Does an AI chatbot company owe Illinois sales, use, or service occupation tax on its subscription plans and a free, open-source API software development kit?

Plain-English summary

This is an earlier General Information Letter answering the exact same question, for the exact same AI chatbot company, that was later addressed again -- and formally SUPERSEDED -- by ST 25-0057-GIL, issued about two months later. The two letters are nearly word-for-word identical: the same company asked whether it owes Illinois sales, use, or service occupation tax on its generative AI chatbot subscriptions (accessed via website or app, never downloaded) and on a free, open-source API software development kit (SDK) that developers can optionally download to integrate the chatbot's capabilities into their own applications.

The Department's analysis in this letter is the same as in the superseding ST 25-0057-GIL: a cloud-based service that's never downloaded is treated as a service, not a taxable sale of tangible personal property; but providing an API, applet, desktop agent, or remote access agent counts as transferring computer software to the subscriber, generally taxable under Service Occupation Tax unless the transfer qualifies as an exempt written-signed software license; and free, genuinely open-source software (with no independent value beyond connecting to the underlying API) supports little to no tax liability under the "de minimis serviceman" rules. Comparing the two letters side by side, the only actual difference is a tiny wording tweak in one sentence about free out-of-state software downloads -- there is no substantive change in the Department's conclusion between this letter and the one that replaced it.

What this means for you

AI and SaaS companies researching this specific fact pattern

Don't cite or rely on THIS letter (ST 25-0050-GIL) going forward -- it has been formally superseded. Use the later ST 25-0057-GIL instead, which covers the identical facts and conclusions and is the Department's current guidance on this topic.

Anyone tracking how Illinois GILs get revised

This is a useful example of the Department reissuing a letter to the same taxpayer on the same facts within a couple of months, with only a cosmetic wording correction -- a reminder to check whether any GIL you're relying on has since been superseded before treating it as current guidance.

Common questions

Q: Is this letter still current Department guidance?
A: No. It was superseded by ST 25-0057-GIL, issued about two months later to the same taxpayer on the same facts.

Q: What changed between this letter and the one that superseded it?
A: Very little -- comparing the two side by side, only a small wording tweak in one sentence about free out-of-state software downloads differs. The legal conclusions are the same.

Q: Should I rely on the substance of this letter?
A: Yes, its substance matches the current guidance in ST 25-0057-GIL -- but cite that later letter directly, since it's the one the Department has designated as controlling.

Citations and references

Statutes:

• 35 ILCS 120/2(a), 120/2-25 (Retailers' Occupation Tax Act -- imposition; computer software definition)
• 35 ILCS 105/3-25 (Use Tax Act -- computer software definition)
• 35 ILCS 115/3 (Service Occupation Tax Act imposition)
• 35 ILCS 120/2-5(49) (nontaxable computer software license criteria)

Regulations:

• 86 Ill. Adm. Code 130.1935(a) (canned computer software; cloud delivery; API/access-agent rule)

Source

• Landing page: Illinois 2025 Sales Tax Letter Rulings
• Original PDF: ST25-0050-GIL.pdf

Original ruling text

ST 25-0050-GIL

09/16/2025

COMPUTER SOFTWARE

Computer software provided separately from a subscription of software as a
service, free-of-charge from an out-of-State retailer’s website or server that is also
located out of State, is not subject to tax. See 86 Ill. Adm. Code 130.1935(a). (This is
a GIL.) This letter is superseded by ST 25-0057-GIL.
September 16, 2025
NAME
TITLE
COMPANY1
ADDRESS1
Dear NAME:
This letter is in response to your letter dated June 11, 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.
Whether to issue a private letter ruling in response to a letter ruling request is within
the discretion of the Department. 2 Ill. Adm. Code 1200.110(a)(4). If there is case law or
there are regulations dispositive of the subject of the request, the Department will decline
to issue a private letter ruling on the subject. 2 Ill. Adm. Code 1200.110(a)(3)(D). Having
reviewed your request, the Department notes that there are laws and regulations dispositive
of the subject of the request. Thus, the Department is declining to issue a private letter ruling
in response to your request. However, 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:
COMPANY1, on behalf of our client, COMPANY2 (the “Company”),
respectfully requests the Illinois Department of Revenue (the “Department”)
provide guidance in the form of a Private Letter Ruling under Ill. Admin. Code

COMPANY2
Page 2
September 16, 2025
2 § 1200.110(b), on the sales and use tax implications of the facts set out
below:
I.

Statement Relating to Request

The Company makes the following representations:
1.

2.
3.
4.

5.
6.

To the best of the Company’s or its representative’s knowledge, the
Department has not previously ruled on the same or similar issue for
the taxpayer or a predecessor or the same or similar issue was
requested but withdrawn before a letter ruling was issued.
The Company is not currently engaged in litigation with the Department
in regard to this or any other tax matter.
The Company is not currently under audit by the Department in regard
to this matter or for the period to which the requested Private Letter
Ruling applies.
The Company requests that certain information be redacted from the
PLR prior to dissemination to others. The Company requests that its
name, address, the location of its office, the name of its
representatives, all references to “CHATBOT”, all references to
Exhibits, and the Exhibits themselves be redacted.
A signature of the taxpayer’s representative, and a duly executed
power of attorney in favor of the representative is enclosed.
Taxpayer’s identifying information is set out as follows:

COMPANY2
ADDRESS2
FEIN: ##-#######
II.

Statement of Material Facts

COMPANY2 is a STATE public benefit corporation headquartered outside of
Illinois. The Company offers advanced artificial intelligence (“AI”) services to
individuals, developers, businesses, and researchers. The primary service
provided by the Company is a generative AI chatbot named “CHATBOT,”
(hereinafter referred to as “Chatbot”) which is powered by a series of large
language models (“LLMs”). 1 Chatbot is trained to respond to plain language
Large language models (LLMs) are neural networks with billions (or more) of parameters trained on massive
text data using self-supervised learning. These models can capture complex patterns in language and
generate fluent, coherent text. Scaling up model size and training data has led to emergent abilities beyond
conventional language processing, enabling LLMs to perform complex reasoning, follow instructions, and
solve novel tasks with few or no examples. Zhao et al. “A Survey of Large Language Models” (2023).
1

COMPANY2
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September 16, 2025
prompts in a human-like manner and can assist with tasks such as writing,
analysis, coding, and problem-solving. The Company has partnered with
Google Cloud and AWS for cloud infrastructure requirements needed to build,
train, and deploy its models. The Company provides four subscription
CHATBOT plans: two for individual use and two for business use.
The software that operates Chatbot is never downloaded onto a customer’s
computer. Instead, customers can create a login and access Chatbot through
the Company website or via a free app available on the iOS and Android app
stores. The free app acts as a conduit for accessing Chatbot services. The
pricing does not change regardless of whether the customer chooses to use
Chatbot’s services via the app or Company website. Both methods require the
customer provide their own internet access to use Chatbot’s functionalities.
Chatbot API
Additionally, users have the option of utilizing Chatbot’s API product, enabling
them to integrate advanced language understanding and generation
capabilities into their own applications. To access Company’s Chatbot API,
users must register on the Company’s platform and obtain an API key. The
user then accesses a software development kit (“SDK”), such as the
Company Python library (“Python SDK”), either in the cloud or locally (i.e.,
downloaded on the user’s computer). For the Python SKD specifically, the
Company grants an MIT license. Exhibit A. This license is a permissible, opensource license that allows users to access the Python SDK, among other
rights, free of charge. The underlying Python software used to develop the
Python SDK is not owned by the Company and was also acquired free of
charge pursuant to an open-source license.
After accessing or downloading the SDK, users then write their own code that
connects to Chatbot API’s endpoint. The API requires the customers use their
own internet access, with processing occurring on servers used by the
Company that are all located outside of Illinois. The Company does not
deliver, electronically or physically, any software or programming code to
customers. Any issues with the code in the SDK would be considered separate
from any failure on the API; for instance, if the SDK was to receive an update
that rendered it useless, the API service would still be available. The SDK has
no independent value and is used solely for purposes of accessing Chatbot’s
functionalities.
Both the API key and the SDK library are available for free to everyone, but
accessing Chatbot functionalities via the API quires a monthly paid

COMPANY2
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September 16, 2025
subscription or usage credits. 2 The Company offers two Chatbot API plans:
the Scale Plan and the Build Plan. In the Scale Plan, access is billed monthly
via invoicing. In the Build Plan, access is pre-paid based on anticipated API
usage. With either plan, the increased functionalities terminate if the
customer stops paying for them.
III.

Question Presented

Does the Company owe Retailers’ Occupation Tax, Use Tax, or Service
Occupation Tax for providing generative AI services, when software
developers can download a free ADK kit to make API requests to access
Company’s services?
IV.

Illinois Law

Retailers’ Occupation Tax, Service Occupation Tax, and Use Tax
Distinguished
The Illinois Retailers’ Occupation Tax Act imposes a tax upon “persons
engaged in the business of selling at retail…tangible personal property” in
Illinois. 3 Retailers Occupation Tax does not apply to sales of services.
Instead, under the Service Occupation Tax Act, persons engaged in the
business of making sales of services (i.e., “servicemen”) are taxed on all
tangible personal property transferred as an incident of the sales of service. 4
The purchase of tangible personal property that is transferred to the service
customer may result in either Service Occupation Tax liability or Use Tax
liability for the servicemen depending upon the activities. 5 The servicemen’s
liability may be calculated 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
Usage credits are a form of payment system used for accessing and utilizing an API (Application
Programming Interface). They work as a currency or allowance that determines how much of the API service
you can use.
3
35 ILCS § 120/2(a).
4
35 ILCS § 115/3. See also 86 Ill. Admin. Code § 140.101.
5
86 Ill. Admin. Code § 140.105; See, e.g., discussion in Ill. Dept. of Rev. General Information Letter No. ST 170006-GIL (Mar. 2, 2017).
2

COMPANY2
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September 16, 2025
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 Retailer’s Occupation Tax Act. 6
In no event can the Service Occupation Tax liability be based on an amount
less than the serviceman’s cost price of the tangible personal property being
transferred. 7
Computer Software
Canned computer software is considered tangible personal property,
regardless of how the software is transferred or transmitted to the customer. 8
Computer software is defined to mean:
“a set of statements, data, or instruction 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 that is held for repeated sale or
lease, and all associated documentation and materials, if any,
whether contained on magnetic tapes, discs, cards, or other
devices or media…” 9
Computer software includes all types of software including operational,
applicational, utilities, compliers, templates, shells, and all other forms. 10
However, the Department has advised through revenue rulings that a provider
of computer software through a cloud-based delivery system is treated as a
serviceman and is providing a service. 11 The sale of such services generally
would not be subject to Retailers’ Occupation Tax or Use Tax provided no
tangible personal property is downloaded as part of the transaction. 12

86 Ill. Admin. Code §§ 140.106; 140.108; 140.109; see also, Ill. Dept. of Rev. General Information Letter No.
ST 17-0006-GIL (Mar. 2, 2017).
7
35 ILCS § 110/3-10
8
86 Ill. Admin. Code § 130.1935(a).
9
35 ILCS § 105/3-25; 35 ILCS § 110/3-25; 53 ILCS § 115/3-25; 35 ILCS § 120/2-25.
10
86 Ill. Admin. Code § 130.1935(a).
11
See, e.g., Ill. Dept. of Rev. General Information Letter No. ST 24-0002-PLR (Sept. 17, 2024).
12
See, e.g., Ill. Dept. of Rev. General Information Letter No. ST-23-0002-GIL (Feb. 7, 2023).
6

COMPANY2
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September 16, 2025
Illinois law provides that “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.” 13 The transfer of the API, applet, desktop agent, or
remote access agent is subject to tax unless the transfer qualifies as a nontaxable computer software license under section 120/2-5(49) of the Illinois
Compiled Statutes, 14 or is otherwise not taxable. If the cloud provider provides
such computer software, the provider is subject to Illinois tax, using one of the
four rules for taxability of servicemen as described above.
De Minimis Servicemen
Servicemen may qualify as de minimis if 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. 15 As noted
above, de minimis servicemen pay either Service Occupation Tax or Use Tax
based on the cost price of tangible personal property transferred. “Cost price”
is defined to mean:
“Cost Price” means the consideration paid by the serviceman
for a purchase, including, on and after January 1, 2025, a lease,
valued in money, whether paid in money or otherwise, including
cash, credits and services, and shall be determined without any
deduction on account of the supplier’s cost of the property sold
or on account of any other expense incurred by the supplier.
When a serviceman contracts out part or all of the services
required in his sale of service, it shall be presumed that the cost
price to the serviceman of the property transferred to him by his
or her subcontractor is equal to 50% of the subcontractor’s
charges to the serviceman in the absence of proof of the
86 Ill. Admin. Code § 130.1935(a)(4).
Illinois General Information Letter ST 20-0018-GIL. 35 ILCS § 120/2-5(49) provides that 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; 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 permitting the license 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 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, int eh [sic] case of a perpetual license, without being set forth in
the license agreement.”
15
86 Ill. Admin. Code §§ 140.108, 140.109; see also Ill. Dept. of Rev. General Information Letter No. ST 240002-PLR, 09/17, 2024.
13
14

COMPANY2
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consideration paid by the subcontractor for the purchase of
such property.” 16
The Department has concluded that “a company that distributes computer
software free of charge that is acquired and transferred subject to original,
third-party open-source licenses…does not include Retailers’ Occupation Tax
liability on the transfer of the software to its customers.” 17 Additionally, if a
company obtains open source computer software free of charge, it does not
incur any Use Tax liability. 18
Use in Illinois
Further, Illinois has issued, through private letter rulings, the following
guidance with respect to computer software downloaded for free from an outof-state retailer’s website:
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. 19
V.

Discussion/Analysis
a. No Retailers’ Occupation Tax or Use Tax is due on Company’s
sales of services

Illinois has not issued specific guidance on the taxability of AI and related
services. Company grants users access to its proprietary software and
algorithm remotely. Chatbot users access the platform and its functionalities
either through the website interface or the free app. Users are unable to
download the software that operates Chatbot or alter or control the algorithm.
Furthermore, access to Chatbot is exclusively via the internet, whether
through the app or the Company’s website, with no offline component or
functionality. This means that all interactions with Chatbot require an active
internet connection, ensuring that the software and algorithm remain
centrally controlled and updated by the Company. As such, Company’s
services are most similar to software as a service or a similar service as the
35 ILCS § 115/2.
Ill. Dept. of Rev. General Information Letter No. ST 20-0009-GIL, 06/09/2020.
18
Id.
19
See Ill. Dept. of Rev. General Information Letter No. ST 20-0018-GIL; Ill. Dept. of Rev. General Information
Letter No. ST 24-0002-PLR, 09/17/2024.
16
17

COMPANY2
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user is paying for access and use of Chatbot that is remotely accessed, can
only be used with a separately purchased internet connection and is owned
and maintained by the Company.
As noted above, software as a service is not subject to Retailers’ Occupation
Tax or Use Tax in Illinois. Instead, software as a service and similar service
providers are treated as servicemen and taxable under one of the four
methods described above for Service Occupation Tax and Service Use Tax to
the extent any computer software or other tangible personal property is
transferred to the user.
b. No Service Occupation Tax or Use Tax is due on Company’s
sales of services
i. Company is a de minis [sic] serviceman and does not owe
Service Occupation Tax or Use Tax on open-source
software licenses
Applying the four methods for taxability of servicemen, Company is a de
minimis serviceman. Any Python software incorporated into the license used
to acquire Company’s services via API was acquired for free pursuant to an
open-source license. As such, Company’s ratio of annual aggregate cost price
of tangible personal property transferred incident to sales of services
compared to annual gross receipts from service transaction is less than 35%.
No use tax is due on the transaction because the cost price of any software
acquired and incorporated is zero. Moreover, Company does not make any
other sales at retail requiring it to be registered with the IL DOR under section
2A of the Retailers’ Occupations Tax Act. Accordingly, Company should be
considered a de minimis unregistered serviceman.
ii. There is no taxable use of Company’s software in Illinois
Further, there is no use tax due on Company’s provision of the free SDK kits
because no software is hosted in Illinois. As noted above, numerous Illinois
letter rulings have advised that there is no taxable use of software in Illinois if
an Illinois customer downloads computer software for free from an out-ofState retailer’s website or server that is also located out of state.
In this instance, Company would not have made any taxable use of its
software in Illinois. The customer would incur no Use Tax liability as the
customer did not acquire the software from a retail transaction. As there is no
taxable use in Illinois, there is no use tax liability.

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V.

Conclusion

For the reasons stated herein, the Company requests that the Department
provide written guidance confirming the Company’s interpretation of Illinois
law. Company would be happy to provide additional facts at the Department’s
request.
Please contact me with any questions, concerns, or requests for clarification
or elaboration on this request.
DEPARTMENT’S RESPONSE:
Retailers’ Occupation Tax
The Illinois Retailers’ Occupation Tax Act imposes a tax upon persons engaged in this
State in the business of selling tangible personal property to purchasers for use or
consumption. 35 ILCS 120/2; 86 Ill. Adm. Code 130.101. In Illinois, Use Tax is imposed on
the privilege of using, in this State, any kind of tangible personal property that is purchased
anywhere at retail from a retailer. 35 ILCS 105/3; 86 Ill. Adm. Code 150.101. These two taxes
comprise what is commonly known as “sales tax” in Illinois. If the purchases occur in
Illinois, the purchasers must pay the Use Tax to the retailer at the time of purchase. 35 ILCS
105/3-45; 86 Ill. Adm. Code 150.401. The retailers are then allowed to retain the amount of
Use Tax paid to reimburse themselves for their Retailers’ Occupation Tax liability incurred
on those sales. 86 Ill. Adm. Code 150.130(b). If the purchases occur outside Illinois,
purchasers must self-assess their Use Tax liability and remit it directly to the Department.
35 ILCS 105/3-45; 86 Ill. Adm. Code 150.701(a).
Service Occupation Tax
Retailers’ Occupation Tax and Use Tax do not apply to sales of service. See 35 ILCS
120/2; 35 ILCS 105/3. Under the Service Occupation Tax Act, businesses providing services
(i.e., servicemen) are taxed on tangible personal property transferred as an incident to sales
of service. 86 Ill. Adm. Code 140.101. The transfer of tangible personal property to service
customers may result in either Service Occupation Tax liability or Use Tax liability for
servicemen, depending upon which tax base they choose to calculate their liability.
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

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Section 2a of the Retailers’ Occupation Tax Act. 86 Ill. Adm. Code Sections 140.106;
140.108; and 140.109.
Using the first method, servicemen may separately state the selling price of each
item transferred as a result of sales of service. The tax is based on the separately stated
selling price of the tangible personal property transferred. If servicemen do not wish to
separately state the selling price of the tangible personal property transferred, those
servicemen must use the second method where they will use 50% of the entire bill to their
service customers as the tax base. Both of the above methods provide that in no event may
the tax base be less than the cost price of the tangible personal property transferred. Under
these methods, servicemen may provide their suppliers with Certificates of Resale when
purchasing the tangible personal property to be transferred as a part of sales of service. They
are required to collect the corresponding Service Use Tax from their customers. See 86 Ill.
Adm. Code 140.106.
The third way servicemen may account for their tax liability only applies to de minimis
servicemen who have either chosen to be registered or are required to be registered because
they incur Retailers’ Occupation Tax liability with respect to a portion of their business.
Servicemen may qualify as de minimis if they determine that their annual aggregate cost
price of tangible personal property transferred incident to sales of service is less than 35%
of their annual gross receipts from service transactions (75% in the case of pharmacists and
persons engaged in graphic arts production). This class of registered de minimis servicemen
is authorized to pay Service Occupation Tax (which includes local taxes) based upon the
cost price of tangible personal property transferred incident to sales of service. Servicemen
that incur Service Occupation Tax collect the Service Use Tax from their customers. They
remit tax to the Department by filing returns and do not pay tax to their suppliers. They
provide suppliers with Certificates of Resale for the tangible personal property transferred
to service customers. See 86 Ill. Adm. Code 140.109.
The final method of determining tax liability may be used by de minimis servicemen
that are not otherwise required to be registered under Section 2a of the Retailers’
Occupation Tax Act. Servicemen may qualify as de minimis if they determine that the annual
aggregate cost price of tangible personal property transferred as an incident of sales of
service is less than 35% of the servicemen’s annual gross receipts from service transactions
(75% in the case of pharmacists and persons engaged in graphic arts production). Such de
minimis servicemen handle their tax liability by paying Use Tax to their suppliers. If their
suppliers are not registered to collect and remit tax, the servicemen must register, selfassess, and remit Use Tax to the Department. The servicemen are considered the end-users
of the tangible personal property transferred incident to service. Consequently, they are not
authorized to collect a “tax” from the service customers. 86 Ill. Adm. Code 140.108.

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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.
Computer Software
“Computer software” means a set of statements, data, or instructions to be used
directly or indirectly in a computer in order to bring about a certain result in any form in which
those statements, data, or instructions may be embodied, transmitted, or fixed, by any
method now known or hereafter developed, regardless of whether the statements, data, or
instructions are capable of being perceived by or communicated to humans, and includes
prewritten or canned software. 35 ILCS 120/2-25. Computer software includes all types of
software, including operational, applicational, utilities, compliers, templates, shells, and all
other forms. 86 Ill. Adm. Code 130.1935(a).
Generally, sales or transfers of “canned” computer software intended for general or
repeated use are taxable retail sales in Illinois. Canned software is considered to be tangible
personal property regardless of the form in which it is transferred or transmitted, including
tape, disc, card, electronic means, or other media. The sale or transfer by a retailer of
computer software which is subject to 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.

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

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 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

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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
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).
Illinois generally does not tax subscriptions of software as a service. That is, computer
software provided through a cloud-based delivery system – a system in which the computer
software is never downloaded onto a client’s computer and is only accessed remotely – is
not subject to tax. 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. Conversely, if an Illinois customer downloads computer software,
separate and unrelated from their subscription of software as a service, for free from an outof-State retailer’s website or server that is also located out-of-State, the retailer, even
though it is providing tangible personal property to the customer, has exercised no power or
control over the property in Illinois. In this instance, the retailer would not have made any
taxable use of the property in Illinois. The customer would incur no Use Tax liability as the
customer did not acquire the software from a retail transaction.

COMPANY2
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September 16, 2025
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 (217) 782-3336.

Very truly yours,

George L. Encarnacion, Jr.
Associate Counsel
GLE:sce