My out-of-state company licenses highly customized software and provides equipment to an Illinois customer, but we keep ownership of both and have no employees or offices in Illinois -- is this revenue Illinois-source income for corporate tax purposes?

Plain-English summary

A company based entirely in another state, with no Illinois offices, property, or employees, licenses highly specialized proprietary software to an Illinois-based customer and also provides related equipment as part of the arrangement. The company retains ownership of both the software and the equipment, both of which are returned at the end of the contract; all training and support is performed remotely from the company's home state. The software is not off-the-shelf and can't be repurposed or resold to another client. The company asked whether the revenue from this arrangement counts as Illinois-source income for Illinois corporate income tax purposes.

The Department again declined to resolve nexus itself. As with other nexus inquiries, the Department reiterated that whether a taxpayer has Illinois nexus is "extremely fact specific" and is not something it resolves through a letter ruling -- that determination is made only in the context of an audit with access to all relevant facts.

The general constitutional and statutory framework. The Due Process Clause requires some minimum connection between Illinois and what it seeks to tax, and the Commerce Clause requires a substantial nexus (citing Quill Corp. v. North Dakota). Public Law 86-272 separately shields an out-of-state corporation from Illinois net income tax if its only in-state activity is soliciting sales of tangible personal property. A nonresident's Illinois tax liability turns on "net income" -- base income (starting from federal taxable income, adjusted by Illinois modifications) classified as business or nonbusiness income and allocated/apportioned under Article 3.

Sourcing rules relevant to a software-and-equipment arrangement. The Department walked through several distinct sourcing categories that could apply depending on how the arrangement is actually characterized:

• Licensing or sale of a patent, copyright, trademark, or similar intangible item is sourced to Illinois to the extent it's utilized in Illinois (§ 304(a)(3)(B-1)).
• Lease or rental of tangible personal property is sourced to Illinois if the property is located in Illinois during the rental period (§ 304(a)(3)(C-5)(ii)).
• Other intangible income is sourced based on whether the taxpayer is a "dealer" in that type of property (§ 304(a)(3)(C-5)(iii)).
• Sales of services are sourced to where the services are RECEIVED, generally the customer's fixed place of business, with cascading rules (ordering office, then billing office) if that location isn't readily determinable (§ 304(a)(3)(C-5)(iv)).

The service-vs-property distinction matters a lot here. The Department's own regulation (86 Ill. Adm. Code 100.3370(c)(8)) draws a sharp line between selling/licensing intangible property (like canned, off-the-shelf software resold to many customers -- see First National Bank of Springfield v. Department of Revenue) and providing a SERVICE (like custom programming or maintenance). A contract combining a service with the customer's use of the taxpayer's property is generally treated as a sale of SERVICE unless it qualifies as a lease under IRC § 7701(e)(1) factors -- including whether the customer has physical possession and control of the property, whether the customer has a significant economic/possessory interest, whether the provider bears little risk on nonperformance, whether the provider uses the same property concurrently for other unrelated customers, and whether the contract price substantially exceeds the property's rental value. The regulation's own example describes a taxpayer selling access to an online database or software requiring ongoing update services, retaining control, and serving multiple customers with the same product -- and treats that as providing a SERVICE, not licensing or leasing property.

What the Department didn't do. It never applied this framework conclusively to the taxpayer's own facts -- it laid out the rules and the illustrative example without stating whether this specific software-and-equipment arrangement is a service, a lease, or a licensing of intangible property, leaving that fact-specific characterization (and the ultimate nexus question) for a future audit if one arises.

What this means for you

Software companies serving Illinois customers with customized products

Whether your revenue is Illinois-source depends heavily on how your arrangement is characterized -- a customized, ongoing-service-style arrangement (updates, retained control, multiple customers on the same underlying product) sources differently than a straightforward license or equipment lease. Compare your contract's actual terms against the regulation's factors (customer possession/control, risk allocation, concurrent use by other customers, price vs. rental value) rather than assuming a label like "license" or "lease" controls.

Companies retaining ownership of equipment provided alongside a service

Retaining ownership and having the equipment returned at contract's end are just some of several factors relevant to whether an arrangement is a lease of tangible property or part of a broader service -- no single fact is dispositive.

Accountants and tax professionals

Because the Department won't resolve nexus or characterization questions like this outside of audit, build the strongest documented record you can (contract terms, actual customer usage, whether the same product serves multiple customers) in case the issue arises later, rather than relying on an informal or general answer.

Common questions

Q: Will the Illinois Department of Revenue tell me definitively whether my software/equipment arrangement creates Illinois nexus?
A: No -- nexus determinations are considered too fact-specific for a letter ruling and are resolved only in the context of an audit.

Q: How does Illinois source revenue from licensing patents, copyrights, or similar intangible property?
A: To Illinois, to the extent the item is utilized in Illinois during the year the revenue is included in gross income.

Q: How does Illinois source revenue from a service arrangement?
A: To where the service is received -- generally the customer's fixed place of business, or (if that's not determinable) the office from which the service was ordered, or the office to which it's billed.

Q: What distinguishes a "service" from a "lease of property" under Illinois's regulations?
A: Factors include whether the customer has physical possession and control of the property, has a significant economic/possessory interest in it, whether the provider bears little risk if the contract isn't performed, whether the provider uses the same property concurrently for other unrelated customers, and whether the contract price substantially exceeds the property's rental value.

Citations and references

Statutes, regulations, and cases:

• 35 ILCS 5/201, 202, 203 (nonresident income tax liability; base income computation)
• 35 ILCS 5/304(a), (h), (a)(3)(A), (B-1), (C-5)(ii)-(iv) (apportionment, sales factor, sourcing rules)
• 86 Ill. Adm. Code 100.3370(c)(8)(C)(ii), (D) (intangible property definition; service-vs-lease test)
• 86 Ill. Adm. Code 100.9720 (nexus)
• Public Law 86-272 (15 U.S.C. § 381)
• Quill Corp. v. North Dakota, 504 U.S. 298 (1992)
• First National Bank of Springfield v. Department of Revenue, 85 Ill. 2d 84 (1981)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2025.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2025/it25-0007-gil.pdf

Original ruling text

IT 25-0007-GIL

8/15/2025

NEXUS

Nexus issues are not generally suitable for resolution by letter ruling. (This is a GIL.)
August 15, 2025
NAME
COMPANY
ADDRESS
EMAIL
Re: Illinois Income Tax – Nexus
Dear NAME:
This letter is in response to your email dated July 28, 2025, in which you requested
information regarding income tax nexus under Illinois law for the licensing of proprietary
software and providing equipment to an Illinois-based customer. 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. Admin. 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.
Admin. Code 1200.120(b) and (c). You may access our website at https://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:
We are writing to request a formal opinion from the Illinois Department of
Revenue regarding the income tax treatment of the following scenario:
My client is a STATE-based company with no physical presence in Illinois—
no offices, property, or employees are located in the state. My client has
entered into a contract with an Illinois-based customer to license proprietary
software. As part of the agreement, my client also provides certain
equipment to the customer. Importantly, my client retains ownership of both
the software and the equipment, and both are returned at the conclusion of
the contract.

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All services, including training and support, are performed remotely from
STATE. No employees or agents of my client perform work within the state of
Illinois.
The software being licensed is highly specialized and tailored to the specific
needs of the Illinois customer. It is not off-the-shelf software and could not
be repurposed or resold to another client.
We seek clarification on whether the revenue generated under this contract
would be considered Illinois-source income for corporate income tax
purposes.
We appreciate your guidance on this matter.
DEPARTMENT’S RESPONSE
The determination as to whether a taxpayer has nexus with Illinois is extremely fact
specific. Therefore, the Department does not issue rulings regarding whether a taxpayer
has nexus with the State. Such a determination can only be made in the context of an audit
where a Department auditor has access to all relevant facts and information. For
information regarding nexus, see 86 Ill. Admin. Code 100.9720 (accessible from the
Department’s website). In addition, the following general information regarding income tax
nexus with the State may be provided.
The United States Constitution limits the power of states to subject foreign corporations
and other nonresidents to income tax. The Due Process Clause requires that there exists
some minimum connection between a state and the person, property, or transaction the
state seeks to tax. (Quill Corp. v. N. Dakota, 504 U.S. 298 (1992)) Similarly, the Commerce
Clause requires that a state’s tax be applied only to activities with a substantial nexus to
the taxing state. (Id.) In addition, in the case of foreign corporations, Illinois may not assert
jurisdiction to tax where a corporation falls under the protection provided by Public Law
86-272 (15 U.S.C. § 381). Public Law 86-272 precludes any state from subjecting a
nondomiciliary corporation to a net income tax where such corporation’s only activities
within the state for the taxable year consist of solicitation activities for sales of tangible
personal property.
A nonresident is liable for Illinois income tax under Section 201 of the Illinois Income Tax
Act (“IITA”; 35 ILCS 5/101 et seq.) if it computes “net income” defined under IITA Section
202 as that portion of the taxpayer’s “base income” which is allocated or apportioned to
Illinois under the provisions of Article 3 of the IITA, less certain deductions. Under IITA
Section 203, base income is generally determined by starting with the taxpayer’s federal
taxable income (adjusted gross income in the case of an individual) and adjusting that

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amount by certain statutorily prescribed addition and subtraction modifications. Base
income must then be classified as between nonbusiness income and business income,
and allocated or apportioned to Illinois, respectively, according to the rules set forth in
Article 3 of the IITA.
IITA Section 304 contains apportionment rules that determine the amount of business
income of a nonresident that is taxable in Illinois where the income is derived from Illinois
and one or more other states. Under IITA Sections 304(a) and (h), the general
apportionment rule requires a taxpayer to multiply its business income for the taxable year
by its sales factor. IITA Section 304(a)(3)(A) defines the “sales factor” as the fraction
consisting of the taxpayer’s total sales in Illinois during the taxable year over its total sales
everywhere during the taxable year. IITA Section 1501(a)(21) defines the term “sales” to
mean all gross receipts of the taxpayer that are part of the taxpayer’s business income.
IITA Section 304(a)(3) provides various rules for determining whether sales are sourced to
Illinois for sales factor purposes. IITA Section 304(a)(3)(B-1) provides that the gross
receipts from the licensing, sale, or other disposition of a patent, copyright, trademark or
similar item of intangible personal property are sourced to Illinois to the extent the item is
utilized in this State during the year the gross receipts are included in gross income. IITA
Section 304(a)(3)(C-5)(ii) provides that sales from the lease or rental of tangible personal
property are sourced to Illinois if the property is located in Illinois during the rental period.
IITA Section 304(a)(3)(C-5)(iii) provides that income from intangible personal property
(other than patents, copyrights, trademarks, and similar items) is sourced to Illinois where,
(i) if the taxpayer is a dealer with respect to the item of intangible personal property, the
income is received from a customer in Illinois, or (ii) if the taxpayer is not a dealer, the
income producing activity of the taxpayer is performed in Illinois, or if the incomeproducing activity of the taxpayer is performed both within and without Illinois, if a greater
proportion of the income-producing activity of the taxpayer is performed within Illinois than
in any other state, based on performance costs. IITA Section 304(a)(3)(C-5)(iv) provides
that sales of services are sourced to Illinois if the services are received in Illinois:
Sales of services are in this State if the services are received in this State. For
the purposes of this section, gross receipts from the performance of services
provided to a corporation, partnership, or trust may only be attributed to a
state where that corporation, partnership, or trust has a fixed place of
business. If the state where the services are received is not readily
determinable or is a state where the corporation, partnership, or trust
receiving the service does not have a fixed place of business, the services
shall be deemed to be received at the office of the customer from which the
services were ordered in the regular course of the customer’s trade or
business. If the ordering office cannot be determined, the services shall be
deemed to be received at the office of the customer to which the services are

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billed. If the taxpayer is not taxable in the state in which the services are
received, the sale must be excluded from both the numerator and
denominator of the sales factor. The Department shall adopt rules
prescribing where specific types of service are received, including, but not
limited to publishing, and utility service.
86 Ill. Admin. Code 100.3370 provides rules for determining “sales” in various situations,
except for when an alternative method of determining the sales factor is prescribed in
Section 100.3380. Section 100.3370(c)(8)(C)(ii) defines “intangible personal property” for
purposes of that subsection (in the case of interest, net gains (but not less than zero) and
other items of income from intangible personal property) as only an item that can ordinarily
be resold or otherwise reconveyed by the person acquiring the item from the taxpayer, and
does not include any obligation of the taxpayer to make any payment, perform any act, or
otherwise provide anything of value to another person. Example 2 in that subsection
illustrates the definition:
EXAMPLE 2: A taxpayer selling canned computer software is selling
intangible personal property. (First National Bank of Springfield v. Dept. of
Revenue, 85 Ill.2d 84 (1981)) If the taxpayer sells software to customers in
the ordinary course of its business, it is a dealer with respect to those sales.
In contrast, a taxpayer providing programming or maintenance services to its
customers is selling services rather than intangible personal property.
Section 100.3370(c)(8)(D) provides further guidance on whether the activities of your client
would be characterized as a sale of service or a lease of property:
D. Sales of services are in this State if the services are received in this State.
(IITA Section 304(a)(3)(C-5)(iv))
i.

General Rule. Gross receipts from services are assigned to
the numerator of the sales factor to the extent that the
receipts may be attributed to services received in Illinois.

ii.

A contract that involves the provision of a service by the
taxpayer and the use of property of the taxpayer by the
service recipient shall be treated as a sale of service unless
the contract is properly treated as a lease of property under
IRC section 7701(e)(1), taking into account all relevant
factors, including whether:
• the service recipient is in physical
possession of the property;
• the service recipient controls the property;

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•

•

•

•

the service recipient has a significant
economic or possessory interest in the
property;
the service provider does not bear any risk of
substantially
diminished
receipts
or
substantially increased expenditures if there
is nonperformance under the contract;
the service provider does not use the
property concurrently to provide significant
services to entities unrelated to the service
recipient; and
the total contract price does not
substantially exceed the rental value of the
property for the contract period.

EXAMPLE: A taxpayer selling access to an online
database or applications software, and who is
required to perform regular update services to
the database or software, retains control over
the contents of the database or software, and
provides access to the same database or
software to multiple customers is not selling or
licensing an item of intangible personal property
to its customers, but rather is providing a
service.
As stated above, this is a General Information Letter. A General Information Letter does not
constitute a statement of Department policy that applies, interprets or prescribes the tax
laws, and it is not binding on the Department. If you require additional information, please
visit the Department’s website at https://tax.illinois.gov/ or contact the Department’s
Taxpayer Assistance Division at 800-732-8866.
Sincerely,
Jennifer Uhles
Associate Counsel (Income Tax)
JU:se