Is a foreign-based company's subscription charge for a cloud-delivered health-coaching app (with a web portal, downloadable App, meal plans, workout videos, and personal coaching) subject to Illinois Retailers' Occupation, Use, or Service Occupation Tax?

Plain-English summary

A foreign-based company (referred to here as the Taxpayer or COMPANY), headquartered outside the United States with its software hosted on servers outside Illinois, wrote to the Illinois Department of Revenue asking whether Illinois sales tax applies to subscription charges for its health-coaching app. The Taxpayer runs a "health coaching ecosystem" (personalized health, fitness, mental wellness, and nutrition Services) that customers ("Members") access either through a web portal or by downloading an App onto phones or tablets. To become a Member, a customer either signs up on the Taxpayer's website or downloads the free App and then pays a recurring subscription charge; the subscription grants a non-transferable, non-exclusive license to use the Services for personal use, and access ends when the subscription lapses. The Services are described as fundamentally Software as a Service (SaaS), mostly requiring an internet connection, though some features (a fasting tracker, a water/hydration tracker, a Bluetooth-based fitness tracker, and downloadable pre-recorded workout videos) work offline and are free to Members and non-Members alike, with some offline features paywalled only for Android users in certain cases.

The Taxpayer asked the Department to issue a Private Letter Ruling (PLR) on whether Illinois would tax the subscription charges for this customized digital content and subscription service. The Taxpayer's own analysis argued the charges should be treated as either a nontaxable "electronically delivered information service" or a nontaxable SaaS arrangement, since Illinois does not tax electronically downloaded information as tangible personal property, and since the servers and company are located outside Illinois with content accessible mainly over the internet.

The Department did not adopt or reject that analysis. It first explained that Illinois's Retailers' Occupation Tax (sales tax) and Use Tax apply to tangible personal property, while Service Occupation Tax applies to tangible personal property transferred incident to a sale of service (with servicemen able to calculate their tax base using one of four statutory methods). It reiterated that electronically transferred or downloaded information/data is not treated as a transfer of tangible personal property under 86 Ill. Adm. Code 130.2105(a)(3), but that "canned" (prewritten) computer software is taxable tangible personal property under 35 ILCS 120/2-25 and 86 Ill. Adm. Code 130.1935 regardless of the medium used to transfer or transmit it, including electronic delivery — unless the transaction meets the five-part test in 86 Ill. Adm. Code 130.1935(a)(1) for a nontaxable software license (a signed written agreement; restrictions on the customer's copying and use; a bar on unauthorized sublicensing/transfer; a replacement/archival-copy policy; and a requirement to destroy or return the software at the end of the license), or qualifies as custom software under 86 Ill. Adm. Code 130.1935(c). The Department also noted that cloud-based software the customer only accesses remotely and never downloads is not a taxable transfer, but that if the provider gives the subscriber an App, API, applet, desktop agent, or remote access agent to enable that access, the subscriber IS receiving computer software — which is taxable unless a qualifying license exemption applies, even if there's no separately stated charge for it.

Applying this framework, the Department said it could not issue the requested PLR "based on the limited facts presented." It pointed out gaps in the Taxpayer's letter: the Taxpayer said most offline App functions are free but not all of them, without explaining how the paid offline functions are delivered or paid for, or why those transactions would fall outside Retailers' Occupation and Use Tax. Because of that gap, the Department said it could not determine whether the additional-charge services are taxable computer software or nontaxable information services. The GIL restates the general download-donation rule (an out-of-state retailer/serviceman giving away downloadable software to an Illinois customer, from servers also located outside Illinois, exercises no power or control over the property in Illinois and so creates no Use Tax liability) but stops there — it does not resolve the Taxpayer's actual question.

What this means for you

SaaS, app, and subscription-service providers

This GIL is a useful map of the legal categories Illinois uses (taxable canned software vs. nontaxable information services vs. nontaxable cloud-accessed SaaS vs. a possibly-exempt software license), but it is NOT a ruling that health, fitness, or wellness subscription apps are tax-free in Illinois. The Department expressly said it could not resolve this taxpayer's facts because the letter didn't explain how paid offline features were delivered and charged. If your product mixes free/paid features, online/offline access, and downloadable app components, be ready to document precisely which pieces involve giving the customer software (an App, API, applet, or agent) versus purely remote access with nothing downloaded — that distinction is what the Department says separates taxable from nontaxable.

Accountants and tax professionals

Note that the Department frames the "computer software you receive by way of an App/API/agent" issue narrowly: even without a separately stated software charge, providing an App or agent that enables remote access is treated as the subscriber receiving computer software, taxable unless the license meets the five-part 130.1935(a)(1) exemption test or qualifies as custom software. A click-through "I agree" to license terms does NOT satisfy the written, signed-agreement requirement of that test. When advising a subscription-app client, walk through whether the app itself functions as the "software" being delivered, separately from the information/content it displays.

Businesses seeking a binding answer

Because the Department declined to issue the PLR the Taxpayer requested and instead issued this GIL, none of this analysis is binding as to the Taxpayer or anyone else. A business wanting a binding answer on its own facts would need to resubmit a PLR request under 2 Ill. Adm. Code 1200.110 with enough operational detail (exactly how each paid and free feature is delivered, downloaded, or streamed) to let the Department actually apply the law to those facts.

Common questions

Q: Did the Department decide whether this company's health-app subscriptions are taxable in Illinois?
A: No. The Department said it could not determine, "based on the limited facts presented," whether the Company's additional-charge services were computer software or information services, and it declined to issue the requested Private Letter Ruling.

Q: Is electronically delivered information taxable in Illinois?
A: No — under 86 Ill. Adm. Code 130.2105(a)(3), information or data that is electronically transferred or downloaded is not treated as a transfer of tangible personal property, so it falls outside Retailers' Occupation Tax, Use Tax, Service Occupation Tax, and Service Use Tax.

Q: Is "canned" (prewritten) computer software taxable in Illinois?
A: Generally yes. Under 35 ILCS 120/2-25 and 86 Ill. Adm. Code 130.1935, canned computer software is tangible personal property and is taxable regardless of the medium used to transfer or transmit it (tape, disc, card, electronic means, or otherwise) — unless the transaction meets the five-part test for a nontaxable software license in 86 Ill. Adm. Code 130.1935(a)(1), or is custom software under 130.1935(c).

Q: Is cloud-based software taxable if the customer never downloads it?
A: The Department reiterated its prior position that software accessed via a cloud-based system, where the software itself is never downloaded, is not a taxable transfer of tangible personal property. But if the provider gives the subscriber an App, API, applet, desktop agent, or remote access agent to enable that access, the subscriber is receiving computer software, which is taxable unless it qualifies for the nontaxable-license or custom-software exemption — even if there's no separate charge for it.

Q: What are the five criteria for a nontaxable canned-software license?
A: Under 86 Ill. Adm. Code 130.1935(a)(1), a license of canned software is not a taxable retail sale only if: (1) it's evidenced by a written agreement signed by the licensor and the customer; (2) it restricts the customer's duplication and use of the software; (3) it prohibits the customer from licensing, sublicensing, or transferring the software to a third party (other than a related party) without the licensor's permission and continued control; (4) the licensor has a policy of providing a replacement copy at minimal or no charge if the software is lost or damaged, or of letting the customer keep an archival copy; and (5) the customer must destroy or return all copies of the software to the licensor at the end of the license period (automatically satisfied for a perpetual license). A click-through online acceptance does not satisfy the written-and-signed-agreement requirement.

Citations and references

Statutes:

• 35 ILCS 120/2 (imposition of Retailers' Occupation Tax)
• 35 ILCS 120/2-25 (definition of "computer software")
• 35 ILCS 105/3 (imposition of Use Tax)
• 35 ILCS 105/3-45 (Use Tax collection/self-assessment)

Regulations:

• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax -- nature of the tax)
• 86 Ill. Adm. Code 130.1935 (computer software)
• 86 Ill. Adm. Code 130.1935(a)(1) (five-part test for a nontaxable software license)
• 86 Ill. Adm. Code 130.1935(c) (custom computer software)
• 86 Ill. Adm. Code 130.2105(a)(3) (electronically transferred information/data not tangible personal property)
• 86 Ill. Adm. Code 140.101, 140.106, 140.108, 140.109 (Service Occupation Tax; serviceman tax-base methods, including de minimis servicemen)
• 86 Ill. Adm. Code 150.101, 150.401, 150.701(a) (Use Tax -- nature of the tax, collection, self-assessment)

Case law cited in the letter:

• Kean v. Wal-Mart Stores, Inc., 235 Ill. 2d 351, 362 (2009) (Retailers' Occupation Tax and Use Tax together are commonly known as Illinois "sales tax")

Prior guidance referenced by the taxpayer (not adopted or confirmed by the Department in this letter):

• Illinois General Information Letter ST 20-0018-GIL
• Illinois General Information Letter ST 10-0113-GIL

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2024.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2024/ST24-0006-GIL.pdf

Original ruling text

ST-24-0006-GIL 02/07/2024 COMPUTER SOFTWARE
This letter discusses computer software. 86 Ill. Adm. Code 130.1935. (This is a GIL.)
February 7, 2024
NAME
TAXPAYER REPRESENTATIVE
ADDRESS
Dear NAME:
This letter is in response to your letter dated December 11, 2023, in which you request
information. The Department issues two types of letter rulings. Private Letter Rulings (“PLRs”) are
issued by the Department in response to specific taxpayer inquiries concerning the application of a
tax statute or rule to a particular fact situation. A PLR is binding on the Department, but only as to the
taxpayer who is the subject of the request for ruling and only to the extent the facts recited in the PLR
are correct and complete. Persons seeking PLRs must comply with the procedures for PLRs found in
the Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General Information
Letter (“GIL”) is to direct taxpayers to Department regulations or other sources of information
regarding the topic about which they have inquired. A GIL is not a statement of Department policy
and is not binding on the Department. See 2 Ill. Adm. Code 1200.120. You may access our website at
www.tax.illinois.gov to review regulations, letter rulings, and other types of information relevant to
your inquiry.
The nature of your inquiry and the information you have provided require that we respond with
a GIL. In your letter you have stated and made inquiry as follows:
To Whom it May Concern:
We respectfully request the issuance of formal written guidance on behalf of COMPANY
for the issues described below based on the facts contained herein. The Company is
located in CITY, COUNTRY.
Facts
The Taxpayer is a foreign‐based company whose headquarters are located outside of
the United States and whose software is hosted on servers located outside the state of
Illinois. The Taxpayer sells subscriptions to access information hosted in the cloud
through a web portal or by a downloaded application onto mobile cell phones (i.e.,
iPhones and Android phones), or other electronic mobile devices (i.e., iPads or tablets),
to customers (“Members”) in the United States. The Taxpayer engages in providing a
health coaching ecosystem through customized health, fitness, mental wellness, and
nutrition services (“Services”). The Taxpayer provides access to body data insights,
personal health coaching, workouts, meal plans, and progress tracking. The Taxpayer
also has a Corporate Wellness Program with weekly statistics and detailed data reports,
group challenges, and various self‐awareness programs.

TAXPAYER REPRESENTATIVE/ NAME
Page 2
February 7, 2024
The Taxpayer offers these Services to Members along with some limited services
available to non‐members free of charge. To become a Member, a new customer can:
1) create an account on the Taxpayer’s website and sign up through a subscription
charge or 2) download the free Taxpayer’s application (“App”) via application
marketplaces, such as the COMPANY1 or COMPANY2 (collectively referred to as the
“App Store”) and sign up through a subscription charge. With the initiation of the
subscription charge, the Taxpayer grants to the Member a non‐transferable,
non‐exclusive, license (without the right to sublicense) to use the Services, solely for the
Member’s personal use. With either option, the frequency of the subscription charge is
selected by the Member. If the subscription expires, the Member loses access to the
purchased Services. The Services are fundamentally Software as a Service, and the
majority of Services are unattainable without access to the Internet. There are limited
functions available in offline mode such as the ability to use various health trackers and
to download pre‐recorded exercise videos. However, most of the offline functions are
available in the App for free to anyone who has downloaded it, whether they are
Members or not.
Regardless of the method selected to become a Member, the Member is prompted to
answer a series of questions around their current health/fitness status and their desired
future health/fitness goals. These answers supplied by the Members are utilized by an
algorithm to provide customized and detailed health and fitness solutions. The health
and fitness solutions provided to a Member are solely determined and delivered by the
algorithm and not done with any human interaction, direction, or involvement. The
Services include compilations (such as access to hundreds of articles that include tips
and tricks on weight loss and dieting) (collectively referred to hereafter as “Content”)
and access to prerecorded video workouts. Additional Content includes meal plans,
progress tracking, and holistic guidance catered to the Customer’s fitness, nutritional,
and mental health needs. The Content is proprietary to the Taxpayer or to third parties.
The information may be individualized to the Customer and the Customer receives a
personalized daily exercise routine and user‐friendly graph to measure their progress.
There is also personalized nutrition and diet information that may be digitally supplied to
the Member. For an additional fee, Members may obtain personal health coaching with
certified professionals that provide expert feedback, 24/7 support, regular check‐ins,
and progress evaluations. Certified coaches assist members with fitness plans that were
initially generated by the algorithm.
As previously indicated, the services provided are primarily Software‐as‐a‐Service,
requiring an Internet connection for most of the App's Content and functionalities with
some features available offline. These features are available to Member and
non‐members free of charge and include a fasting tracker, water/hydration tracker,
fitness tracker, and non‐personalized, pre‐recorded workout videos, which can be
downloaded. The fasting tracker allows customers to log their fasting progress and view
automatically compiled statistics, available free of charge for all iOS and Android users.
However, Android users may incur a charge if they choose to access
app‐recommended training activities.

TAXPAYER REPRESENTATIVE/ NAME
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February 7, 2024
Similarly, the water tracker enables customers to record their hydration and view online
and offline statistics. This feature is free during a trial period on iOS, but a Membership
is required thereafter. In contrast, Android users can use the water tracker free of
charge and would only pay to access the recommended training activities. The fitness
tracker, which collects physical activity data from the user’s phone, electronic device, or
wearable wristband via Bluetooth, also functions without an Internet connection. The
fitness tracker records users’ physical activities and provides statistics, accessible
offline for both Members and non‐members using iOS or Android. Finally, the App also
offers non‐personalized, pre‐recorded workout videos that are free and can be
downloaded for offline viewing.
Issues
Would Illinois impose sales tax on the subscription charges for the customized digital
content and subscription service delivered by the Taxpayer through the Taxpayer’s App
on the customer’s device and website?
Analysis Supporting Taxpayer’s Views
Due to the nature of the personalized health content sold by the Taxpayer and the
delivery of the content through a web browser or App, the associated subscription fee
and resulting content should be characterized as Software as a Service (“SaaS”) or an
electronically delivered information service. Below we examine the taxability of the
Services under Illinois law.
Illinois imposes a Retailers’ Occupation Tax and Service Occupation Tax on persons
engaged in the business of selling tangible personal property, including computer
software, at retail 1 and on the transfer of tangible personal property by a service person
in connection with the rendered services. 2 For the purposes of the Retailers’ Occupation
Tax, prewritten computer software is recognized as tangible personal property. 3
Electronically Delivered Information Service
In Illinois, the downloading of information electronically is not seen as the transfer of
tangible personal property. The state’s stance, as previously expressed, is that the
downloading of digital media (including videos) is considered an intangible transfer and
does not fall under the Retailers’ Occupation and Use Tax. 4
Software‐as‐a‐Service

Illinois imposes Retailers’ Occupation and use tax on the sale, lease, or license of
prewritten computer software with limited exemption for software licenses which meet
certain criterion. Prewritten computer software, or “Canned software” is considered
35 ILCS 120/2a
35 ILCS 115/3
3
35 ILCS 120.2-25
4
Illinois General Information Letter ST 06-0071-GIL
1
2

TAXPAYER REPRESENTATIVE/ NAME
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February 7, 2024
tangible personal property regardless of the form in which it is transferred or transmitted,
including by electronic means. The sale at retail or transfer of canned software intended
for general or repeated use is also considered taxable. 5
The Illinois Department of Revenue (“The Department”) has previously advised it does
not view software accessed via a cloud‐based system, where such software is never
downloaded, as a taxable transfer of tangible personal property. It was also advised that
“if an Illinois customer downloads computer software for free from an out‐of‐state
retailer’s website or server that is also located out‐of‐state, the retailer, even though it is
donating tangible personal property to the customer, has exercised no power or control
over the property in Illinois.” 6 Therefore the customer would incur no use tax liability for
the retailer to collect.
Furthermore, The Department has stated that information or data which is electronically
delivered or downloaded is not considered a taxable transfer of tangible personal
property in the state. Illinois has previously declined to provide additional guidance
regarding transactions involving computer software Application Service Providers
(ASPs), software hosting and web‐based software, citing these topics as being
reviewed for administrative rule. 7
Existing Internal Revenue Service Regulations, § 1.861‐18 8, provides [sic] rules for
classifying transactions involving computer programs. For this purpose, § 1.861‐18(a)(3)
defines a computer program as “a set of statements or instructions to be used directly or
indirectly in a computer in order to bring about a certain result” and includes “any media,
user manuals, documentation, data base or similar item if the media, user manuals,
documentation, data base or similar item is incidental to the operation of the computer
program.” Furthermore, Section 1.861‐18 generally does not provide a comprehensive
basis for categorizing many common transactions involving what is commonly referred
to as “cloud computing,” which typically is characterized by on‐demand network access
to computing resources, such as networks, servers, storage, and software. Cloud
computing transactions typically are described for non‐tax purposes as following one or
more of the following three models: Software as a Service (“SaaS”); Platform as a
Service (“PaaS”); and Infrastructure as a Service (“IaaS”). SaaS allows customers to
access applications on a provider’s cloud infrastructure through an interface such as a
web browser. 9 Other transactions exist that are not solely related to computing but still
involve on‐demand network access to technological resources (these transactions and
cloud computing transactions are collectively referred to herein as “cloud transactions”).
These transactions have increased in frequency over time and share similarities with
the three cloud computing models described above. Examples include streaming music
and video, transactions involving mobile device applications (“apps”), and access to
data through remotely hosted software.

Ill. Admin. Code tit. 86, § 130.1935(a)
Illinois General Information Letter ST 20-0018-GIL
7
Illinois General Information Letter ST 10-0113-GIL
8
Internal Revenue Code § 1.861-18
9
National Institute of Standards and Technology, Special Publication 500-322 (February 2018)("NIST Report")
5
6

TAXPAYER REPRESENTATIVE/ NAME
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February 7, 2024
Since the user of the Services can get more than just information services (i.e., meal
plan, health plan, workout plan), the state may classify the Service as Software as a
Service (“SaaS”). For instance, the user can get their heart rate, steps, and other body
metrics if they are using a connected device, all of which is available to members and
non‐members. It is reasonable to conclude that based on Illinois law, the subscription
should not be subject to tax as it is not prewritten computer software. Specifically, the
subscription is predominantly for the purchase of the meal and health plan, workout
plan, and workout videos, which are nontaxable electronically delivered information
services. 10 However, should the subscription be classified as software, it is also
nontaxable as it is a SaaS solution. Specifically, the customer does not pay for the
downloaded App, the Company and servers are located out‐of‐state, subscriptions are
nontaxable, and the content is generally only accessible via the Internet, which is clearly
nontaxable pursuant to Illinois General Information Letter ST 20‐0018‐GIL. Further, this
classification aligns with the IRS regulations outlined above whereby applications that
are only functional with the Internet are treated as SaaS by the IRS. For these reasons,
we believe the subscription fee is not taxable in Illinois.
Analysis Contrary to Taxpayer’s Views
There are no statues, regulations, rulings or other state provided guidance which
specifically addresses the presented facts.
Conclusion
Based on the foregoing, the Services should be characterized as an Information Service
or Software as a Service. Regardless of such classification, the Taxpayer’s Services are
ultimately Software as a Service or an Information Service, neither of which are taxable
in the state when the hosted software is accessed on servers located outside of Illinois.
The above relates to tax periods May 2020 to present. To the best of the Taxpayer’s
knowledge and ours, the Department has not previously ruled on the same or a similar
issue for the taxpayer or a predecessor. Additionally, neither the Taxpayer nor its
representatives have previously submitted the same or a similar issue to the
Department but withdrew it before a letter ruling was issued.
As you review the above request for guidance, please do not hesitate to reach out to me
with any questions at PHONE or EMAIL. We kindly request an opportunity to have a
conference call to discuss the above request prior to the Department issuing the formal
ruling.
DEPARTMENT’S RESPONSE:
Retailers’ Occupation Tax

10

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

TAXPAYER REPRESENTATIVE/ NAME
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February 7, 2024
The Illinois Retailers’ Occupation Tax Act imposes a tax upon persons engaged in this State in
the business of selling tangible personal property to purchasers for use or consumption. 35 ILCS
120/2; 86 Ill. Adm. Code 130.101. In Illinois, Use Tax is imposed on the privilege of using, in this
State, any kind of tangible personal property that is purchased anywhere at retail from a retailer.
35 ILCS 105/3; 86 Ill. Adm. Code 150.101. These two taxes comprise what is commonly known as
“sales tax” in Illinois. Kean v. Wal-Mart Stores, Inc., 235 Ill. 2d 351, 362 (2009). If the purchases
occur in Illinois, the purchasers must pay the Use Tax to the retailer at the time of purchase. 35 ILCS
105/3-45; 86 Ill. Adm. Code 150.401. The retailers are then allowed to retain the amount of Use Tax
paid to reimburse themselves for their Retailers’ Occupation Tax liability incurred on those sales. 86
Ill. Adm. Code 150.130(b). If the purchases occur outside Illinois, purchasers must self-assess their
Use Tax liability and remit it directly to the Department. 35 ILCS 105/3-45; 86 Ill. Adm. Code
150.701(a).
Service Occupation Tax
Retailers’ Occupation Tax and Use Tax do not apply to sales of service. See 35 ILCS 120/2;
35 ILCS 105/3. Under the Service Occupation Tax Act, businesses providing services (i.e.,
servicemen) are taxed on tangible personal property transferred as an incident to sales of service. 86
Ill. Adm. Code 140.101. The transfer of tangible personal property to service customers may result in
either Service Occupation Tax liability or Use Tax liability for servicemen, depending upon which tax
base they choose to calculate their liability.
Servicemen may calculate their tax base in one of four ways: (1) separately- stated selling
price of tangible personal property transferred incident to service; (2) 50% of the serviceman’s entire
bill; (3) Service Occupation Tax on the serviceman’s cost price if the serviceman is a registered de
minimis serviceman; or (4) Use Tax on the serviceman’s cost price if the serviceman is de minimis
and is not otherwise required to be registered under Section 2a of the Retailers’ Occupation Tax Act.
86 Ill. Adm. Code Sections 140.106; 140.108; and 140.109.
Using the first method, servicemen may separately state the selling price of each item
transferred as a result of sales of service. The tax is based on the separately stated selling price of
the tangible personal property transferred. If servicemen do not wish to separately state the selling
price of the tangible personal property transferred, those servicemen must use the second method
where they will use 50% of the entire bill to their service customers as the tax base. Both of the
above methods provide that in no event may the tax base be less than the cost price of the tangible
personal property transferred. Under these methods, servicemen may provide their suppliers with
Certificates of Resale when purchasing the tangible personal property to be transferred as a part of
sales of service. They are required to collect the corresponding Service Use Tax from their
customers. See 86 Ill. Adm. Code 140.106.
The third way servicemen may account for their tax liability only applies to de minimis
servicemen who have either chosen to be registered or are required to be registered because they
incur Retailers’ Occupation Tax liability with respect to a portion of their business. Servicemen may
qualify as de minimis if they determine that their annual aggregate cost price of tangible personal
property transferred incident to sales of service is less than 35% of their annual gross receipts from
service transactions (75% in the case of pharmacists and persons engaged in graphic arts
production). This class of registered de minimis servicemen is authorized to pay Service Occupation
Tax (which includes local taxes) based upon the cost price of tangible personal property transferred

TAXPAYER REPRESENTATIVE/ NAME
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February 7, 2024
incident to sales of service. Servicemen that incur Service Occupation Tax collect the Service Use
Tax from their customers. They remit tax to the Department by filing returns and do not pay tax to
their suppliers. They provide suppliers with Certificates of Resale for the tangible personal property
transferred to service customers. See 86 Ill. Adm. Code 140.109.
The final method of determining tax liability may be used by de minimis servicemen that are
not otherwise required to be registered under Section 2a of the Retailers’ Occupation Tax Act.
Servicemen may qualify as de minimis if they determine that the annual aggregate cost price of
tangible personal property transferred as an incident of sales of service is less than 35% of the
servicemen’s annual gross receipts from service transactions (75% in the case of pharmacists and
persons engaged in graphic arts production). Such de minimis servicemen handle their tax liability
by paying Use Tax to their suppliers. If their suppliers are not registered to collect and remit tax, the
servicemen must register, self-assess, and remit Use Tax to the Department. The servicemen are
considered the end-users of the tangible personal property transferred incident to service.
Consequently, they are not authorized to collect a “tax” from the service customers. 86 Ill. Adm.
Code 140.108.
If an entity provides services that are accompanied with the transfer of tangible personal
property, including computer software, such service transactions are generally subject to tax liability
under one of the four methods set forth above. If a transaction does not involve the transfer of any
tangible personal property to the customer, then it generally would not be subject to Retailers’
Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax.
Information services
In Illinois, information or data that is electronically transferred or downloaded is not considered
the transfer of tangible personal property in this State. 86 Ill. Adm. Code 130.2105(a)(3). However,
canned computer software is considered taxable tangible personal property regardless of the form in
which it is transferred or transmitted, including tape, disc, card, electronic means, or other media.
The Department does not consider the viewing, downloading or electronically transmitting of video,
text, and other data over the internet to be the transfer of tangible personal property. However, if a
company provides services that are accompanied with the transfer of tangible personal property (e.g.,
medical records delivered to a customer in a hardcopy version, rather than sent electronically), such
service transactions are generally subject to tax liability.
Computer software
“Computer software” means a set of statements, data, or instructions to be used directly or
indirectly in a computer in order to bring about a certain result in any form in which those statements,
data, or instructions may be embodied, transmitted, or fixed, by any method now known or hereafter
developed, regardless of whether the statements, data, or instructions are capable of being perceived
by or communicated to humans, and includes prewritten or canned software. 35 ILCS 120/2-25.
Computer software includes all types of software including operational, applicational, utilities,
compliers, templates, shells, and all other forms. 86 Ill. Adm. Code 130.1935(a).
Generally, sales or transfers of “canned” computer software intended for general or repeated
use are taxable retail sales in Illinois. Canned software is considered to be tangible personal
property regardless of the form in which it is transferred or transmitted, including tape, disc, card,

TAXPAYER REPRESENTATIVE/ NAME
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electronic means, or other media. The sale or transfer by a retailer of computer software which is
subject to manufacturer licenses restricting the use or reproduction of the software is also taxable.
86 Ill. Adm. Code 130.1935(a). However, if all of the criteria provided in subsection (a)(1) of Section
130.1935 are met, then neither the sale or transfer of the software nor the subsequent software
updates are subject to Retailers’ Occupation Tax. Specifically, a license of software is not a taxable
retail sale if:
1.

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

2.

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

3.

It prohibits the customer from licensing, sublicensing or transferring the software to a
third party (except to a related party) without the permission and continued control of the
licensor;

4.

The licensor has a policy of providing another copy at minimal or no charge if the
customer loses or damages the software, or permitting the licensee to make and keep
an archival copy, and such policy is either stated in the license agreement, supported by
the licensor’s books and records, or supported by a notarized statement made under
penalties of perjury by the licensor; and

5.

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

86 Ill. Adm. Code 130.1935(a)(1).
criteria, the software is taxable.

If a license of canned computer software does not meet all the

Please note that it is very common for software to be licensed over the internet and the
customer to check a box that states that he or she accepts the license terms. Acceptance in this
manner does not constitute a written agreement signed by the licensor and the customer for purposes
of subsection (a)(1)(A) of Section 130.1935. To meet the signature requirement for an exempt
software license, the agreement must contain the written signature of the licensor and customer.
A provider of software as a service is acting as a serviceman. As a serviceman, the seller
does not incur Retailers’ Occupation Tax. Service Occupation Tax is imposed upon all persons
engaged in the business of making sales of service on all tangible personal property transferred
incident to a sale of service, including computer software, and is calculated as explained above.
Computer software is defined broadly in the Retailers’ Occupation Tax Act and Service
Occupation Tax. However, computer software provided through a cloud-based delivery system – a
system in which computer software is never downloaded onto a client’s computer and is only
accessed remotely – is not subject to tax. If a provider of a service provides to the subscriber an
App, API, applet, desktop agent, or a remote access agent to enable the subscriber to access the
provider’s network and services, the subscriber is receiving computer software. Although there may
not be a separate charge to the subscriber for the computer software, it is nonetheless subject to tax,
unless the transfer qualifies as a non-taxable license of computer software.

TAXPAYER REPRESENTATIVE/ NAME
Page 9
February 7, 2024
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 as the customer did not acquire the software from a retail
transaction. Illinois generally does not tax subscriptions.
Moreover, sales of custom computer programs prepared to the special order of the customer
may not be a taxable sale. 86 Ill. Adm. Code 130.1935(c)(1). Custom software means the software
which results from real and substantial changes to the operational coding of canned or pre-written
software in order to meet the specific individualized requirements of the purchaser for his limited or
particular use. 86 Ill. Adm. Code 130.1935(c)(2). Custom computer software is not subject to the
Retailers’ Occupation Tax, Use Tax, Service Occupation Tax or Service Use Tax if the following
elements are present:
1.

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

2.

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

If modified software is held for general or repeated sale or lease, it is canned software. 86 Ill. Adm.
Code 130.1935(c)(2). The selection of pre-written or canned programs assembled by vendors into
software packages does not constitute custom software unless real and substantial changes are
made to the programs or creation of program interfacing logic. 86 Ill. Adm. Code 130.1935(c)(3).
Computer software that is not custom software is considered to be canned computer software. See
86 Ill. Adm. Code 130.1935.
The Department is unable to provide the Company with a private letter ruling based on the
limited facts presented in your letter. Your letter states that customers may download an application to
enable them to obtain online and offline services. The majority of the services may require access to
the Internet, but some services are provided without Internet access, which means some services are
not provided through SaaS. Customers obtain services through subscription charges, but there are
additional charges for some services provided by the Company.
Your letter states that most of the offline functions available in the App are free, but not all of
them. You do not explain how the offline functions are acquired, how they are paid for by customers,
and why the transactions are not subject to Retailers’ Occupation Tax and Use Tax.
In Illinois, information or data that is electronically transferred or downloaded is not considered
the transfer of tangible personal property in this State. However, canned computer software is
considered taxable tangible personal property. Computer software includes all types of software,
including operational, applicational, utilities, compliers, templates, shells, and all other forms. 86 Ill.
Adm. Code 130.1935(a). Based on the information provided, it is not possible for the Department to
determine whether some of the services the Company provides for an additional charge are computer
software or information services.

TAXPAYER REPRESENTATIVE/ NAME
Page 10
February 7, 2024
If an Illinois customer downloads computer software for free (such as an App, API, applet,
desktop agent, or remote access agent) from an out-of-State serviceman’s web site or server that is
also located out of State, the serviceman, even though it is donating tangible personal property to the
customer, has exercised no power or control over the property in Illinois, and the donor would not
have made any taxable use of the property in Illinois.
I hope this information is helpful. If you have further questions related to the Illinois sales tax
laws, please visit our website at www.tax.illinois.gov or contact the Department’s Taxpayer
Information Division at (217) 782-3336.
Very truly yours,

Alexis K. Overstreet
Deputy General Counsel
AKO:RSW:rn