How did Illinois distinguish taxable canned software from custom software, qualifying licenses, and related support or training services?

Plain-English summary

Illinois responded to a software company asking about hourly service calls, custom programming, integrations, consulting, canned software, support, and training. The GIL supplied classification rules rather than issuing a separate yes-or-no determination for every offering.

Electronic information and services

Information or data transferred electronically was not tangible personal property. A service with no property transfer was outside Illinois Retailers' Occupation and Use Taxes.

If a service transferred property such as a written report, tangible media, or a training manual, Service Occupation Tax or Use Tax rules could apply. This distinction mattered because the requester said most deliverables were electronic but training included a tangible guide.

Canned and custom software

Canned software was taxable tangible personal property regardless of delivery method, including electronic transmission.

Custom software prepared to a customer's special order might not be a taxable retail sale. Merely selecting and assembling prewritten programs did not create custom software unless the vendor made real and substantial program changes or created program-interfacing logic.

Nontaxable license conditions

A software license and later updates were not taxable only when all five conditions in 86 Ill. Adm. Code 130.1935(a)(1) were met. Among other requirements, the license needed a written agreement signed by licensor and customer, restrictions on duplication and transfer, a replacement or archival-copy policy, and destruction or return of copies at the end of the license period.

Clicking "accept" online did not satisfy the signed-written-agreement condition described in the rule.

Updates and related services

Canned-software updates were fully taxable. If a maintenance agreement included canned-software updates and those charges were not separately stated and taxed, the entire agreement was taxable as canned software. Qualifying custom-software updates might not be taxable.

Separately stated installation, phone support, training, and seminar charges could be exempt when those services transferred no tangible personal property. Training connected to nontaxable custom software or a nontaxable software license was not taxable whether or not separately stated.

What this means for you

Software vendors

Classify each deliverable independently. Electronic delivery does not make canned software nontaxable, and a click-through license did not meet the specific signed-agreement condition stated in this 2011 GIL.

Service and training providers

Document whether reports, manuals, or other physical items are transferred. A tangible training guide can move the transaction into the serviceman rules even when the instruction itself is a service.

Common questions

Q: Was electronically delivered canned software taxable?
A: Yes.

Q: Did clicking "accept" create the qualifying signed license?
A: No under the rule stated in the GIL.

Q: Were separately stated support or training charges always exempt?
A: No. The stated treatment assumed no tangible personal property was transferred.

Citations and references

• 86 Ill. Adm. Code 130.1935 — canned software, custom software, qualifying licenses, updates, and related service charges.
• 86 Ill. Adm. Code 130.2105(a)(3) — electronically transferred information or data.
• 86 Ill. Adm. Code 140.101 through 140.109 — services involving transfers of tangible personal property.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2011.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2011/st-11-0068.pdf

Original ruling text

ST 11-0068-GIL 08/22/2011 COMPUTER SOFTWARE
This letter concerns the taxation of computer software transactions. See 86 Ill. Adm. Code
130.1935. (This is a GIL.)

August 22, 2011

Dear Xxxxx:
This letter is in response to your letter dated November 23, 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:
I am requesting your help to determine the sales taxability of services my company
furnishes to our clients. The following services are described below:
BILLABLE SERVICE CALL. A service that is outside of the client’s original support
contract. When a client calls in and needs assistance outside of the parameters
outlined in their support contract, COMPANY bills the client per hour of support. There
are no tangible materials exchanged during this process.
CUSTOM PROGRAMMING.
A service that provides new features/functionality,
reporting, or interfaces that are unique to a business and/or specifically requested by a
business using software development to address the need. The solution is generally
developed for a single customer, designed to their specifications. There is no tangible
material exchanged during this process as any software updates are provided to the
client via [sic] or ftp site.
INTEGRATION. A service that involves the development of process to allow two or
more applications to function together, exchanging information and taking appropriate
actions based on the exchange. There is no tangible material exchanged during this
process.
CONSULTATION. The service whereby an analyst or subject matter expert reviews an
operation or need and provides feedback as to alternative approaches to achieve either
improvement or a solution to the need. There are no tangible materials exchanged
during this process as any reports provided to the client are sent electronically through
email or ftp site.

SOFTWARE. A canned product that has already been developed and is resold by
COMPANY. The product is designed to perform all of the tasks needed to collect
money. There are no tangible materials exchanged during this process as any reports
provided to the client are sent electronically through email or ftp site.
SUPPORT. An additional service that is offered to the client and is not tied to the
software or the original contract. A Support Agreement is designed to provide answers
to the most commonly asked questions from end users of the software or provide
resolutions that exist in a knowledge base to those of a more complex nature. There is
no tangible material exchanged during this process.
TRAINING. A service that allows users to gain the knowledge, skills, and competencies
they need to excel at their position. This is as a result of the teaching of vocational or
practical skills and knowledge that relate to specific useful competencies. Training is
provided through three facets. First is Online Training (E-Learning) where the client is
located at their office and a COMPANY trainer is connected remotely. On-Site
education involves the COMPANY trainer traveling to the client’s location and training
in-person. The third is training at COMPANY where the client travels to COMAPNY’s
offices to train in-person. In each instance, the trainer provides a tangible training guide
for the client’s reference.
We would appreciate your time and effort to respond to our taxability questions. If you
need further clarification as to the products and services described above, please do not
hesitate to contact me.

DEPARTMENT’S RESPONSE:
The Illinois Retailers' Occupation Tax Act imposes a tax upon persons engaged in this State in
the business of selling tangible personal property to purchasers for use or consumption. 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 nor 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 nontaxable custom computer software or a nontaxable license
of computer software, the charges for that training are not subject to tax, regardless of whether they
are separately.
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