Does Illinois sales/use tax apply to fees a company pays a vendor for maintenance and support services on open-source database software?

Plain-English summary

A company that publishes online coupons asked the Illinois Department of Revenue for a private letter ruling on whether Illinois sales/use tax applied to fees it paid a vendor for maintenance and support on open-source database software (PostgreSQL, MySQL, MongoDB, and the vendor's own monitoring/management tools). The vendor had started charging 6.25% tax on its service invoices, and the company wanted a ruling that the tax did not apply because the underlying software was free, open-source, and no tangible property was ever transferred -- only maintenance services.

The Department declined to issue a private letter ruling on these facts (that decision is discretionary under 2 Ill. Adm. Code 1200.110(a)(4)) and instead issued this General Information Letter explaining the general rules, without applying them to a yes/no conclusion for this taxpayer.

The Department's explanation of the law: canned (prewritten) computer software is generally taxable tangible personal property, however it's delivered. Custom software prepared to a customer's special order can be non-taxable. For maintenance agreements, the key distinction is between a patch or bug fix (taxed based on the vendor's cost of the tangible property transferred) and an update that is a new release or version with enhancements (fully taxable as a sale of canned software under 86 Ill. Adm. Code 130.1935(b), unless separately stated and unless the update itself qualifies as custom software). The Department then stated the specific rule that matters here: if the updates included in a maintenance agreement consist solely of software distributed under open-source license provisions at no charge, no Retailers' Occupation Tax or Use Tax is owed, because the taxable base is zero -- even if that software isn't separately itemized on the invoice.

What this means for you

Businesses buying open-source software support/maintenance

If your maintenance agreement's "updates" are genuinely open-source software distributed at no charge (not a customized or repackaged version your vendor is reselling), the Department's stated rule is that there's no tax base for those updates, so no Retailers' Occupation Tax or Use Tax applies to them -- regardless of whether the invoice separately breaks out a software charge. But this GIL does not confirm that the taxpayer's own vendor relationship qualifies; it only states the general rule.

Software vendors and consultants who bill for "maintenance" or "support"

Whether your invoice is taxable turns on what's actually included. A pure service fee for consulting, monitoring, or support, with no software (or only free open-source software) transferred, fits the Department's zero-tax-base rule. But if you bundle in patches, bug fixes, or updated canned software that isn't itself open-source and free, those pieces are taxable, and lumping untaxed and taxed items into one unstated lump sum risks making the whole charge taxable under 86 Ill. Adm. Code 130.1935(b).

If you disagree with a vendor's tax position

This taxpayer's vendor took the contrary position that Illinois taxes canned software "regardless of the method it is transferred" and that charges for updates, training, installation, and consultation are taxable when not separately stated. The Department's GIL doesn't resolve that specific dispute for this taxpayer -- it only lays out the framework. A taxpayer wanting a binding answer on its own facts needs a Private Letter Ruling request that the Department chooses to accept, following the procedures in 2 Ill. Adm. Code 1200.110.

Common questions

Q: Did the Department rule that this taxpayer's maintenance fees were tax-exempt?
A: No. The Department declined to issue a private letter ruling on the taxpayer's specific facts and issued this General Information Letter instead, which explains the applicable rules but does not resolve the taxpayer's own dispute with its vendor.

Q: What is the actual holding stated in this GIL?
A: If the updates of canned software included in a maintenance agreement consist solely of software distributed under open-source license provisions at no charge, no Retailers' Occupation Tax or Use Tax is owed -- even if the software isn't separately itemized on the invoice -- because the taxable base is zero. See 86 Ill. Adm. Code 130.1935(b).

Q: Is all computer software taxable in Illinois?
A: Canned (prewritten) software is generally taxable tangible personal property. Custom software prepared to a customer's special order may not be taxable. Licensed software that meets all the criteria in 86 Ill. Adm. Code 130.1935(a)(1)(A)-(E) is not a taxable retail sale, including its subsequent updates.

Q: What's the difference between a patch/bug fix and a software "update" for tax purposes?
A: A patch or bug fix (object code inserted to correct an error) is taxed based on the vendor's cost of the tangible property transferred. An update that is a new release/version with enhancements is fully taxable as a sale of canned software, unless it qualifies as custom software or, as here, is open-source and free.

Q: Why didn't the Department just answer the taxpayer's question directly?
A: Issuing a Private Letter Ruling is discretionary under 2 Ill. Adm. Code 1200.110(a)(4). The Department can decline and instead issue a GIL, which only directs the taxpayer to relevant regulations and is not binding on the Department, per 2 Ill. Adm. Code 1200.120.

Citations and references

Statutes and regulations:

• 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 (definition of computer software)
• 86 Ill. Adm. Code 130.1935 (taxation of computer software generally)
• 86 Ill. Adm. Code 130.1935(a)(1)(A)-(E) (exempt software license criteria)
• 86 Ill. Adm. Code 130.1935(b) (maintenance agreements/software updates; open-source zero-tax-base rule)
• 86 Ill. Adm. Code 130.1935(c)(3) (custom software)
• 86 Ill. Adm. Code 140.301, 140.301(b)(3) (Service Occupation Tax treatment of maintenance agreements)
• 2 Ill. Adm. Code 1200.110, 1200.110(a)(4) (Private Letter Ruling procedure and Department's discretion)
• 2 Ill. Adm. Code 1200.120 (General Information Letters)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2025.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2025/st25-0028-gil.pdf

Original ruling text

ST 25-0028-GIL 04/15/2025 COMPUTER SOFTWARE
If updates of canned software included in a maintenance agreement consist solely
of software distributed under open-source license provisions at no charge, then,
even if the software is not separately itemized on the invoice, no Retailers’
Occupation Tax or Use Tax is owed because the taxable base is zero. (86 Ill. Adm.
Code 130.1935(b). (This is a GIL).
April 15, 2025
NAME
COMPANY
ADDRESS
EMAIL
Dear NAME:
This letter is in response to your letter dated January 23, 2025, 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.
In your letter you have stated and made inquiry as follows:
I am writing to request a private letter ruling (PLR) from the Illinois Department
of Revenue (IDOR) under Illinois tax law regarding the application of Sales and
Use Tax to fees for maintenance services on open-source software.
We seek this ruling to ensure that we are following compliance with Illinois tax
laws and to clarify the correct tax treatment of the described activities. We
believe the requested ruling is necessary due to the complexities or
ambiguities involved in the application of Illinois tax law to our situation.
Below, I have provided all the required information as outlined in your
guidelines for submitting a request for a private letter ruling.

COMPANY/NAME
Page 2
April 15, 2025

Statement of Facts and Other Pertinent Information
Interested Parties:
The parties involved in this request are as follows:
•

•

COMPANY: COMPANY (COMPANY) is a STATE limited liability
company with an office location at ADDRESS. It is primarily engaged in
the publishing of online coupons and discount offers on its website
located at WEBSITE.
COMPANY1: COMPANY1 (COMPANY1) is a STATE limited liability
company with an office address of ADDRESS1. As shown on their
website, COMPANY1 is an open source database software support
and consulting services company that helps make databases and
applications run better.

Description of the Transaction:
In January 20XX, COMPANY engaged COMPANY1 to perform software
maintenance services such as project consulting, performance monitoring,
technical support, bug fixes, software updates, and database architecture. As
noted in section 5 of the MSA, COMPANY1 provides services solely with the
respect of open-source software. All related software noted in the SOW is and
always has been free of charge and available on public repository. This
includes PostgresSQL, MySQL, MongoDB, and COMPANY1 Monitoring and
Management. Since the software is free of charge, COMPANY has never
purchased software from COMPANY1, only maintenance and support
services.
With that engagement, a Statement of Work was made effective to perform
these services. After the duration of the initial Statement of Work expired,
COMPANY entered into another Statement of Work for the same services in
November of 20XX. Upon expiration of that Statement of Work period, a new
Statement of Work was agreed to again for the same services in November
20XX. Upon viewing the invoice for this statement of work, COMPANY1
charged COMPANY a 6.25% tax on the service fees. This was the first invoice
that COMPANY1 had sent to COMPANY which included this tax. Upon
inquiring about this, COMPANY1 responded and said this tax was for the
application of Illinois Sales and Use tax since they registered to collect this tax
in 20XX.

COMPANY/NAME
Page 3
April 15, 2025
According to section 11 of the MSA between COMPANY and COMPANY1, the
Customer agrees to pay any and all taxes arising from the agreement. That
said, COMPANY questioned COMPANY1's stance that the tax is appropriately
being applied. COMPANY1 responded with their reasoning (detailed below
under 'Authorities Contrary to Taxpayers View'), but also suggested we submit
for a private letter ruling on whether the tax should be applied. A private letter
ruling was also suggested by a representative from the IDOR Taxpayer
Assistance Support Team.
Analysis of Material Facts to the Issues:
Database software, patches, and updates are being provided by COMPANY1
through their maintenance and support services. However, this software is all
open-source, meaning it is free of charge and found on public repository. This
is clearly stated in the MSA and SOW. Thus, no tangible value is being added
and the service fees are solely for the maintenance and support services on
the software.
Relevant Contracts, Licenses, Agreements, or Other Documents:
Attached are the following documents that are pertinent to this request:
•

•

•

COMPANY1 Master Services Agreement: This is the Master Services
Agreement (MSA) between COMPANY and COMPANY1 made effective
January 29th, 20XX. The Statement of Work attached to this agreement
does not represent the fees in question.
COMPANY1 Statement of Work: This is the Statement of Work (SOW)
showing the services fees in question made effective on November
6th, 20XX.
COMPANY1 Invoice: This is the invoice COMPANY1 sent to COMPANY
dated October 29th, 20XX showing the total services fees and tax
charged (6.25% of total fee).

Tax Period at Issue and Pending Audit or Litigation
This request pertains to the following tax period(s):
•

Tax Period: The Statement of Work service period takes place from
November 5th 20XX to February 5th, 20XX. The service fees were
invoiced on October 29th, 20XX.

COMPANY/NAME
Page 4
April 15, 2025
•

Audit or Litigation Status: To the best of our knowledge, there is no
pending audit or litigation related to this issue for the specified tax
period.

Prior Rulings on the Same or Similar Issue
To the best of our knowledge, COMPANY has not previously submitted the
same or similar issue to the Illinois Department of Revenue. Additionally, the
Department has not issued any ruling on this issue for COMPANY1 or any
predecessor.
Authorities Supporting the Taxpayer's View
We believe that the Illinois tax laws, regulations, and administrative rulings
support the following conclusion:
Authority 1: According to 86 Ill. Adm. Code 140.301, "As part of a retail sale,
charges for maintenance agreements or warranty contracts are taxable if they
are included in the selling price of the tangible personal property but are not
taxable if they are sold separately.
The seller of maintenance agreements and warranty contracts does incur use
tax liability on the seller's cost price of any tangible personal property
transferred incident to the maintenance agreement."
Per 86 Ill. Adm. Code Part 140, "Illinois does not tax sales of service."
Since the property pertaining to the agreement is strictly open-source
software and free of charge, no tangible personal property is being transferred
incident to the maintenance agreement. The only value added is a sale of
service, which is not taxable.
Authority 2: While there are factual differences to the circumstances
involving our ruling, the General Information Letter, ST 24-0017-GIL
04/04/2024 COMPUTER SOFTWARE, speaks to open-source software by
stating the following, "A fee charged by a company for the services in the form
of a subscription that provides customers with support, access to the
software, software maintenance in the form of security updates, fixes,
functionality enhancements, upgrades to the software, access to services
such as its support knowledge base, product usage documentation, and
account management tools is not subject to Retailers' Occupation Tax or

COMPANY/NAME
Page 5
April 15, 2025
Service Occupation Tax, as long as any additional software provided pursuant
to the subscription is distributed under open source license provisions and is
provided at no charge."
We conclude that, based on these authorities, the fees charged to COMPANY
are not subject to tax as open-source software is free of charge and no
tangible property is being transferred as a result of the maintenance services.
Maintenance services alone are not taxable.
Authorities Contrary to the Taxpayer's View
COMPANY1's analysis and stance to charge the tax is based on the following
statement from their tax advisory, "COMPANY1 transfers open-source
software, not modified for customer need, to its customer's servers to be used
indefinitely and provides support services which are not separately stated. In
Illinois, sales tax applies to the transfer of canned software regardless of the
method it is transferred. 86 Ill. Adm. Code § 130.1935(a). Illinois does not give
any different consideration to open-source software. Sales tax applies to the
entire charge made to the customer, including charges for updates. 86 Ill.
Adm. Code § 130.1935(b). Further, sales tax applies to charges for training,
installation, and consultation when they are not separately stated charges. 86
Ill. Adm. Code § 130.1935(b). As such, we maintain that the services
purchased are taxable and we request payment for the balance due."
Request for Deletion of Trade Secret Information
No trade secret information is provided in this letter. Outside of the names of
the interested parties, all information pertaining to this ruling can be
disclosed.
Additional Documentation
If necessary, we are happy to provide any additional documents or
information to assist in your review. Please let us know if you require any
further clarification or supporting materials.
We appreciate your attention to this matter and look forward to receiving the
Illinois Department of Revenue's guidance on this issue. Should you have any
questions, or if you require further information, please do not hesitate to
contact me at PHONE or EMAIL.

COMPANY/NAME
Page 6
April 15, 2025
Thank you for your time and consideration.
DEPARTMENT’S RESPONSE:
The Department’s regulation “Public Information, Rulemaking and Organization”
provides that “[w]hether 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). The Department recently met
and determined that it would decline to issue a Private Letter Ruling in response to your
request. We hope, however, the following General Information Letter will be helpful in
addressing your questions.
Retailers’ Occupation Tax and Use Tax
The Illinois Retailers’ Occupation Tax Act imposes a tax upon persons engaged in this
State in the business of selling tangible personal property to purchasers for use or
consumption. See 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. See 35 ILCS 105/3; 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 retain the amount of Use Tax paid to reimburse themselves
for their Retailers’ Occupation Tax liability incurred on those sales. If the purchases occur
outside Illinois, purchasers must self-assess their Use Tax liability and remit it directly to the
Department.
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

COMPANY/NAME
Page 7
April 15, 2025
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. If all the criteria
listed in subsection (a)(1) of Section 130.1935 are met, then neither a transaction involving
the licensing of that computer software nor the subsequent software updates for that
software will be considered a taxable retail sale subject to Retailers’ Occupation and Use
Taxes. See 86 Ill. Adm. Code 130.1935(a)(1)(A)-(E).
Maintenance Agreements
In general, maintenance agreements that cover computer software are treated the
same as maintenance agreements for other types of tangible personal property. See 86 Ill.
Adm. Code 130.1935(b). The taxation of maintenance agreements is discussed in
subsection (b)(3) of Section 140.301 of the Department’s administrative rules under the
Service Occupation Tax Act. See 86 Ill. Adm. Code Sec. 140.301(b)(3). The taxability of
agreements for the repair or maintenance of tangible personal property depends upon
whether charges for the agreements are included in the selling price of the tangible personal
property. If the charges for the agreements are included in the selling price of the tangible
personal property, those charges are part of the gross receipts of the retail transaction and
are subject to tax. In those instances, no tax is incurred on the maintenance services or
parts when the repair or servicing is performed. A manufacturer’s warranty that is provided
without additional cost to a purchaser of a new item is an example of an agreement that is
included in the selling price of the tangible personal property.
If agreements for the repair or maintenance of tangible personal property are sold
separately from tangible personal property, sales of those agreements are not taxable
transactions. However, when maintenance or repair services or parts are provided under
those agreements, the service or repair companies will be acting as service providers under
provisions of the Service Occupation Tax Act that provide that when service providers enter
into agreements to provide maintenance services for particular pieces of equipment for
stated periods of time at predetermined fees, the service providers incur Use Tax based on
their cost price of tangible personal property transferred to customers incident to the
completion of the maintenance service. See 86 Ill. Adm. Code 140.301(b)(3). The sale of an
optional maintenance agreement or extended warranty is an example of an agreement that
is not generally a taxable transaction.

COMPANY/NAME
Page 8
April 15, 2025
If, under the terms of a maintenance agreement involving computer software, a
software provider provides a piece of object code (“patch” or “bug fix”) to be inserted into
an executable program that is a current or prior release or version of its software product to
correct an error or defect in software or hardware that causes the program to malfunction,
the tangible personal property transferred incident to providing the patch or bug fix is taxed
in accordance with the provisions discussed above.
In contrast to a patch or bug fix, if the sale of a maintenance agreement by a software
provider includes charges for updates of canned software, which consist of new releases or
new versions of the computer software designed to replace an older version of the same
product and which include product enhancements and improvements, the general rules
governing taxability of maintenance agreements do not apply. This is because charges for
updates of canned software are fully taxable as sales of software under Section
130.1935(b). Please note that if the updates qualify as custom software under Section
130.1935(c), they may not be taxable.
Therefore, if a maintenance agreement provides for updates of canned software, and
the charges for those updates are not separately stated and taxed from the charges for
training, telephone assistance, installation, consultation, or other maintenance agreement
charges, then the whole agreement is taxable as a sale of canned software. If, however, the
updates of canned software included in the maintenance agreement consist solely of
software distributed under open-source license provisions at no charge, then, even if the
software is not separately itemized on the invoice, no Retailers’ Occupation Tax or Use Tax
is owed because the taxable base is zero.
I hope this information is helpful. If you have further questions you may contact me
at (217) 782-7055. 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 (800) 732-8866.
Very truly yours,

Kimberly Rossini
Associate Counsel
KAR:slc