Does Illinois sales tax apply to locally installed software licenses, and what has to be in the license agreement for the sale to be exempt?

Plain-English summary

A software company asked the Illinois Department of Revenue whether its locally installed software licenses (for pension plan, OPEB plan, foundation, and endowment software) qualified as nontaxable retail sales. The company had registered for an Illinois sales tax account after crossing the state's $100,000 economic nexus threshold and had been collecting and remitting tax, but it later believed its licensing terms actually met the criteria for a tax-exempt software license.

The Department explained that Illinois generally taxes sales of "canned" (prewritten, off-the-shelf) computer software as sales of tangible personal property, regardless of how it is delivered — tape, disc, card, or electronic download. This is true even when the software is licensed rather than sold outright, and even when the license restricts copying or use. However, 86 Ill. Adm. Code 130.1935(a)(1) carves out an exemption: a software license is not a taxable sale if the agreement meets all five of the following conditions: (A) it is evidenced by a written agreement signed by both licensor and customer (a verifiable electronic signature counts, but simply clicking "I agree" does not); (B) it restricts the customer's duplication and use of the software; (C) it prohibits the customer from sublicensing or transferring the software to third parties without the licensor's continued control; (D) the licensor has a policy of replacing lost or damaged copies at minimal or no cost, or of allowing an archival copy; and (E) the customer must destroy or return all copies at the end of the license period (this last condition is automatically satisfied for perpetual licenses).

The Department also confirmed that computer software delivered through a true cloud-based system — one where the software is never downloaded and is only accessed remotely — is not subject to tax, even if the provider gives the subscriber an API, applet, or remote-access agent to reach the service. Because the company's product in this case was locally installed rather than cloud-based, that exclusion didn't apply.

Based on the order form and terms and conditions the company submitted, the Department noted that they did not appear to require the customer to destroy or return the software at the end of the license period — meaning condition (E) was not met. If that's accurate, the licenses fail the five-part test and the sales are taxable. Because the Department had regulations directly on point, it declined to issue a binding Private Letter Ruling and instead issued this non-binding General Information Letter (GIL).

What this means for you

Software vendors licensing locally installed (on-premises) software

If you sell or license software that customers download and install rather than access purely in the cloud, you are presumptively selling taxable tangible personal property in Illinois. To avoid charging sales tax, your license agreement must satisfy all five conditions in 86 Ill. Adm. Code 130.1935(a)(1) — not just some of them. In particular, review your signature mechanism: a simple "click to agree" checkbox does not satisfy the written-signature requirement, but a verifiable, authenticated electronic signature attached to the agreement does. Also check whether your agreement actually requires customers to destroy or return the software when the license ends — this GIL flags that omission as the likely reason the requesting company's licenses failed the test.

SaaS and cloud-software companies

If your product is never downloaded to the customer's device and is accessed only remotely, the Department treats it as a nontaxable cloud-based delivery, even when you provide an API, applet, desktop agent, or remote-access agent to enable that access. But if any component is locally installed — as was the case for the requester here — the on-premises analysis (and the five-part exemption test) applies instead. Hybrid products should be reviewed component-by-component.

Accountants and tax professionals advising software clients

Before advising a client that software license sales are exempt, confirm the client's actual signed agreements meet every one of the five 130.1935(a)(1) criteria — this GIL underscores that the Department checks the "destroy or return copies" clause specifically, and that electronic "I agree" clicks fail the signature test. If a client already registered and began collecting tax under an economic-nexus review (as the requester did after crossing the $100,000 threshold) and now believes it over-collected, get a definitive written agreement analysis and consider a formal Private Letter Ruling request rather than relying on a non-binding GIL before amending returns or issuing refunds.

Common questions

Q: Does licensing software instead of selling it outright avoid Illinois sales tax?
A: Not automatically. Illinois taxes canned software licenses the same as sales unless the license agreement meets all five specific criteria in 86 Ill. Adm. Code 130.1935(a)(1), including a genuine written or verifiable electronic signature and a return/destroy-on-termination clause.

Q: We have customers click "I agree" to accept our license online — does that count as a signed agreement?
A: No. The regulation specifically states that accepting terms by clicking "I agree" does not satisfy the written-signature requirement. A verifiable, authenticated electronic signature attached to or made part of the license agreement can satisfy it, but a simple checkbox click cannot.

Q: Is our cloud-based software taxable?
A: If the software is never downloaded to the customer's computer and is only accessed remotely, it is not subject to tax under 86 Ill. Adm. Code 130.1935(a)(3) — even if you provide an API, applet, desktop agent, or remote access agent to enable that access.

Q: What happens if a license agreement meets four of the five criteria but not the fifth?
A: The GIL is explicit: if a license does not meet all the criteria in 130.1935(a)(1), the software sale is taxable. There's no partial exemption for meeting most, but not all, of the conditions.

Q: Can this letter be relied on to get a refund of sales tax already collected?
A: This is a General Information Letter, not a binding Private Letter Ruling — the Department only issues GILs when existing regulations already address the topic, and a GIL is not a statement of Department policy and does not bind the Department. It does not by itself authorize a refund; a taxpayer would need to evaluate its specific agreements (potentially through a PLR request or with a tax professional) before amending returns or seeking refunds.

Citations and references

Statutes and regulations:

• 86 Ill. Adm. Code 130.1935 (computer software, including the five-part license exemption test and the cloud-based delivery exclusion)
• 35 ILCS 120/2; 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax imposition)
• 35 ILCS 105/3; 86 Ill. Adm. Code 150.101 (Use Tax imposition)
• 35 ILCS 120/2-25 (statutory definition of "computer software")
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedure)
• 2 Ill. Adm. Code 1200.120 (General Information Letters)

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/ST24-0038-GIL.pdf

Original ruling text

ST 24-0038-GIL 11/22/2024 COMPUTER SOFTWARE
This letter discusses computer software. 86 Ill. Adm. Code 130.1935. (This is a
GIL.)
November 22, 2024
NAME, TITLE
COMPANY
ADDRESS
EMAIL
Dear NAME:
This letter is in response to your letter dated September 5, 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.
Whether to issue a private letter ruling in response to a letter ruling request is within
the discretion of the Department. The Department will respond to all requests for private
letter rulings either by issuance of a ruling or by a letter explaining that the request for ruling
will not be honored. 2 Ill. Adm. Code 1200.110(a)(4). A request for a private letter ruling
must be made by, or on behalf of, an identified taxpayer. The Department will not issue letter
rulings to taxpayer representatives for anonymous or unidentified taxpayers. 2 Ill. Adm.
Code 200.110(a)(1). If there is case law or there are regulations dispositive of the subject of
the request, the Department will also decline to issue a private letter ruling on the subject.
2 Ill. Adm. Code 200.110(a)(3)(D). There is also certain information that must be included in
each request for a private letter ruling as provided in 2 Ill. Adm. Code 200.110(b)(1)-(8). The
Department determined not to issue a Private Letter Ruling in response to your request
because there are regulations dispositive of the subject of the request. However, the
Department is issuing a General Information Letter to help address your question. In your
letter you have stated and made inquiry as follows:

COMPANY
Page 2
November 22, 2024
I am writing to request a formal ruling regarding the applicability of Illinois
sales tax to computer software licenses and maintenance agreement
regarding Title Section 130.1935 of the Illinois Administrative Code.
Specifically, I would like to obtain guidance as to if the sales of our software
licenses are nontaxable retail sales based on the five criteria listed in
130.1935.
Issue: COMPANY registered for a sales tax account and began collecting
Illinois sales tax beginning with the DATE filing period. We have been
collecting sales tax and remitting monthly as per Illinois Department of
Revenue requirements. It recently came to our attention that, based on
COMPANY’S Order Agreements, these sales meet the criteria to be
considered a non-taxable retail sale.
Background: I am seeking clarification on whether this product/service is
taxable or if any exemptions apply. COMPANY is a provider of software for
defined benefit pension plans, other post-employment benefit (OPED) plans,
foundations, and endowments. COMPANY products are locally installed
licensed software. COMPANY’S PRODUCT can be installed on any system
that meeting [sic] the minimum supported requirements. PRODUCT is not a
cloud-based solution.
During an economic nexus review, it was determined that COMPANY had
exceeded Illinois’ $100,000 sales threshold. We registered with the
Department of Revenue and began collecting sales tax as of the DATE period.
Relevant Facts: Per Section 130.1935 a) “Computer Software means all types
of software including operational, applications, utilities, compliers,
templates, shells, and other forms. Canned software is considered to be
tangible personal property regardless of the form in which it is transferred or
transmitted, including tape, disc, card, electronic means, or other media. The
sales at retail, or transfer, of canned software intended for general or repeated
use its [sic] taxable, including the transfer by a retailer of software which is
subject to manufacturer licenses restricting the use of reproduction of the
software.
1)

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;
i)
An electronic agreement in which the customer accepts
the license by means of an electronic signature that is

COMPANY
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November 22, 2024

B)
C)

D)

E)

verifiable and can be authenticated and is attached to or
made part of the license will comply with this
requirement.
ii)
A license agreement in which the customer
electronically accepts the terms by clicking “I agree”
does not comply with this requirement.
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 of
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
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.

I have enclosed a copy of a PRODUCT Order Form which includes detailed
terms and conditions.
Specific Questions:
1.

Based on the Order Agreement Terms and Conditions enclosed, are
the sales of PRODUCT software licenses considered to be a
nontaxable retail sale in Illinois?

2.

If it is determined that sales of PRODUCT software licenses are not
a taxable retail transaction in Illinois, are we able to issue refunds
to customers, amend returns, and request refunds for taxes
collected in error.

We are seeking your guidance to ensure compliance with Illinois sales tax
regulations and to make informed business decisions. We appreciate your
assistance and look forward to your response.

COMPANY
Page 4
November 22, 2024

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. 35 ILCS 120/2; 86 Ill. Adm. Code 130.101. In Illinois, Use Tax is imposed on
the privilege of using, in this State, any kind of tangible personal property that is purchased
anywhere at retail from a retailer. 35 ILCS 105/3; 86 Ill. Adm. Code 150.101. These taxes
comprise what is commonly known as “sales” tax in Illinois.
“Computer software” means a set of statements, data, or instructions to be used
directly or indirectly in a computer in order to bring about a certain result in any form in which
those statements, data, or instructions may be embodied, transmitted, or fixed, by any
method now known or hereafter developed, regardless of whether the statements, data, or
instructions are capable of being perceived by or communicated to humans, and includes
prewritten or canned software. 35 ILCS 120/2-25. Computer software includes all types of
software including operational, applicational, utilities, compliers, templates, shells and all
other forms. 86 Ill. Adm. Code 130.1935(a).
Generally, sales or transfers of “canned” computer software intended for general or
repeated use are taxable retail sales in Illinois. Canned software is considered to be tangible
personal property regardless of the form in which it is transferred or transmitted, including
tape, disc, card, electronic means or other media. The sale or transfer by a retailer of
computer software which is subject to manufacturer licenses restricting the use or
reproduction of the software is also taxable. 86 Ill. Adm. Code 130.1935(a). However, if all
of the criteria provided in subsection (a)(1) of Section 130.1935 are met, then neither the
sale or transfer of the software nor the subsequent software updates are subject to
Retailers’ Occupation Tax. Specifically, a license of software is not a taxable retail sale if:
A)
customer;

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

B)

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

C)

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

D)

The licensor has a policy of providing another copy at minimal or no charge if
the customer loses or damages the software, or of permitting the licensee to
make and keep an archival copy, and such policy is either stated in the license

COMPANY
Page 5
November 22, 2024
agreement, supported by the licensor’s books and records, or supported by a
notarized statement made under penalties of perjury by the licensor; and
E)

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

86 Ill. Adm. Code 130.1935(a)(1). If a license of canned computer software does not meet
all the criteria, the software is taxable.
Please note that it is very common for software to be licensed over the internet and
the customer to accept the license terms by checking a box or clicking “I agree”.
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. 86 Ill. Adm.
Code 130.1935(a)(1)(A)(ii). 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)(i).
Computer software is defined broadly in the Retailers’ Occupation Tax Act. However,
computer software provided through a cloud-based delivery system is not subject to tax. A
cloud-based delivery system is one in which computer software is never downloaded onto
a client’s computer and only accessed remotely. 86 Ill. Adm. Code 130.1935(a)(3). If a
provider of a service provides to the subscriber an API, applet, desktop agent, or a remote
access agent to enable the subscriber to access the provider’s network and services, the
subscriber is receiving computer software. 86 Ill. Adm. Code 130.1935(a)(4). 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.
It appears that the Order Form and Terms and Conditions provided do not require the
customer to destroy or return all copies of the software to the licensor at the end of the
license period. If this is the case, the requirements of Section 130.1935 are not met, and the
sales of the computer software are taxable.
I hope this information is helpful. If you require additional information, please visit
our website at https://tax.illinois.gov/ or contact the Department’s Taxpayer Information
Division at 800-732-8866.
Very truly yours,

COMPANY
Page 6
November 22, 2024
Richard S. Wolters
Associate Counsel
RSW:sce