data processing/storage (which the Telecommunications Excise Tax Act's "gross charges" definition excludes), not for transmission. And because 100% of the company's Illinois sales are non-taxable, it is not required to register with the Department or collect Illinois Retailers' Occupation, Use, Service Occupation, or Service Use Tax -- even though its Illinois gross receipts exceed the $100,000 Wayfair economic-nexus threshold. This ruling binds the Department only as to this taxpayer, and only if the facts it described were correct and complete.

Apply this to your situation

This page answers the general question as of 2024. Ezel answers yours, under current Illinois tax law, with citations.

Disclaimer: This is an official Illinois Department of Revenue Private Letter Ruling (PLR), issued under 2 Ill. Adm. Code 1200.110. It is binding on the Department, but ONLY as to the taxpayer who requested it and only to the extent the facts they gave were correct and complete: no other taxpayer can rely on it. Taxpayer-identifying details are redacted. This summary is informational only and is not legal or tax advice. Consult a licensed Illinois tax professional about your specific situation.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page as a PDF) is the authoritative source for any reliance.

View original ruling (PDF)

Plain-English summary

A remote data-processing company (called COMPANY1, doing business as COMPANY2, in the redacted ruling) asked the Illinois Department of Revenue for a Private Letter Ruling covering three related questions about its Illinois sales and use tax exposure. The company's proprietary cloud-based software connects medical laboratories ("Labs"), physician practices, EMR (electronic medical record) vendors, and patients so that lab test results can be collected, translated into a format each recipient's own software can read, and delivered -- work the company calls its "Data Processing Services." Labs send test data to the company's out-of-state servers; the company's personnel and software translate and reformat it (a process requiring substantial custom programming for each Lab's unique system); and the processed results are then delivered either to an EMR vendor's software (in "EMR connections") or displayed through the company's own cloud-based "COMPANY2 Portal" (in "Portal connections"). Physician practices and patients can also optionally download free mobile apps that let them view results or place lab orders, but the apps have no function beyond that. None of the company's customers can install, download, or take control of the company's core software -- each Dataflow Participant keeps using its own separately purchased LIS or EMR system. The company charges Labs a Monthly Data Processing Fee (based on volume/size of the physician practices served) and an Initial Setup Fee for the custom programming, plus separate small fees tied to the optional apps. Although the company has no Illinois office, employees, or inventory, its gross receipts from Illinois customers recently exceeded $100,000, which is enough on its own to create Illinois's remote-seller ("Wayfair") economic nexus.

The company asked the Department to rule on three things: (1) that none of its Illinois offerings are taxable sales, leases, licenses, or other transfers of software, SaaS, or tangible personal property; (2) that none of its services are taxable telecommunications services; and (3) that it is not required to register with the Department or collect Illinois Retailers' Occupation Tax (ROT), Use Tax, Service Occupation Tax (SOT), or Service Use Tax. The Department agreed with the company on all three points, but its reasoning treats the free mobile apps differently from the core data-processing service. On the core service, the Department held the company is a "serviceman" (not a retailer) because it never transfers computer software to its customers -- the company's software is only accessed remotely through a cloud-based delivery system and is never downloaded onto a client's device, so neither the Monthly Data Processing Fee nor the Initial Setup Fee is subject to ROT or SOT. On the apps, the Department agreed that a patient's or physician's free download of the Physician App or Patient App IS a transfer of computer software (software is broadly defined under 35 ILCS 120/2-25 and covers apps), but because the apps are downloaded at no charge from the company's server located outside Illinois, the company -- as the "donor" of that software -- exercises no power or control over the property once it lands in Illinois and so makes no taxable use of it here; no ROT, SOT, or Use Tax applies to the app itself or to the related one-time app setup fee or ongoing monthly app fee. On telecommunications, the Department held the company's charges are for data processing and storage (which the Telecommunications Excise Tax Act's "gross charges" definition, 35 ILCS 630/2(a)(3), expressly excludes) rather than for transmission, so none of the fees are subject to the 7% Telecommunications Excise Tax. Finally, because all of the company's Illinois sales are exempt, the Department held the company is not required to register with the Department or collect ROT, Use Tax, SOT, or Service Use Tax, even though its Illinois gross receipts exceed the $100,000 economic-nexus threshold -- Department regulation 86 Ill. Adm. Code 150.803(e)(2) excuses registration where 100% of an out-of-state retailer's Illinois sales are non-taxable.

What this means for you

SaaS and cloud data-processing companies serving Illinois customers

If your business processes, translates, or reformats customer-supplied data using your own cloud-hosted software -- without ever letting the customer download, install, or take meaningful control of that software (no API, applet, desktop agent, or remote-access agent that hands the customer real functionality) -- this ruling supports treating your service fees as non-taxable data processing rather than taxable SaaS or computer software, consistent with the Department's general position in several GILs cited in the ruling (e.g., ST 20-0018-GIL, ST 17-0024-GIL). The key line the Department draws is between a customer merely feeding in data and viewing an output (non-taxable) versus a customer getting genuine access to manipulate, analyze, or generate reports from your software (potentially taxable SaaS).

Companies offering free companion mobile apps

Don't assume a free app is automatically tax-free just because there's no separate charge. The Department confirmed a free app download is still a transfer of "computer software" under Illinois's broad statutory definition (35 ILCS 120/2-25). What actually eliminates the tax here is that the app is downloaded from a server located outside Illinois at no charge -- the out-of-state donor exercises no power or control over the software once it's on an Illinois device, so there's no taxable Illinois "use." If your app or its distribution servers were instead based in Illinois, or if you charged for the download, this specific reasoning would not apply.

Businesses with substantial custom programming costs

The ruling's fact pattern (100+ to 500 hours of customization per client, roughly 61-70% of costs tied to human labor) is relevant background on Illinois's custom-vs-canned software distinction under 86 Ill. Adm. Code 130.1935(c)(2)-(3), but the Department's actual holding did not need to resolve whether the company's software was "custom" or "canned" -- it resolved the case entirely on the ground that no software was transferred to customers in the first place (except for the separately analyzed apps).

Remote sellers near or above the $100,000 Illinois economic-nexus threshold

Crossing the $100,000 gross-receipts threshold (or 200 transactions) creates Illinois's remote-seller nexus under 35 ILCS 110/2(9), but nexus alone doesn't create a collection obligation if every one of your Illinois sales is legally exempt. Per 86 Ill. Adm. Code 150.803(e)(2), an out-of-state retailer whose Illinois sales are 100% non-taxable is not required to register or collect. If even a portion of your sales to Illinois customers were taxable, this registration exception would not apply, and you likely would need to register and collect on those taxable sales.

Telecommunications and data-transmission providers

The Department's telecommunications holding turned on two specific facts: the company's charges were for processing/storing data (which the Telecommunications Excise Tax Act's "gross charges" definition excludes under 35 ILCS 630/2(a)(3)), and the company did not separately bill customers for line or transmission charges. A provider that does bill separately for transmission, or whose true object is moving signals/data rather than processing it, would be analyzed differently.

Everyone else

Remember this is a Private Letter Ruling, not a General Information Letter: it resolves this specific taxpayer's specific, detailed facts (a lab-connectivity data-processing business with no meaningful customer control over its software) and binds the Department only as to that taxpayer, only for up to 10 years, and only so long as the facts recited remain correct and complete. If your facts differ in any material way -- for example, if your customers can manipulate or analyze data through your software, or if you charge separately for data transmission -- this ruling does not protect you, and you would need to seek your own PLR.

Common questions

Q: Is data-processing/data-translation software as a service (SaaS) taxable in Illinois?
A: Not automatically. The Department's general position (reflected in several GILs cited in this ruling) is that cloud-based software accessed remotely, with no transfer of tangible personal property, is not subject to Retailers' Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax. It becomes taxable if the provider furnishes the customer an API, applet, desktop agent, or remote access agent that lets the customer actually access the provider's network and software functionality.

Q: Did the Department find that this company transferred computer software to its Lab, physician-practice, and patient customers through its EMR and Portal connections?
A: No. The Department found the company's Data Processing Services (aside from the mobile apps) do not transfer any computer software -- customers only send data in and view processed output, using their own separately purchased LIS or EMR systems, never gaining install/download access to the company's software. As a result, the Monthly Data Processing Fees and Initial Setup Fees are not subject to Retailers' Occupation Tax or Service Occupation Tax.

Q: Are the free physician and patient mobile apps taxable?
A: The apps are computer software under Illinois's broad statutory definition, but because they are downloaded free of charge from the company's out-of-state server, the company (as donor) is treated as having exercised no power or control over the software once it reaches an Illinois device, so no Illinois use tax, Retailers' Occupation Tax, or Service Occupation Tax applies -- to the app itself or to the related one-time setup fee or monthly app fee.

Q: Does this company's Telecommunications Excise Tax exposure change the outcome?
A: No. The Department ruled none of the company's charges constitute taxable telecommunications, because the charges are for processing and storing data (expressly excluded from the Telecommunications Excise Tax Act's "gross charges" definition) rather than for transmission, and the company does not separately bill for line or transmission charges.

Q: The company's Illinois sales exceed the $100,000 remote-seller threshold -- does it have to register and collect tax anyway?
A: No, on these facts. Crossing that threshold creates Illinois economic nexus, but a Department regulation (86 Ill. Adm. Code 150.803(e)(2)) excuses an out-of-state retailer from registering and collecting if 100% of its Illinois sales are non-taxable, which the Department found true here.

Q: If my SaaS or data-processing business looks similar to this one, can I rely on this ruling?
A: No. A Private Letter Ruling binds the Department only as to the taxpayer who requested it, and only to the extent the facts described were correct and complete -- no other taxpayer, however similar its facts, can rely on it. You would need to request your own PLR under 2 Ill. Adm. Code 1200.110 for a binding answer on your own facts.

Citations and references

Statutes:

35 ILCS 120/1, 120/2, 120/2-12(6), 120/2-25 (Retailers' Occupation Tax Act -- imposition, sourcing, and the definition of "computer software")
35 ILCS 105/2, 105/2(1.2), 105/3, 105/3-10 (Use Tax Act -- nexus, referral nexus, imposition, rate)
35 ILCS 115/1, 115/3 (Service Occupation Tax Act)
35 ILCS 110/1, 110/2(9), 110/3 (Service Use Tax Act, including the Wayfair economic-nexus threshold)
35 ILCS 630/2(a), 630/2(a)(3), 630/2(a)(4), 630/2(c), 630/3, 630/4 (Telecommunications Excise Tax Act)
35 ILCS 636/5-10, 636/5-15 (Simplified Municipal Telecommunications Tax Act)

Regulations:

86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax -- imposition)
86 Ill. Adm. Code 130.1935 (computer software: canned vs. custom, and the software-license exception)
86 Ill. Adm. Code 130.2115(b) (serviceman tax-base calculation methods)
86 Ill. Adm. Code 150.101, 150.130 (Use Tax -- imposition and Retailers' Occupation Tax credit)
86 Ill. Adm. Code 150.803(e)(2) (registration exception where 100% of sales are exempt)
86 Ill. Adm. Code 495.100(c) (Telecommunications Excise Tax -- automated data processing example)
2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedures, including expiration under 1200.110(e))
2 Ill. Adm. Code 1200.120 (General Information Letter procedures)

Prior letter rulings referenced by the taxpayer/Department:

Illinois General Information Letter ST 14-0009-GIL (March 10, 2014)
Illinois General Information Letter ST 17-0018-GIL (June 2, 2017)
Illinois General Information Letter ST 17-0024-GIL (June 28, 2017)
Illinois General Information Letter ST 19-0021-GIL (Dec. 4, 2019)
Illinois General Information Letter ST 20-0018-GIL (Sept. 28, 2020)
Illinois General Information Letter ST 21-0001-GIL (Jan. 15, 2021)
Illinois Private Letter Ruling ST 20-0004-PLR (June 10, 2020)

Source

Original ruling text

ST 24-0003-PLR 09/26/2024 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 26, 2024
NAME
COMPANY
ADDRESS
Dear NAME:
This letter is in response to your letter dated April 16, 2024, 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 https://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 COMPANY1 (d/b/a
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 neither
COMPANY1, 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:
We are requesting a private letter ruling on behalf of COMPANY1 (d/b/a
COMPANY2) (the “Taxpayer” or “COMPANY2”), a STATE corporation,

COMPANY./NAME
Page 2
September 26, 2024
pursuant to Ill. Admin. Code tit. 2, § 1200.110. (A copy of Form IL-2848,
Power of Attorney, authorizing this Firm to represent the Taxpayer was
filed with the Illinois Department of Revenue on April 16, 2024, via
facsimile transmission to PHONE and is attached hereto as Exhibit “A.”)
The Taxpayer remotely provides connectivity solutions to facilitate the
process of
laboratory testing, as well as obtaining and sharing laboratory results for
laboratories located across the country, including laboratories in Illinois.
The essence of the Taxpayer’s services is best characterized as data
processing, data translation and data exchange services. Recently, the
Taxpayer’s gross receipts from sales of services into Illinois have
exceeded the $100,000 threshold, which threshold is sufficient for the
Taxpayer to create a substantial economic nexus with Illinois. However,
the Taxpayer believes that none of the services it provides to Illinois
customers are subject to either (i) the Illinois retailers’ occupation and use
tax; or (ii) the Illinois service occupation and service use tax. Thus, we
respectfully request, on behalf of the Taxpayer, that the Illinois
Department of Revenue (the “Department”) rule on whether the
Taxpayer’s services, which services process and translate laboratory test
results and that allow various customers’ software systems to
communicate with each other, are services that are exempt from Illinois
retailers’ occupation and use tax and Illinois service occupation and
service use taxes.
A.

TAXPAYER INFORMATION AND STATEMENTS RELATED TO
REQUEST
1.

TAXPAYER INFORMATION

The Taxpayer interested in this matter is set forth below, along with
its mailing address, telephone number, taxpayer identification number,
and state of incorporation. The Taxpayer reports on a calendar year basis,
and it uses the accrual method of accounting.
Taxpayer:
COMPANY1
(d/b/a COMPANY2)
c/o NAME
COMPANY
STATEADDRESS
Telephone: PHONE1
EIN: NUMBER
State of Incorporation: STATE

COMPANY./NAME
Page 3
September 26, 2024
2.
Ill. Admin. Code tit. 2, § I200.l l0(b)(3) requires that the
Taxpayer identify the tax period at issue. The Taxpayer is not currently
registered for Illinois sales and use tax purposes because it believes that
none of its product offerings remotely provided to Illinois customers is
subject to Illinois sales or use taxes. Given that this Private Letter Ruling
Request pertains to the taxability of the Taxpayer’s product offerings in
general, there is no specific tax period at issue.
3.
In accordance with Ill. Admin. Code tit. 2, § 1200.110(b)(3),
the Taxpayer and its representatives hereby represent that, the Taxpayer
has not been contacted by the State of Illinois, the Multistate Tax
Commission or any other agent thereof for purposes of an audit
concerning any Illinois state tax obligation. As such, at the time of this
Private Letter Ruling Request, no identical issue is involved in the
Taxpayer’s return for an earlier period, and that no issue is being
examined as a part of any Department audit or is pending in litigation in a
case involving the Taxpayer or a person related to the Taxpayer in which
the Department is named as a plaintiff or defendant.
4.
In accordance with Ill. Admin. Code tit. 2, § 1200. l 10(b)(4),
the Taxpayer and its representatives hereby represent that, to the best of
the knowledge of the Taxpayer and its representatives: (i) the Department
has not previously ruled on the same or a similar issue for the Taxpayer or
its predecessor; and (ii) neither the Taxpayer nor any of its representatives
previously submitted the same or a similar issue to the Department but
withdrew it before a letter ruling was issued.
5.
In accordance with Ill. Admin. Code tit. 2, §
1200.110(a)(3)(D), the Taxpayer and its representatives hereby represent
that they have reviewed all relevant Illinois tax statutes, regulations and
administrative opinions issued by the Department, but were unable to
locate authority that is dispositive of the subject of this Private Letter
Ruling Request and that directly addresses the taxation of offerings
furnished by the Taxpayer to its Illinois customers.
6.
In accordance with Ill. Admin. Code tit. 2, § 1200.110(b)(6),
the Taxpayer and its representatives hereby represent that they have
reviewed all relevant Illinois tax statutes, regulations, and administrative
opinions issued by the Department, but were unable to locate authority
claiming that the types of offerings furnished by the Taxpayer to its Illinois
customers are subject to taxation.
B.

STATEMENT OF FACTS

COMPANY./NAME
Page 4
September 26, 2024
The Taxpayer is a STATE-based service corporation (copies of the
Taxpayer’s Certificate of Incorporation, By-laws, and Certificate of
Renewal of Alternate Name are attached hereto as Exhibits “B,” “C”, and
“D”) that has developed proprietary software to facilitate the process of
laboratory (“lab”) testing, obtaining lab results and sharing the lab results
with physician practices and patients. The proprietary software furnishes
a connectivity solution to order and collect lab tests from laboratories
(“Labs”), to timely and securely receive such test results by physician
practices, and to quickly and securely share such results with the
practices’ patients. The software is capable of electronic interconnectivity,
and the essence of the Taxpayer’s services is the combination of data
processing, data translation, data hosting and data exchange services
(sometimes collectively referred to as the “Data Processing Services”).
The Taxpayer’s proprietary software and other software are stored
in the Taxpayer’s data centers located exclusively in STATE. STATE is
the place in which the Taxpayer hosts and maintains its own infrastructure
to provide the Data Processing Services. This infrastructure includes
hardware (e.g., multiple servers) and multiple types of other software
necessary to support, manage and process lab test results and dataflow
from Labs to the Labs’ customers, which customers are generally
physician practices and physicians. Depending on the software that the
physician practices use to manage and store patient healthcare records,
the Taxpayer’s Data Processing Services are provided via the following
two types of connections: (i) the Electronic Medical Record (“EMR”)
connections; and (ii) the COMPANY2Portal connections. A detailed
dataflow spreadsheet (the “Dataflow Spreadsheet”) describing each step
of the dataflow is attached hereto as Exhibit “E.”
1.
DATAFLOW SUMMARY.
The dataflow includes the
following participants, in addition to the Taxpayer: (i) Labs; (ii) physician
practices; (iii) patients; and (iv) in the case of the EMR connections, EMR
vendors (the “Dataflow Participants”1, and can be briefly summarized as
follows:
Step #1: Each Lab collects lab tests via its own laboratory
information software (“LIS”).
Step #2: The collected data is conveyed to the Taxpayer’s
STATE servers where the data is processed, combined with proprietary
codes (“translated”) in order to be readable by other software systems,
Although the Taxpayer is also a participant of the dataflow, for purposes of this Private Letter Ruling
Request, the term "Dataflow Participants" does not include the Taxpayer.

COMPANY./NAME
Page 5
September 26, 2024
and hosted for further delivery to the end users. Note that the abovedescribed Step #1 and Step #2 are similar for both types of connections,
the EMR connections and the COMPANY2 Portal connections.
Step #3: The processed data is delivered to either EMR
vendors (in the case of the EMR connections) or physician practices, and,
in some cases, to patients themselves (in the case of the COMPANY2
Portal connections). As described below, the essence of the Taxpayer’s
services rendered via the EMR connections and the COMPANY2 Portal
connections is the same. However, there is a slight difference as to how
the lab test results are ultimately displayed to the physician practices and
patients.
(i)
EMR Connections.
As noted supra, the
delivery of the processed lab test results to the Lab’s customers (i.e.,
physician practices) for display depends upon the software that the
physician practices use to manage and store patient lab test results.
Some physician practices use EMR software, which they separately
purchase from various EMR vendors. Generally, an EMR system
purchased by a physician practice is not immediately compatible with the
relevant Lab’s LIS. Thus, the Taxpayer has to map or configure each
Lab’s LIS to the respective physician practice’s EMR system.
The Taxpayer deals with hundreds of physician practices across
the country. Accordingly, each physician practice could have a different
EMR system. Also, there are hundreds of EMR vendors located
throughout the U.S. Thus, in order to deliver the required lab test results
from a Lab’s system (i.e., LIS) to a physician practice in the most
expedient and secure manner, the Taxpayer must “translate” or
manipulate the Lab’s test codes and results (data) such that they can be
read by that physician practice’s EMR system. Once “translated,” the data
is then pushed to the relevant EMR software, and the EMR vendor (not
the Taxpayer) transfers it to the physician practice. Simply stated, the
essence of the Taxpayer’s services via the EMR connections is to: (i)
process data received from its customers via “translation” and other data
manipulation so that the physician practice’s EMR system can read and
understand it; and (ii) electronically transfer, or push, the lab test results
between two systems, the Lab’s LIS and the EMR vendor’s system.
The Subscriber Data Processing Agreement (the “Subscriber
Agreement”) between the Taxpayer and each Lab (a sample of which is
attached hereto as Exhibit “F”) does not authorize the retail sale of
software. Under the Subscriber Agreement, the Taxpayer does not issue
a license to the software. Notably, none of the Dataflow Participants can
have any access or rights to use or control the Taxpayer’s software

COMPANY./NAME
Page 6
September 26, 2024
system. Consequently, none of the Dataflow Participants can install,
download or transfer any of the Taxpayer’s software or applications to
their computers. In fact, each Dataflow Participant has its own software
and applications purchased from third-party vendors: each Lab uses its
own LIS system, while each physician practice uses its own EMR software
supplied by its respective EMR vendor. The Taxpayer owns, operates,
and maintains the software applications, as well as the servers (all located
in STATE) that support the application software. Thus, none of the
Dataflow Participants has any control over the network, servers, operating
systems, storage or application capabilities of the Taxpayer. In essence,
the Taxpayer’s personnel and the Taxpayer’s system only process the
data and push the processed data between the Lab’s LIS and the EMR
vendor’s software.
(ii)
COMPANY2 Portal Connections.
Some
physician practices use the COMPANY2 Portal, a cloud-based platform
housed in the Taxpayer’s STATE data center, to access lab test result
data. For physician practices, such access is accomplished via the
COMPANY2 Provider Portal to securely access for display the remotely
stored lab test results via the internet using HTTPS (Hyper Text Transfer
Protocol Secure) or SSL (Secure Sockets Layer). Physician practices can
also remotely place Lab orders (in a preset format) to the COMPANY2
Portal. Also, the COMPANY2 Portal permits the patients to remotely
access for display their lab test results via a HIPAA and CLIA compliant
Patient Access Portal, which is simply a separate feature of the
COMPANY2 Portal. The Patient Access Portal can be remotely accessed
via the internet (using HTTPS/SSL).
Furthermore, the Taxpayer developed: (i) a mobile physician
application (the “Physician App”); and (ii) a mobile patient application (the
“Patient App,” or collectively the “Apps”), which Apps function as the
COMPANY2 Provider Portal and the Patient Access Portal, respectively.
Although the Taxpayer so far has not had any customers in Illinois
utilizing the Apps, physician practices and patients have an option to
download their respective Apps to a personal device, such as a phone,
table, etc. The Apps are hosted on the Taxpayer’s servers located in
STATE and are publicly available for download, free of charge, via the
COMPANY2 Portal or Apple’s “App Store.” The Taxpayer does not
provide any of its Dataflow Participants with a personal device (i.e., tablet
or cell phone) for use with the Apps; nor does it provide any other tangible
personal property. Both the Physician Apps and the Patient Apps merely
provide an alternative means of accessing Lab test results for the sole
purpose of viewing them, and in the case with the Physician Apps, to
order Lab test results by completing pre-coded fields. The Apps have no
function or purpose other than to display lab test results (and, as

COMPANY./NAME
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September 26, 2024
applicable, completing the Lab orders) and therefore have no separate
value apart from the Apps’ relationship to COMPANY2’s Data Processing
Services. Importantly, Labs do not use the COMPANY2 Portal or any of
the Apps, as they have their own software, i.e., LIS.
As is the case with the Taxpayer’s services via the EMR
connections, the Subscriber Agreement with Labs does not authorize the
retail sale of the COMPANY2 Portal software. Under the Agreement, the
Taxpayer does not issue a license to the COMPANY2 Portal software to
any of the Dataflow Participants. Although physician practices and
patients can download the Apps, they cannot acquire any control over the
Taxpayer’s software, manipulate or otherwise change the data, as the
Apps’ use is strictly limited to the viewing of Lab test results and, as
applicable, inputting Lab orders information into pre-coded fields. The
Taxpayer owns, operates, and maintains the software applications, as well
as the servers that support the application software.
Thus, none of the Dataflow Participants has any control over the
network, servers, operating systems, storage or application capabilities of
the Taxpayer. Thus, the essence of the Taxpayer’s services rendered via
the COMPANY2 Portal connections remains the same as it does via the
EMR connections: (i) to provide data processing services so that various
software used by the Taxpayer can read and understand it; and (ii)
electronically transfer, or push, the lab test results between two systems:
the Lab’s LIS and the COMPANY2 Portal. The only difference is that the
lab test results in the case of the COMPANY2 Portal connections can be
viewed directly by the physician practices and patients via the Taxpayer’s
platform and Apps hosted in STATE, not via the EMR vendor’s software.
Finally, in order to facilitate the transfer of the processed lab test
results, the COMPANY2 Portal offers an automated, cloud-based printing
module “PRINT,” which allows a physician practice to print paper copies
(using the practice’s own paper) of the electronically received lab test
results to a designated computer in the physician’s office (i.e., physician’s
own computer).
The PRINT module is a built-in function of the
COMPANY2 Portal and therefore does not require separate downloading
of additional software or applications.
2.
CUSTOM PROGRAMMING & SUBSTANTIAL HUMAN
INVOLVEMENT. The cloud-based software that the Taxpayer utilizes in
the provision of its Data Processing Services, or more specifically,
Software as a Service (“SaaS”) 2, cannot be categorized as prewritten
For purposes of this Private Letter Ruling Request, the terms “cloud-based software” and “SaaS” shall be
used interchangeably.

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software, irrespective of how broadly the phrase “prewritten software” is
defined. In contrast to other cloud-based software that can be used
immediately by populating fields, a Lab cannot simply login to the
Taxpayer’s system or any of the Taxpayer cloud-based software at Step

2 (as described supra, at p. 4) and start uploading its lab test results for

subsequent delivery to the physician practices and patients (via the
above-described EMR and COMPANY2 Portal connections). Before this
can happen, the Taxpayer is required to perform substantial customization
of its software, and as applicable, the EMR software, which process
requires many hours of human labor.
Specifically, there are over five hundred (500) types of LIS and
equipment testing software vendors (who sell software to Labs), with each
such software having a unique data structure. Consequently, every Lab
has its own unique combination of various vendors and unique data
structures. Thus, in order to enable the processing of data of any given
Lab, or more specifically, in order for such Lab to start conveying its lab
test results to the Taxpayer’s system for data processing, the Taxpayer’s
personnel must: (i) create interfaces to such Lab’s LIS; and (ii) perform
substantial programming customizations of its own software (e.g., writing
and validating new codes, connection setups, troubleshooting and making
additional changes) to accommodate the specifications of the data coming
from the Lab’s LIS.
The foregoing custom programming of the Taxpayer’s system and
software to enable data processing and “translation” requires many hours
of labor. For example, in order to start processing lab test results from
any given Lab, the Taxpayer’s personnel must perform over one hundred
(100) hours of custom programming to customize its system and software
for such particular Lab, and this is just a basic minimum. A hospital
system or a Lab with multiple testing locations generally requires between
two hundred (200) and five hundred (500) hours of custom programming.
Absent any specific reasons and given associated administrative costs,
the Taxpayer has not tracked the exact number of hours its personnel
spends [sic] on ongoing custom programming for each project. However,
according to the Taxpayer’s analysis of other relevant data for 2023, its
personnel devotes [sic] approximately 61% of working hours to ongoing
custom programming (as opposed to 39% of its working hours devoted to
initial custom programming).
Furthermore, in the case of the EMR connection, the Taxpayer has
to map or configure each Lab’s LIS to the respective physician practice’s
EMR system owned by each of the physician practices to make it
compatible with the relevant Lab’s LIS.

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The above-described custom initial and ongoing custom
programming that require substantial involvement of the Taxpayer’s
personnel are an integral part of the data processing and “translation”
services. It is important to note that none of the Taxpayer’s system (i.e.,
cloudbased software), or its COMPANY2 Portal and Apps have any
separate value for Labs, physician practices or patients, other than as the
mode for viewing lab test results.
Finally, in addition to the initial and ongoing custom programming,
the provision of the Data Processing Services (e.g., the “translation” and
manipulation of the received lab test results) requires substantial personal
and professional services from the Taxpayer’s personnel on a daily basis.
Overall, the human labor component in the provision of the data
processing services exceeds seventy (70%) percent, by value, of all of the
Taxpayer’s expenses.
3.
REVENUE FLOW. Despite the many Dataflow Participants,
the Taxpayer receives fees only from Labs. Specifically, each Lab signs a
contract with the Taxpayer. The Taxpayer renders the Data Processing
Services, and in exchange for such services, each Lab pays the Taxpayer
a monthly fee for processing and hosting the data (the “Monthly Data
Processing Fee”). This is the main source of revenue for the Taxpayer.
(Two samples of the Taxpayer’s invoices are attached hereto as Exhibits
“G” and “H.”). Generally, the amount of the Monthly Processing Fee is
determined based on the following factors: (1) the number of physician
practices for which the Lab performs lab tests; and (2) the size of each
physician practice. In essence, the Taxpayer’s pricing is based on the
volume of the data to be processed and hosted for each Lab (as opposed
to the value of the cloud-based software/SaaS to be utilized by each Lab
or such Lab’s customers).
Given that before the provision of the Taxpayer’s Data Processing
Services to each Lab and such Lab’s customers the Taxpayer must
substantially modify and customize its software, the Taxpayer separately
charges initial customization and set up fees (the “Initial Setup Fees”) to at
least partially reimburse some of the costs associated with human labor.
As indicated above, the Patient and Physician Apps are free of
charge and can be downloaded via the Taxpayer’s website or Apple’s
“App Store.” In the event that a Lab desires that its customers (i.e.,
physician practices and patients) have an option to use the Apps, the
Taxpayer charges a Lab a one-time setup fee (at a flat rate irrespective of
the number of downloads) to cover human labor for the initial
customization that enables the delivery of the lab tests to the Apps (the
“Setup App Fees”). In addition, Labs are separately charged an additional

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monthly fee for additional processing (e.g., code modifications and
manipulations) of the data to be delivered to such Apps (the “Monthly App
Fees”).
4.
NEXUS WITH ILLINOIS. The Taxpayer does not maintain
an office in Illinois. Neither does the Taxpayer engage in taxable sales of
property and services via persons, acting on its behalf, such as
employees, independent contractors, agents, or other sales
representatives. Furthermore, the Taxpayer does not regularly solicit
orders from Illinois customers via the website of an entity or individual
physically located in Illinois.
However, recently, the Taxpayer’s gross receipts generated from
sales of services to its customers located in Illinois exceeded $100,000
during the preceding 12-month period.
C.

RULINGS REQUESTED

RULING #l: All of the Taxpayer’s offerings to Illinois
customers are non-taxable services, and are not taxable sales,
leases, licenses or other transfers of software, SaaS or other tangible
personal property in Illinois.
RULING #2: None of the Taxpayer’s services provided to
Illinois customers constitute taxable telecommunication services.
RULING #3: The Taxpayer is not required to collect any of: (i)
retailers’ occupational tax; (ii) use tax; (iii) service occupation tax; or
(iv) service use tax in Illinois or to register with the Department to
collect the foregoing taxes.
D.

STATEMENT OF LAW AND ANALYSIS

GENERAL SALES AND USE TAXATION IN ILLINOIS

The Illinois sales and use tax system operates with the following
four separate taxes: (i) retailers’ occupation tax; (ii) service occupation tax;
(iii) use tax; and (iv) service use tax (from time to time collectively referred
to as the “Illinois Sales and Use Taxes”). 35 ILCS §§ 120/14, 115/1, 105/1

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and 110/l. All of these taxes have the same tax rate of 6.25%. 35 ILCS §
105/3-10.
Retailers’ occupation tax is imposed upon persons engaged in the
business of selling tangible personal property at retail, and its
complementary tax is the use tax. 35 ILCS §§ 120/2 and 105/3. “Sale at
retail” means “any transfer of the ownership of or title to tangible personal
property to a purchaser, for the purpose of use or consumption.” 35 ILCS
120/1. Since January 1, 2021, retail sales by out-of-state retailers have
been sourced to Illinois where the tangible personal property is shipped or
delivered or where the purchaser takes possession. 35 ILCS 120/2-12(6).
Service occupation tax is imposed upon all persons engaged in the
business of rendering services (referred to as “servicemen”), and its
complementary privilege tax is the service use tax. 35 ILCS §§ 115/3 and
110/3. Service occupation tax is only applicable to tangible personal
property transferred as an incident of a sale of a service, including
computer software, as opposed to property sold and purchased at retail.
35 ILCS § 115/3. The serviceman’s liability may be calculated in one of
the four (4) following ways: (i) separately stated selling price of tangible
personal property transferred incident to the service; (ii) 50% of the
serviceman’s entire bill; (iii) service occupation tax on the serviceman’s
cost price if the serviceman is a registered de minimis serviceman; or (iv)
use tax on the serviceman’s cost price if the serviceman is de minimis and
is not otherwise required to be registered under 35 ILCS 120/2(a). Ill.
Admin. Code tit. 86, § 130.2115(b); Illinois General Information Letter ST
14-0009-GIL (March 10, 2014) (attached hereto as Exhibit “I”).
In view of the foregoing, if a service provider transfers no tangible
personal property as part of its services, the transaction is not subject to
the service occupation and service use taxes. Illinois General Information
Letter ST 17-0018-GIL (June 2, 2017) (service transactions not involving
transfer of tangible personal property to a customer are exempt from
taxation) (attached hereto as Exhibit “J”).
2.
PREWRITTEN SOFTWARE AND CERTAIN SAAS ARE
TAXABLE BY ILLINOIS AS TANGIBLE PERSONAL PROPERTY.
Illinois considers prewritten software to be tangible personal
property and subjects it to taxation regardless of the method of its delivery.
Ill. Admin. Code tit. 86, § 130.1935(a). However, charges for installation
and implementation of prewritten software are exempt if they are
separately stated from the selling price of prewritten software. Ill. Admin.
Code tit. 86, § 130. l 935(b).

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“Prewritten software” means prewritten computer programs held for
general or repeated sale or lease. Ill. Admin. Code tit. 86, § 130.1935.
Modification of an existing prewritten program to meet the customer’s
needs is custom software. Ill. Admin. Code tit. 86, § 130. l 935(c)(2). If
modified software is sold to other customers without further real and
substantial modifications to the operational coding, it is “taxable canned
software,” and is treated as repeated sales of such modified software. Id
The selection of pre-written or canned programs or program
modules assembled by the vendor into a software package does not
constitute custom software unless real and substantial changes are made
to the programs or the creation of program interfacing logic. If the prewritten program or module was previously marketed, the new program
would qualify as a custom program if the price of the pre-written program
was 50% or less of the price of the new program. If the pre-written
program was not previously marketed, the new program would qualify as a
custom program if the charge made to the customer for custom
programming services, as evidenced by the records of the seller, was
more than 50% of the contract price to the consumer. Ill. Admin. Code tit.
86, § 130.1935(c)(3).
Generally, Illinois does not impose tax on SaaS or software
furnished via a cloud-based delivery system and is only accessed
remotely, provided that the transaction does not include a transfer of
tangible personal property. Illinois General Information Letter ST 20-0018GIL (Sept. 28, 2020) (attached hereto as Exhibit “K”); Illinois General
Information Letter 17-0024- GIL (June 28, 2017) (attached hereto as
Exhibit “L”).
However, if the provider of such SaaS provides to the customer an
API (Application Programming Interface), applet, desktop agent, or
remote access agent to enable the customer to access the provider’s
network and services, the customer is considered to have received
computer software from the provider. Id. This transaction is subject to
tax (and the provider of SaaS acts as a serviceman rather than a retailer),
even if there is no separate charge to the customer for the computer
software, unless the transaction qualifies as a non-taxable license of
computer software. Id.
A license of prewritten software is not a taxable sale if the
transaction meets all of the following criteria: (i) it is evidenced by a written
agreement signed by the licensor and the customer; (ii) it restricts the
customer’s duplication and use of the software; (iii) 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

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control of the licensor; (iv) 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 (v) the customer must
destroy or return all copies of the software to the licensor at the end of the
license period (the “License Exception”). Ill. Admin. Code tit. 86, §
130.1935(a)(l ). A license agreement in which the customer electronically
accepts the terms of the license by clicking “I agree” does not comply with
the requirement of a written agreement set forth in Ill. Admin. Code tit. 86,
§ 130.l 935(a)(l). Id.
Notwithstanding the foregoing, the Department has held in a
number of General Information Letters and at least in one Private Letter
Ruling that if an Illinois customer downloads computer software for free
from an out-of-state retailer’s website or server that is also located outof-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. Illinois General Information Letter ST 21-0001-GIL
(Jan. 15, 2021) (attached hereto as Exhibit “M”); Illinois General
Information Letter ST 20-0018-GIL (Sept. 28, 2020) (see Exhibit “K,”
supra); Illinois Private Letter Ruling ST 20-0004-PLR (June 10, 2020)
(attached hereto as Exhibit “N”); Illinois General Information Letter ST 19002 I-GIL (Dec. 4, 2019) (attached hereto as Exhibit “O”).
3.
DATA PROCESSING SERVICES AND INFORMATION
SERVICES ARE NON-TAXABLE SERVICES.
In Illinois, electronically transferred or downloaded data or
information is not deemed to be a transfer of tangible personal property.
Ill. Adm. Code tit. 86, § 130.2105(a)(3). The Department does not
consider the viewing, downloading or electronically transmitting of
information and other data over the internet to be a transfer of tangible
personal property. Illinois General Information Letter ST 20-0018-GIL
(Sept. 28, 2020) (see Exhibit “K,” supra). Thus, if no tangible property is
transferred as part of the services, the transaction is not subject to any of
the Illinois Sales and Use Taxes.
Illinois does not separately define either “information services” or
“data processing services.”

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4.
APPLICATION OF ILLINOIS LAW TO THE TAXPAYER’S
OFFERINGS.
(a)
None of the Taxpayer’s offerings rendered via the
EMR connections can be deemed as a taxable SaaS. Although the
Taxpayer’s customers gain temporary access to its cloud-based
software/SaaS when the Taxpayer renders its Data Processing
Services via the COMPANY2 Portal connections, such limited access
does not render the Taxpayer’s offerings taxable.
Given that the Taxpayer’s cloud-based software/SaaS has no
separate or ascertainable value apart from the Taxpayer’s Data
Processing Services (due to such users’ limited access, if any, to
generally view lab test results), it is not clear whether such software/SaaS
is prewritten software or custom software. Absent any separate value for
the customers, the Taxpayer’s cloud-based software/SaaS was not
prepared to the special order of any specific customer. Rather, it was
developed by the Taxpayer to facilitate the Taxpayer’s provision of the
Data Processing Services to multiple Labs and their customers. Such
multiple-customer utilization of the software/SaaS could conceivably bring
it within the purview of Illinois’ broad definition of prewritten software set
forth in Ill. Admin. Code tit. 86, § 130.1935.
However, as described above, before such software/SaaS can be
utilized for the provision of the Data Processing Services to a certain Lab
and such Lab’s customers, it requires a substantial level of customization
and modification, which should exempt such software/SaaS from taxation
pursuant to Ill. Admin. Code tit. 86, § 130.1935(c)(2). Nonetheless, Ill.
Admin. Code tit. 86, § 130.1935(c)(3) appears to require that in order to be
substantial, the modified product’s price should exceed the price of the
prior version of the software by 50%. Given that the Taxpayer’s pricing for
its offerings is generally determined based on the volume of the processed
information that is processed for each Lab (not based on the value of the
software utilized by the Taxpayer or accessed, if any, by the Dataflow
Participants), the foregoing 50% threshold does not appear to be
applicable to the Taxpayer.
Setting aside the aforesaid substantial customization argument and
assuming, arguendo, that the cloud-based software/SaaS utilized by the
Taxpayer as part of the provision of its data processing services is
prewritten cloud-based software/SaaS, the main question is whether such
software/SaaS constitutes taxable SaaS. As stated supra at pp. 10-11, a
taxpayer’s cloud-based computer software/SaaS becomes taxable in
Illinois only if the taxpayer both: (i) provides to its customers remote
access to the SaaS; and (ii) as part of such access, the taxpayer also

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provides to its customers an API, applet, desktop agent, or remote
access agent to enable the customers to access the provider’s network
and services. In the event that (i) the taxpayer’s customers have no
access to the taxpayer’s network; or (ii) they do have the access, but such
access does not include the furnishing of any of the API, applet, desktop
agent, or remote access agent, the taxpayer’s SaaS is not subject to the
Illinois Sales and Use Taxes.
In the case of the Taxpayer’s offerings provided via the EMR
connections, at no point do any of the Dataflow Participants (i.e., Labs,
EMR vendors, physician practices or patients) gain access, electronically
or by any other means, to the Taxpayer’s network or the Taxpayer’s
cloudbased software. Specifically, each Dataflow Participant has its own
software: each Lab uses its own LIS system, while each physician practice
uses its own EMR software supplied by its respective EMR vendor.
Simply stated, in this case, the Taxpayer’s software and personnel
process and translate the received data and push such data between the
Lab’s LIS and the EMR vendor’s software, and none of the Dataflow
Participants may access COMPANY2’s system (even temporarily) via the
usage of their prewritten software. Thus, absent any access to the
Taxpayer’s system by its customers (including such customers’
customers), none of the Taxpayer’s offerings provided via the EMR
connections should be taxed as cloud-based software/SaaS.
In view of the foregoing, absent any access to the Taxpayer’s
network and SaaS, none of the Monthly Data Processing Fees charged by
the Taxpayer for its offerings via the EMR connections is subject to any of
the Illinois Sales and Use Taxes. Furthermore, given that the separately
stated charges for installation and implementation of prewritten software
are taxexempt services under Ill. Admin. Code tit. 86, § 130. l 935(b), the
Initial Setup Fees charged by the Taxpayer as part of its services
rendered via the EMR connections are also exempt from the Illinois Sales
and Use Taxes.
With respect to the cases with the COMPANY2 Portal connections,
in which cases the processed data is pulled for display via the
COMPANY2 Portal software, the Labs, as the actual customers of the
Taxpayer (i.e., the customers who pay for the Taxpayer’s Data Processing
Services), use their own LIS software to manage and create lab test
results. Each Lab’s use of the Taxpayer’s cloud-based software is limited
to temporary logins to the COMPANY2 Portal to turn on, or more
specifically initiate, the automatic transfer of LIS data to the Taxpayer’s
data center. The physician practices do gain some temporary access to
the Taxpayer’s system for the following limited purposes, such as: (i) to
order lab test results by completing pre-coded fields; and (ii) to view the

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processed lab tests via the COMPANY2 Portal or the Physician Apps (with
the latter being publicly available for download, free of charge). Finally, the
patients’ temporary access to the Taxpayer’s system is strictly limited to
viewing the processed lab tests either via the COMPANY2 Portal or the
Patient Apps (with the latter being publicly available for download, free of
charge).
In order to gain the foregoing temporary access to the COMPANY2
Portal, all of the Dataflow Participants (i.e., Labs, physician practices and
patients) can only use a secure URL/HTTPS. Importantly, however, such
access to the COMPANY2 Portal does not include the furnishing of any
API, desktop agent, or remote access agent by the Taxpayer. Regarding
the Physician Apps and the Patient Apps, although the Taxpayer so far
has not had any customers in Illinois utilizing this option, the physician
practices and patients can optionally download, free of charge, the
Physician Apps and the Patients Apps, respectively, hosted by the
Taxpayer on its out-of-state servers. This is just an alternative mode to
temporarily access the Taxpayer’s cloudbased system/SaaS.
As applicable to the App downloads, Illinois has a well-established
position that such Apps should not be subject to the Illinois Sales and Use
Taxes (or, more specifically, to the use tax) because they are downloaded
for free from the Taxpayer’s out-of-state web site and/or server.
Furthermore, the separately stated one-time Setup App Fee and Monthly
App Fees that the Labs pay the Taxpayer in connection with the
downloaded Apps should not be subject to any of the Illinois Sales and
Use Taxes. Specifically, the one-time App Setup Fees should be taxexempt as separately stated charges for installation and/or implementation
of prewritten software pursuant to Ill. Admin. Code tit. 86, § 130.1935(b).
The App Monthly Fees should also be tax-free because they constitute
nontaxable data processing services, or more specifically, the services
(e.g., additional code writing and combining) that enable the delivery of the
processed lab test results to the end users (i.e., physician practices and
patients). As described supra at p. 11, Illinois does not tax subscriptions.
Regarding the Taxpayer’s customers’ temporary access to the
COMPANY2 Portal, as noted supra, such customers can only use a
secure URL/HTTPS. Given that the Taxpayer does not furnish to any of
its customers any API, desktop agent, or remote access agent, the
Taxpayer does not believe that such access includes any transfer of
tangible personal property. Even if we assume, arguendo, that some SaaS
were transferred as part of such temporary logins, its limited functionality
in the hands of the Taxpayer’s customers is strictly confined to: (i) initiating
the transfer of data to the Taxpayer for processing; (ii) populating prewritten templates for lab test orders; and (iii) viewing the processed data

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output (i.e., lab test results), without any right to manipulate or otherwise
utilize it, such transferred SaaS, if any, has no separate value to the
Taxpayer’s customers to warrant its taxation.
Absent any separate value to the Taxpayer’s customers apart from
the Data Processing Services rendered to them, it is impossible for the
Taxpayer to determine which SaaS is actually being transferred to its
customers and therefore to quantify the cost associated with such transfer.
In view of this, the cost methods for calculating the Taxpayer’s liability set
forth in the abovecited Ill. Admin. Code tit. 86, § 130.2115(b) and Illinois
General Information Letter ST 14-0009-GIL (March 10, 2014) cannot be
utilized by the Taxpayer to determine the cost of the transferred SaaS; the
usage of the other methods (e.g., 50% of the entire bill) would unfairly
cause overtaxation of the Taxpayer’s services.
Absent any specific guidance from Illinois regarding the taxation of
SaaS that is combined with tax-exempt data processing services, the
Taxpayer analyzed sales tax laws of other states that tax such SaaS in a
manner similar to Illinois (the “Surveyed States”).
The Taxpayer
understands that such state law analyses are not binding upon Illinois.
Nonetheless, such analyses are persuasive inasmuch, as they illustrate
the legal soundness of the Taxpayer’s arguments advanced in this Private
Letter Ruling Request.
According to our analysis (attached hereto as Exhibit “P”), the
Surveyed States subject to taxation a combination of the cloud-based
prewritten computer software and services as SaaS, only when the cloudbased software allows the taxpayer’s customers multi-functional
utilization. In such an event, such software constitutes a valuable
component of the transaction, thereby rendering the taxpayer’s SaaS
taxable by the Surveyed States.
Specifically, in order to be taxable in the Surveyed States, the
access to the taxpayer’s cloud-based software must allow the taxpayer’s
customers: (i) to have some meaningful control over the data entry
(importantly, however, data entry into templates created by the service
provider does not rise to the level of control that renders transactions
taxable); (ii) to manipulate, analyze and otherwise process such data
and/or combine such data with some other data obtained from third
parties; and (iii) to create various types of reports that can be furnished to
others. To this end, mere retrieval and creation of reports that contain
personal or individual information (such as lab tests or other patient
results) that is not or may not be substantially incorporated into reports
furnished to others is not a taxable transaction.

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In contrast to the above-described wide-range functionality of SaaS
that renders it taxable in the Surveyed States, the Taxpayer’s customers
cannot have any meaningful control over the data entry (as noted supra,
placing lab test orders in a pre-set format is disregarded for such
purposes). Furthermore, the Taxpayer’s customers cannot manipulate,
analyze and otherwise process such data; this function is performed by
the Taxpayer. Finally, the Taxpayer’s customers cannot create various
types of reports to be furnished to others, as lab test results represent
personal information. To be more specific, the Taxpayer’s SaaS has a
very limited functionality in the hands of the Taxpayer’s customers, as
they can only utilize the SaaS to transfer their raw data to the Taxpayer for
processing and view the final output. To this effect, the true object of the
Taxpayer’s offerings is the data processing services, and the Taxpayer’s
software merely facilitates the provision of such data processing services.
Generally, nontaxable computer data processing services are
confined to the following three steps: (i) the taxpayer receives data from
its customers; (ii) the taxpayer (not the taxpayer’s customers) processes
such customer-supplied data utilizing its software; and (iii) the taxpayer
distributes the processed output in the form of a screen display, a report or
in some other forms. The customers are only allowed to transfer the data
for processing (including completing orders) and view the final output.
This invariably limits the cloud-based software’s functionality for the
customers to the extent that they can only access the software to transfer
their data to the taxpayer for processing and to view the final output
processed by the taxpayer. In view of such limited functionality, the states
that subject SaaS to sales and use tax exempt from taxation the offerings
that combine/bundle data processing services with cloud-based software.
The main rationale for this is that although certain SaaS is being
transferred as part of the data processing services, the SaaS’s limited
functionality in the hands of the customers has no independent or
ascertainable value apart from its relationship to the taxpayer’s data
processing services.
Thus, the purpose for using cloud-based software as part of data
processing transactions for any customer is the ability to transfer the data
for processing and to access the final processed output, not the
customer’s ability to utilize the taxpayer’s software to compare, manipulate
and analyze data or create various types of output by utilizing various
aspects of the software’s functionality. Once a taxpayer’s customers are
allowed to have control over the data entry and to manipulate and
otherwise process the data, the object of the transaction is no longer data
processing services; rather, the object is the taxable SaaS which can be
best described as either taxable access to database services or
information retrieval products, or some combination thereof. As noted

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above, such services are generally subject to the sales tax by the
Surveyed States.
The Taxpayer’s offerings are data processing services in their
purest form. As described above, (i) Labs electronically supply test results
(originated from physician practices) to the Taxpayer; (ii) the test results
supplied by the Labs are then automatically manipulated and processed
by the Taxpayer and its cloud-based software (not by the Labs, physician
practices or patients); and (iii) the processed data is then transferred back
to the physician practices and patients. Consequently, the functionality
of the Taxpayer’s cloud-based software/SaaS for the Taxpayer’s direct
and indirect customers (i.e., the Labs and the Lab’s customers) is strictly
limited to such customers’ ability to transfer the data to the Taxpayer (by
logging into the COMPANY2 Portal to initiate the automatic transfer of LIS
data to the Taxpayer’s data center or by completing pre-coded fields to
order lab tests) and to view the processed lab tests either via the
COMPANY2 Portal or the Apps. Given such limited functionality for the
Taxpayer’s customers, neither the COMPANY2 Portal nor the Apps can
have any separate or ascertainable value for the Taxpayer’s customers
apart from its relationship to the Taxpayer’s Data Processing Services.
In view of the foregoing, insofar as the Taxpayer’s customers are
given the right to access the COMPANY2 Portal for the sole purpose of
transferring the data to the Taxpayer for data processing and viewing the
final output, such limited access should not subject the Taxpayer’s offering
to the Illinois Sales and Use Taxes. Consequently, none of the Monthly
Data Processing Fees charged by the Taxpayer for its offerings via the
COMPANY2 Portal connections should be subject to any of the Illinois
Sales and Use Taxes. Furthermore, given that the separately stated
charges for installation and implementation of prewritten software are taxexempt services under Ill. Admin. Code tit. 86, § 130. l 935(b), the Initial
Setup Fees charged by the Taxpayer as part of its services rendered via
the COMPANY2 Portal connections should also be exempt from the
Illinois Sales and Use Taxes.
(b)
Even if, as part of its Data Processing Services,
the Taxpayer is deemed to be transferring taxable cloud-based
prewritten software/SaaS, it should be exempt from the Illinois Sales
and Use Taxes because it meets the License Exception.
As noted above, a license of prewritten software is not a taxable
sale if the transaction meets all of the following five criteria of the License
Exception:

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September 26, 2024
(i)
it is evidenced by a written agreement signed by the licensor
and the customer;
(ii)
software;

it restricts the customer’s duplication and use of the

(iii)
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;
(iv)
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
(v)
the customer must destroy or return all copies of the
software to the licensor at the end of the license period.
Although the Taxpayer believes that none of its offerings is subject
to the Illinois Sales and Use Taxes, any cloud-based software/SaaS that
could be deemed to be received and used by Illinois customers meets all
five (5) requirements of the License Exemption.
(i)
The access to the Taxpayer’s cloud-based software/SaaS as
part of the Taxpayer’s Data Processing Services is evidenced by a written
agreement (see a sample of the Subscriber Agreement attached hereto as
Exhibit “F”);
(ii)
The Subscriber Agreement restricts the customer’s
duplication and use of the Taxpayer’s cloud-based software/SaaS.
Specifically, Section 9.A. of the Subscriber Agreement provides in relevant
part that “all of COMPANY2’s software, Proprietary Material ... and the
COMPANY2 System shall remain the sole and exclusive property of
COMPANY2. “
Furthermore, Section 9.B. of the Subscriber Agreement states that
“Subscriber acknowledges and agrees that Subscriber and Subscriber’s
end-user customers shall have no right to control or direct the use of
COMPANY2‘s software or the COMPANY2 System, and that Subscriber’s
and its enduser customers’ use of COMPANY2 ‘s software and the
COMPANY2 System shall be limited to viewing the processed laboratory
test results, using the COMPANY2 System‘s modules to print such results
on Subscriber’s and its end-user customers’ ‘printers, and, if applicable,

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placing test orders (as fully described in Exhibit A attached hereto),
subject to additional restrictions set forth in Section 11 hereof”
Finally, Section 11 of the Subscriber Agreements expressly provides that
“Subscriber may not under any circumstances attempt, or knowingly
permit or encourage others to attempt to decompile, decipher,
disassemble, reverse engineer, or otherwise decrypt or discover the
source code of all or any portion of the COMPANY2 System, including any
third-party portions of the system embedded within the COMPANY2
System. Use of the COMPANY2 System is restricted solely to viewing the
processed data and using limited functions and features available through
screens provided to Subscriber.”
(iii)
The Taxpayer’s Subscriber Agreement prohibits the
Taxpayer’s customers from licensing, sub licensing or transferring the
software to a third party. Section 9.A. of the Subscriber Agreement
provides in its pertinent part that “Subscriber further agrees that
COMPANY2 grants no license to use any of COMPANY2‘s software,
Proprietary Material or the COMPANY2 System, and that Subscriber shall
have no right to sell, license, sublicense or otherwise dispose of any of
such items.”
(iv)
The Taxpayer has a policy of providing another copy at no
charge if the customer loses or damages the software. To this end, it
should be noted that the Taxpayer’s customers do not receive any
software from the Taxpayer (other than the Apps). Furthermore, given the
customers’ very limited access to the Taxpayer’s cloud-based software
(restricted to mere ordering and viewing of lab tests), the Taxpayer’s
customers cannot damage the Taxpayer’s cloud-based software. The
only software that can be damaged or destroyed is the App. The Apps are
publicly available for download, free of charge, via the COMPANY2 Portal
or Apple’s “App Store.”
(v)
The Taxpayer’s Subscriber Agreement provides that the
customer must destroy or return all copies of the software to the licensor
at the end of the license period. Pursuant to Section 6.D. of the
Subscriber Agreement, “[u]pon termination of the Agreement, the
Subscriber’s access to the COMPANY2 System shall be terminated and
Subscriber shall return to COMPANY2 all of the items and documentation
related to the COMPANY2 System and/or COMPANY2 Proprietary
Materials.” In addition to this as this relates to COMPANY2’s software,
Section 9.A. of the Subscriber Agreement provides that, “[u]pon the
termination of this Agreement, [software] items not returned to
COMPANY2 pursuant to Section 6.D. hereof shall be completely
destroyed by Subscriber.”

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In view of the foregoing, the Taxpayer’s cloud-based prewritten
software and the Apps clearly meet the five-part test of the License
Exception. Thus, even if, as part of its Data Processing Services the
Taxpayer is deemed to be transferring a taxable cloud-based prewritten
software/SaaS to its customers, it should be exempt from the Illinois Sales
and Use Taxes because it meets the License Exception.
RULING#2: None of the Taxpayer’s services provided to
Illinois customers constitute taxable telecommunication services.
Telecommunication services in Illinois are not subject to any of the
Illinois Sales and Use Taxes. Rather, Illinois subjects telecommunication
services to telecommunications excise tax on the act or privilege of
originating or receiving intrastate or interstate telecommunications by
persons in Illinois at the rate of 7% of the gross charges for such
telecommunications purchased at retail from retailers by such persons. 35
ILCS § 630/3; 35 ILCS § 630/4.
The term “telecommunications” is broadly defined to include
messages and information transmitted through the use of computer
exchange services and any other transmission of messages or information
by electronic or similar means. 35 ILCS § 630/2(c). However, “gross
charges” do not include the charges for storing data or information for
subsequent retrieval or for processing data or information intended to
change its form or content. 35 ILCS § 630/2(a)(3). Finally, persons who
provide services and who do not, as part of those services, charge
customers for the line or other transmission charges that are used to
obtain these services are not considered to be telecommunications
retailers by virtue of those activities. Illinois General Information Letter ST
19-0021-GIL (Dec. 4, 2019) (attached hereto as Exhibit “O”).
For the reasons stated in the analysis for Ruling #1, the true object
of the Taxpayer’s offerings to Illinois customers is data processing
services, and the Taxpayer’s gross charges related to data transmittance
represent the charges for: (i) processing lab tests, which processing
changes its digital form and content (e.g., code modifications and other
code and data manipulations); and (ii) subsequent storing of the
processed lab tests in the Taxpayer’s services for subsequent retrieval by
the Taxpayer’s customers. Specifically, for such services the Taxpayer
charges the Monthly Data Processing Fees and Monthly App Fees. 3
Finally, the Taxpayer does not, as part of its data processing services,
The Taxpayer also charges the Initial Setup Fees and Setup App Fees. However, such fees are charged for human
labor associated with initial customization of the Taxpayer’s software, and therefore they are unrelated to any
possible electronic transmittance of data.
3

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charge customers for the line or other telecommunication transmission
charges that are used to obtain these services.
In view of the foregoing, none of the Taxpayer’s services provided
to Illinois customers constitute taxable telecommunication services and
the Taxpayer should not be considered to be a telecommunications
retailer by virtue of the provision of its Data Processing Services.
RULING #3: The Taxpayer is not required to collect any of: (i)
retailers’ occupational tax; (ii) use tax; (iii) service occupation tax; or
(iv) service use tax in Illinois or to register with the Department to
collect the foregoing taxes.
The Taxpayer does not maintain an office in Illinois or engage in
taxable sales of property and services via persons, acting on its behalf,
such as subsidiaries, employees, independent contractors, agents, or
other sales representatives in Illinois. Neither does the Taxpayer maintain
any inventory in Illinois. Thus, the Taxpayer has not established either a
physical nexus or an affiliate nexus with Illinois. 35 ILCS 105/2.
Furthermore, the Taxpayer does not have any contracts with persons
located in Illinois for the referral of customers through the use of a
promotional code or other mechanism that would allow the Taxpayer to
track purchases of customers referred by such in-state persons. 35 ILCS
105/2(1.2).
Effective October 1, 2018, remote service providers who render
services to purchasers in Illinois from outside Illinois are subject to the
Illinois Sales and Use Taxes if gross receipts from such sales are at least
$100,000 or involve at least 200 separate transactions in the preceding
12- month period (the “Wayfair Nexus”). 35 ILCS § 110/2(9). Remote
sellers who meet either threshold must register with the Department to
collect the Illinois Sales and Use Taxes.
Recently, the Taxpayer’s gross receipts from sales in Illinois
exceeded $100,000 for the preceding 12-month period.
However,
pursuant to Ill. Admin. Code tit. 86, § 150.803(e)(2), in the event that an
out-of-state retailer’s only activities are non-taxable sales (i.e., 100% of
their sales to Illinois purchasers are exempt), such out-of-state retailer is
not required to register with the Department.
For the reasons stated in the analysis for Rulings #1 and #2, the
Taxpayer does not engage in taxable sales of tangible personal property,
prewritten computer software, cloud-based prewritten computer software,
or any taxable services delivered into Illinois. The Taxpayer provides only
non-taxable services to Illinois customers. As such, the Taxpayer is not

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September 26, 2024
required to be registered as a remote seller with the Department or collect
any of the Illinois Sales and Use Taxes.
E.

CONCLUSION

RULING #l: Although Illinois generally subjects to the Illinois Sales
and Use Taxes sales of cloud-based prewritten computer software (i.e.,
SaaS) and apps as tangible personal property if the user is located in
Illinois, none of the Taxpayer’s offerings to Illinois customers constitute a
taxable sale, lease, license or other transfer of cloud-based computer
software or other tangible personal property in Illinois.
This is because the true object of the Taxpayer’s transactions in
Illinois is non-taxable data processing services, not the use of the
underlying cloud-based software/SaaS, Apps (which are publicly available
via a free download) or the network that the Taxpayer hosts in STATE and
utilizes to render such services. The sole purpose for which the
Taxpayer’s customers engage in transactions with the Taxpayer is the
Taxpayer’s Data Processing Services. Specifically, the scope of the
Taxpayer’s services is confined to the following three steps: (i) the
Taxpayer receives data for processing from its customers; (ii) the
Taxpayer (not its customers) processes and stores such customersupplied data utilizing its software; and (iii) the Taxpayer delivers the
output (i.e., processed data) by an electronic transfer for retrieval in the
form of a screen display. The Taxpayer’s cloud-based software/SaaS,
Apps and network merely facilitate the provision of such Data Processing
Services.
Generally, Illinois subjects to taxation cloud-based software (i.e.,
SaaS) only if the provider of such SaaS provides to customers an API,
applet, desktop agent, or remote access agent to enable such customers
to access the provider’s network and services. In such case, Illinois treats
the customers as if they have received cloud-based software/SaaS from
the provider as part of the rendered services.
In the case of the Taxpayer’s offerings provided via the EMR
connections, at no point do any of the Taxpayer’s customers gain access,
electronically or by any other means, to the Taxpayer’s network or the
Taxpayer’s cloud-based software. Thus, absent any access to the
Taxpayer’s cloud-based software/SaaS and network, none of the
Taxpayer’s offerings provided via the EMR connections should be taxed
as SaaS.
With respect to the cases with the COMPANY2 Portal connections,
the Taxpayer’s customers can temporarily access the COMPANY2 Portal

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September 26, 2024
via a secure URL/HTTPS for the following limited purposes: (i) initiating
the transfer of data to the Taxpayer for processing; (ii) populating
prewritten templates for lab test orders; and (iii) viewing the processed
data output (i.e., lab test results). Although the Taxpayer so far has not
had any customers in Illinois utilizing the Apps, the Taxpayer may provide
its customers the Apps (with the latter being publicly available for
download, free of charge), which is an alternative mode to temporarily
access the Taxpayer’s cloud-based system/SaaS.
As applicable to the App downloads, Illinois has a well-established
position that such Apps should not be subject to the Illinois Sales and Use
Taxes (or more specifically to the Use Tax) because they are downloaded
for free from the Taxpayer’s out-of-state website and/or server.
Regarding the Taxpayer’s customers’ temporary access to the
COMPANY2 Portal via a secure URL/HTTPS, since the Taxpayer does
not furnish to any of its customers any API, desktop agent, or remote
access agent, the Taxpayer does believe that such access includes any
transfer of tangible personal property. Even if we assume, for purposes of
this Private Letter Ruling Request, that, as part of the above-described
temporary logins, some cloud-based software/SaaS were transferred, the
Taxpayer believes that given the very limited functionality of such cloudbased software/SaaS in the hands of the Taxpayer’s customers, such
cloud-based software/SaaS should not be subject to the Illinois Sales and
Use Taxes. This is because such SaaS is merely a means to deliver data
for processing and to view the processed output. Furthermore, the SaaS
cannot function independently of the Taxpayer’s system. Neither the
SaaS nor the furnished data can be altered or manipulated by the
Taxpayer’s customers. As such, the Taxpayer’s SaaS, has no value for
the Taxpayer’s customers other than as a mere facilitator for the provision
of the Taxpayer’s non-taxable services. Finally, even if, despite the
foregoing arguments, the Department were to conclude that as part of its
Data Processing Services the Taxpayer is deemed to be transferring
taxable cloud-based prewritten software/SaaS, it should be exempt from
the Illinois Sales and Use Taxes because it meets the License Exception.
In view of the foregoing, insofar as the Taxpayer’s customers are
given the right to access the COMPANY2 Portal for the sole purpose of
transferring the data to the Taxpayer for data processing and viewing the
final output, such limited access should not subject the Taxpayer’s
offerings to the Illinois Sales and Use Taxes. Thus, all of the Taxpayer’s
offerings to Illinois customers are non-taxable services, and are not
taxable sales, leases, licenses or other transfers of software, SaaS, the
Apps or other tangible personal property in Illinois.

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RULING #2: Even though Illinois broadly defines the term “taxable
telecommunications services,” it expressly excludes from taxation charges
for storing data or information for subsequent retrieval or for processing
data or information intended to change its form or content. Furthermore, a
service provider who does not, as part of that service, charge customers
for the line or other transmission charges that are used to obtain these
services is not considered to be a telecommunications retailer.
Given that the true object of the Taxpayer’s offerings to Illinois
customers is data processing services, all of the Taxpayer’s gross charges
related to data transmittance represent charges for processing lab tests,
which processing changes its digital form and content (e.g., code
modifications and other code and data manipulations) and subsequent
storage in the Taxpayer’s servers for subsequent retrieval by the
Taxpayer’s customers. Finally, the Taxpayer does not, as part of its Data
Processing Services, charge its customers for the line or other
telecommunication transmission charges that are used to obtain these
services.
In view of the foregoing, none of the Taxpayer’s services provided
to Illinois customers constitute taxable telecommunication services and
the Taxpayer cannot be considered to be a telecommunications retailer by
virtue of the provision of its Data Processing Services.
RULING #3: The Taxpayer’s only nexus with Illinois is its gross
receipts from the sales in Illinois that have recently exceeded the
$100,000 threshold, which threshold is sufficient for an out-of-state retailer
to create the Wayfair Nexus with Illinois. However, the Taxpayer does not
engage in taxable sales of tangible personal property, prewritten computer
software, cloudbased prewritten computer software/SaaS, or any taxable
services delivered into Illinois. The Taxpayer provides only non-taxable
services to Illinois customers. As such, the Taxpayer is not required to
register with the Department or collect any of the Illinois Sales and Use
Taxes.
Please contact the undersigned at PHONE1 if you have any
questions about this request.
DEPARTMENT’S RESPONSE:
The Illinois Retailers’ Occupation Tax Act imposes a tax upon persons engaged
in this State in the business of selling tangible personal property to purchasers for use
or consumption. See 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

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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. If the purchases occur in
Illinois, the purchasers must pay the Use Tax to the retailer at the time of purchase.
The retailers are then allowed to reduce the amount of Use Tax they must remit by the
amount of Retailers’ Occupation Tax liability which they are required to and do pay to
the Department with respect to the same sales. See 86 Ill. Adm. Code 150.130.
Computer Software
“‘Computer software’ means a set of statements, data, or instructions to be used
directly or indirectly in a computer in order to bring about a certain result in any form in
which those statements, data, or instructions may be embodied, transmitted, or fixed, by
any method now known or hereafter developed, regardless of whether the statements,
data, or instructions are capable of being perceived by or communicated to humans,
and includes prewritten or canned software.” 35 ILCS 120/2-25. Generally, sales of
“canned” computer software are taxable retail sales in Illinois. Canned computer
software is considered to be tangible personal property regardless of the form in which it
is transferred or transmitted, including tape, disc, card, electronic means, or other
media. 86 Ill. Adm. Code 130.1935. However, if the computer software consists of
custom computer programs, then the sales of such software may not be taxable retail
sales. Custom computer programs or software are prepared to the special order of the
customer. The selection of pre-written or canned programs assembled by vendors into
software packages does not constitute custom software unless real and substantial
changes are made to the programs or creation of program interfacing logic. See 86 Ill.
Adm. Code 130.1935(c)(3). Computer software that is not custom software is
considered to be canned computer software.
If transactions for the licensing of computer software meet all of the criteria
provided in subsection (a)(1) of Section 130.1935, neither the transfer of the software
nor the subsequent software updates will be subject to Retailers’ Occupation Tax. A
license of software is not a taxable retail sale if:
A)

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

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

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;

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

COMPANY./NAME
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September 26, 2024
records, or supported by a notarized statement made under penalties of
perjury by the licensor; and
E)

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

If a license of canned computer software does not meet all the criteria the software is
taxable.
Please note that it is very common for software to be licensed over the internet
and 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)(A).
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). 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 may be 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.
Under the Service Occupation Tax Act, a serviceman is taxed on tangible
personal property transferred incident to a sale of service. 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) separately stated selling price; (2) 50% of the entire bill; (3) Service Occupation Tax
on cost price if they are registered de minimis servicemen; or (4) Use Tax on cost price
if the servicemen are de minimis and are not otherwise required to be registered under
Section 2a of the Retailers’ Occupation Tax Act.

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If the provider, as a serviceman, is not otherwise required to be registered under
Section 2a of the Retailers’ Occupation Tax Act and qualifies as a de minimis
serviceman, the provider could elect to pay Use Tax on its cost price of the 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 generally does not tax
subscriptions of software-as-a-service.
Telecommunications
The Illinois Telecommunications Excise Tax Act imposes a tax on the act or
privilege of originating or receiving intrastate or interstate telecommunications by
persons in Illinois at the rate of 7% of the gross charges for such telecommunications
purchased at retail from retailers by such persons. 35 ILCS 630/3 and 4. The
Simplified Municipal Telecommunications Tax Act allows municipalities to impose a tax
on the act or privilege of originating in such municipality or receiving in such municipality
intrastate or interstate telecommunications by persons in Illinois at a rate not to exceed
6% for municipalities with a population of less than 500,000, and at a rate not to exceed
7% for municipalities with a population of 500,000 or more, of the gross charges for
such telecommunications purchased at retail from retailers by such persons. 35 ILCS
636/5-10 and 5-15.
The Act defines gross charges as including the amount paid for the act or
privilege of originating or receiving telecommunications in this State and for all services
and equipment provided in connection therewith by a retailer. 35 ILCS 630/2(a). The
Act does exclude charges for customer equipment, including equipment that is leased
or rented by the customer from any source, when those charges are disaggregated and
separately identified from other charges. 35 ILCS 630/2(a)(4).
“Gross charges” does not include charges for the storage of data or information
for subsequent retrieval or charges for the processing of data or information intended to
change its form or content. 35 ILCS 630/2(a)(3). Charges for automated data storage,
retrieval and processing services or for the use of computer time or other equipment are
not included in gross charges. Automated information retrieval or data processing
charges are not included in gross charges. For example, a customer who accesses an
on-line computer database is not subject to tax on the charge for the data processing or
inquiry but would be subject to tax on any charge for the transmission of the data. 86 Ill.
Adm. Code 495.100(c).

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Ruling
According to the Company, the Company
“has developed proprietary software to facilitate the process of laboratory
(“lab”) testing, obtaining lab results and sharing the lab results with
physician practices and patients. The proprietary software furnishes a
connectivity solution to order and collect lab tests from laboratories
(“Labs”), to timely and securely receive such test results by physician
practices, and to quickly and securely share such results with the
practices’ patients. The software is capable of electronic interconnectivity,
and the essence of the Taxpayer’s services is the combination of data
processing, data translation, data hosting and data exchange services
(sometimes collectively referred to as the “Data Processing Services”).”
The Company enters into agreements with Labs to provide the Data Processing
Services. The following parties are involved: (i) Labs; (ii) physician practices; (iii)
patients; and (iv) in the case of the EMR connections, EMR vendors (“Dataflow
Participants”). The Company describes a three step process: (i) each Lab collects lab
tests from physician practices via the Lab’s laboratory information software or “LIS”; (ii)
the collected data is conveyed by the Labs to the Company’s servers located in STATE
where the data is processed, combined with proprietary codes (“translated”) in order to
be readable by other software systems, and stored on the Company’s servers for future
delivery; (iii) the processed data is delivered to either EMR vendors (in the case of the
electronic medical record (“EMR”) connections), who transmit the data to the physician
practice or physician practices.
If the physician has purchased EMR software from an EMR vendor, the
Company must “translate” the Lab’s test codes and results so that the results can be
read by the physician’s EMR system. The results are then transferred to the EMR
vendor, and the EMR vendor transfers the data to the physician. In other cases,
physicians use the Company’s COMPANY2 Portal, a cloud-based platform housed in
the Company’s STATE data center to access lab test results. Physician practices using
the COMPANY2 Portal may use a cloud-based printing module called “PRINT” to print
paper copies of the electronically received lab results. PRINT does not require the
downloading of software or applications.
The Company must expend considerable time and money to create interfaces to
the multitude of LIS systems and perform substantial customization to its own systems
to accept lab results from all the different Labs’ LISs. The Company must also map and
configure each Lab’s LIS to the physicians EMR systems. According to the information
received from the Company by email dated May 8, 2024, “COMPANY1 never makes
any changes to either a Lab’s LIS or an EMR vendor’s software. … All changes
associated with the initial set-up connections and any future changes are done only to
COMPANY1’s own software and systems to enable them to interface and communicate

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September 26, 2024
with each Lab’s LIS and EMR vendor’s software.
programming is done only on COMPANY1’s side.”

Thus, all initial and ongoing

None of the Dataflow Participants can install, download, or transfer any of the
Company’s software or applications on their computers, nor do any of the parties have
“any control over the network, servers, operating systems, storage, or application
capabilities” of the Company.
The Company charges Labs a Monthly Data Processing Fee for processing and
hosting the data based on the number of physician practices for which the Lab performs
lab tests and the size of each physician practice. The Company also charges the Labs
an Initial Setup Fee to recover some the costs incurred by the Company to modify the
Company’s software to communicate with EMR vendors.
The Company has developed: (i) a mobile physician application and (ii) a mobile
patient application (collectively the “Apps”), which Apps function as the COMPANY2
Provider Portal and the Patient Access Portal, respectively. Physician practices and
patients have an option to download their respective Apps to a personal device, such as
a phone, tablet, etc. The Apps are hosted on the Taxpayer’s servers located in STATE
and are publicly available for download, free of charge, via the COMPANY2 Portal or
Apple’s “App Store.” If a Lab desires that its customers (i.e., physician practices and
patients) have an option to use the Apps, the Taxpayer charges a Lab a one-time setup
fee (at a flat rate irrespective of the number of downloads) to cover The Company’s
human labor for the initial customization that enables the delivery of the lab tests to the
Apps. In addition, Labs are separately charged an additional monthly fee for additional
processing (e.g., code modifications and manipulations) of the data to be delivered to
such Apps.
The Company is making sales of service and is a serviceman. The services the
Company provides, collectively the Data Processing Services (except for the Patient
and Physician Apps), are not subject to Retailers’ Occupation Tax or Service
Occupation Tax because the Company does not transfer any computer software to the
Data Flow Participants. The Company provides the Data Processing Services using a
cloud-based delivery system – a system in which computer software is never
downloaded onto a client’s computer and is only accessed remotely. It is our
understanding the ability of a client to print lab results on a client’s device does not
involve the transfer of any computer software to the client, and the Company does not
incur any tax liability on this option.
The Labs pay a Monthly Processing Fee for the Company’s services. The
Company states that no tangible personal property is transferred in consideration of the
Fee. The Fee is not subject to Retailers’ Occupation Tax or Service Occupation Tax.
The Initial Setup Fee is charged by the Company to Labs for customization of the
Company’s computer software.
Once again, no tangible personal property is

COMPANY./NAME
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September 26, 2024
transferred in consideration of the Fee, and it is not subject to Retailers’ Occupation Tax
or Service Occupation Tax.
In two situations the client does download computer software: when a patient or
physician downloads an App on a mobile device. Computer software is defined broadly
in the Retailers’ Occupation Tax Act. Although there may not be a separate charge to
the clients for the downloaded Apps, apps are subject to tax under one of the four
methods discussed above, unless the transfer of the software qualifies as a non-taxable
license of computer software, or the Apps are downloaded for free from an out-of-State
web site or server that is located out of State. If the Apps are downloaded from the
Company’s server in STATE, the Company does not incur any Retailers’ Occupation
Tax or Service Occupation Tax liability. The Company also does not incur any
Retailers’ Occupation Tax or Service Occupation Tax liability on the one-time setup fee
to cover the cost of the Company’s labor for the initial customization that enables the
delivery of lab tests to the Apps or on the additional monthly fee the Company charges
Labs for additional processing (e.g., code modifications and manipulations) of the data
to be delivered to such Apps.
Lastly, the Data Processing Services the Company provides do not fall withing
the definition of “telecommunications” and are not subject to Telecommunications
Excise Tax. 35 ILCS 630/2(c). Moreover, “gross charges” does not include charges for
the storage of data or information for subsequent retrieval or charges for the processing
of data or information intended to change its form or content. 35 ILCS 630/2(a)(3).
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.
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 https://tax.illinois.gov/ or contact the
Department’s Taxpayer Information Division at (217) 782-3336.
Very truly yours,
Samuel J. Moore
Chairman – Private Letter Ruling Committee
SJM:RSW:slc

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Illinois Department of Revenue

Requested by

A remote data-processing company (COMPANY1, d/b/a COMPANY2) that connects medical laboratories, physician practices, and patients so lab test results can be processed, translated, and shared, and that recently crossed Illinois's $100,000 remote-seller economic-nexus threshold (identity redacted by the Department)

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