Did Illinois decide whether a New York provider's web-based software and training were taxable or created Illinois collection duties?

Plain-English summary

The Department did not decide whether the New York company's web-based offering was taxable or whether it had Illinois collection duties. It declined to make a nexus determination in a GIL and said ASP, hosting, and web-software guidance should come through formal rulemaking after further study.

The letter nevertheless outlined the 2010 software rules. Electronically transferred information or data was not treated as tangible personal property, but canned software was taxable tangible property regardless of whether delivered by disc or electronically. Custom software could be nontaxable when prepared to a customer's special order with real and substantial changes.

A software license avoided taxable-retail-sale treatment only if it met every condition in the rule, including a written agreement signed by both sides, restrictions on copying and transfer, a replacement-or-archive policy, and return or destruction of copies at the end. The letter said clicking “accept” online did not satisfy the signed-agreement condition then described.

Canned-software updates were taxable. If a maintenance agreement bundled those updates without separately stating and taxing them, the whole agreement was taxable as canned software. Separately stated installation, support, training, or seminar services could be exempt when they transferred no tangible property.

The GIL's Quill physical-presence nexus framework is historical and noncurrent; the Supreme Court overruled that rule in Wayfair in 2018.

What this means for you

Do not use this GIL as a current SaaS answer. Identify exactly what the customer receives, whether it is software or information, how customized it is, what the license says and how it is accepted, whether updates or tangible materials are transferred, and what current nexus law requires.

Common questions

Q: Did the GIL say web-based software was exempt?
A: No. It left the ASP, hosting, and web-software classification unresolved.

Q: Was electronic delivery alone enough to make canned software nontaxable?
A: No under the 2010 rule described.

Q: Is the letter's physical-presence nexus test current?
A: No. Wayfair overruled Quill's physical-presence rule.

Subject

Computer Software

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2010.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2010/st-10-0103.pdf
• Later authority: South Dakota v. Wayfair, Inc., 585 U.S. 162 (2018)

Original ruling text

ST 10-0103-GIL 10/29/2010 COMPUTER SOFTWARE
This letter concerns the taxation of computer software transactions. See 86 Ill. Adm. Code
130.1935. (This is a GIL.)

October 29, 2010

Dear Xxxxx:
This letter is in response to your letter dated January 5, 2010, in which you request
information. The Department issues two types of letter rulings. Private Letter Rulings (“PLRs”) are
issued by the Department in response to specific taxpayer inquiries concerning the application of a
tax statute or rule to a particular fact situation. A PLR is binding on the Department, but only as to the
taxpayer who is the subject of the request for ruling and only to the extent the facts recited in the PLR
are correct and complete. Persons seeking PLRs must comply with the procedures for PLRs found in
the Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General Information
Letter (“GIL”) is to direct taxpayers to Department regulations or other sources of information
regarding the topic about which they have inquired. A GIL is not a statement of Department policy
and is not binding on the Department. See 2 Ill. Adm. Code 1200.120. You may access our website
at www.tax.illinois.gov to review regulations, letter rulings and other types of information relevant to
your inquiry.
The nature of your inquiry and the information you have provided require that we respond with
a GIL. In your letter you have stated and made inquiry as follows:
We respectfully request a response to the following.
A taxpayer maintains a web-based business in New York. We would appreciate a
response as to the collection of sales tax in your state.
1.

A customer in your state is obtained either through an independent contractor,
salaried employee in New York State or through an advertisement.

2.

The company provides web-based training or an initial on-site set up.

3.

The customer uses the New York web-based server for servicing their clients
within your state.

Please respond to my office as to my client’s responsibility for collecting sales tax from
customers in your state.
If you have any questions, please call me.

DEPARTMENT’S RESPONSE:

Your inquiry touches on the issues of nexus and computer software. We hope you find the
following information helpful.
Nexus:
The Department declines to make nexus determinations in the context of Private Letter Rulings
or General Information Letters because the amount of information required to make those
determinations is often best gathered by an auditor. The following information outlines the principles
of nexus. We hope it is helpful to you.
An “Illinois Retailer” is one who either makes sales in the State of Illinois or maintains an
inventory in Illinois and fills Illinois orders from that inventory. The Illinois Retailer is then liable for
Retailers' Occupation Tax on gross receipts from sales and must collect the corresponding Use Tax
incurred by the purchasers.
Another type of retailer is the retailer maintaining a place of business in Illinois. The definition
of a “retailer maintaining a place of business in Illinois” is described in 86 Ill. Adm. Code 150.201(i).
This type of retailer is required to register with the State as an Illinois Use Tax collector. See 86 Ill.
Adm. Code 150.801. The retailer must collect and remit Use Tax to the State on behalf of the
retailer’s Illinois customers even though the retailer does not incur any Retailers' Occupation Tax
liability.
The United States Supreme Court in Quill Corp. v. North Dakota, 112 S.Ct. 1904 (1992), set
forth the current guidelines for determining what nexus requirements must be met before a person is
properly subject to a state's tax laws. The Supreme Court has set out a 2-prong test for nexus. The
first prong is whether the Due Process Clause is satisfied. Due process will be satisfied if the person
or entity purposely avails itself or himself of the benefits of an economic market in a forum state. Quill
at 1910. The second prong of the Supreme Court's nexus test requires that, if due process
requirements have been satisfied, the person or entity must have physical presence in the forum
state to satisfy the Commerce Clause. A physical presence is not limited to an office or other physical
building. Under Illinois law, it also includes the presence of any agent or representative of the seller.
The representative need not be a sales representative. Any type of physical presence in the State of
Illinois, including the vendor’s delivery and installation of his product on a repetitive basis, will trigger
Use Tax collection responsibilities. Please refer to Brown’s Furniture, Inc. v. Zehnder, 171 Ill.2d 410,
(1996).
The final type of retailer is the out-of-State retailer that does not have sufficient nexus with
Illinois to be required to submit to Illinois tax laws. A retailer in this situation does not incur Retailers’
Occupation Tax on sales into Illinois and is not required to collect Use Tax on behalf of its Illinois
customers. However, the retailer’s Illinois customers will still incur Use Tax liability on the purchase of
the goods and have a duty to self-assess and remit their Use Tax liability directly to the State.

Web-based software:
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 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 86 Ill. Adm. Code
150.101. These taxes comprise what is commonly known as "sales tax” in Illinois.

Illinois Retailers' Occupation and Use Taxes do not apply to sales of service that do not involve
the transfer of tangible personal property to customers. However, if tangible personal property is
transferred incident to sales of service, this will result in either Service Occupation Tax liability or Use
Tax liability for the servicemen depending upon his activities. For your general information see 86 Ill.
Adm. Code 140.101 through 140.109 regarding sales of service and Service Occupation Tax.
Services that involve the transfer of tangible personal property (such as, for example, written reports,
other tangible media and training manuals) incident to a sale of service may be subject to either
Service Occupation Tax liability or Use Tax liability.
Information or data that is electronically transferred or downloaded is not considered the
transfer of tangible personal property in this State. See 86 Ill. Adm. Code 130.2105(a)(3). However,
canned computer software is considered taxable tangible personal property regardless of the form in
which it is transferred or transmitted, including tape, disc, card, electronic means or other media. See
86 Ill. Adm. Code 130.1935. If the computer software consists of custom computer programs, then
the sales of such software may not be taxable retail sales. See Section 130.1935(c).
Custom computer programs or software are prepared to the special order of the customer. The
selection of pre-written or canned programs assembled by vendors into software packages does not
constitute custom software unless real and substantial changes are made to the programs or creation
of program interfacing logic. See Section 130.1935(c)(3).
If transactions for the licensing of computer software meet all of the criteria provided in Section
130.1935(a)(1), neither the transfer of the software or the subsequent software updates will be
subject to Retailers’ Occupation Tax. A license of software is not a taxable retail sale if:
A)
B)
C)

D)

E)

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

Please note that acceptance of a software license agreement by clicking “accept” while online
is not considered “acceptance” sufficient enough to constitute a written agreement signed by the
licensor and the customer for purposes of subsection (a)(1)(A) of Section 130.1935.
Charges for updates of canned software are fully taxable pursuant to Section 130.1935. If the
updates qualify as custom software under Section 130.1935(c), they may not be taxable. But, if
maintenance agreements provide for updates of canned software, and the charges for those updates
are not separately stated and taxed, then the whole agreement would be taxable as sales of canned
software.
Assuming that any services provided, such as installation, phone support, training, and
seminars, do not require the transfer of tangible personal property to the recipients of those services,
charges for such services are exempt if they are separately stated from the selling price of canned

software. See Section 130.1935(b). If computer software training or other support services are
provided in conjunction with a sale of custom computer software or an exempt license of computer
software, the charges for that training are not subject to tax.
It is not clear from your letter, but it appears to inquire regarding computer software Application
Service Providers (ASP’s), software hosting, and web-based software. The Department believes that
the proper forum for providing guidance regarding transactions involving computer software ASP’s,
software hosting, and web-based software is through a formal administrative rulemaking process
rather than through individual inquires such as letter ruling requests. The Department at present is in
the process of researching the nature and type of services and products provided by these types of
providers, including discussions with industry participants. The Department has found, based on the
discussions to date and previous letters received by the Department, that there is no universal
agreement regarding the nature of services or products that these types of providers provide to their
customers.
When the Department has completed its review of the products or services these types of
providers provide to their customers, it intends to propose regulations for adoption. Until that time,
these types of providers will have to determine, based on the definition contained in Section 2-25 of
the Retailers’ Occupation Tax Act (35 ILCS 120/2-25), whether the products they sell or lease are
“computer software.”
I hope this information is helpful. If you require additional information, please visit our website
at www.tax.illinois.gov or contact the Department’s Taxpayer Information Division at (217) 782-3336.
Sincerely,

Samuel J. Moore
Associate Counsel
SJM:msk