Was a supplier's charge for a website taxable in Illinois when the work was delivered electronically?

Plain-English summary

A purchaser was charged Illinois sales tax for a website and asked for the rule governing nontangible goods and electronically delivered work.

IDOR gave several classifications but did not apply one to the invoice. Information or data transferred or downloaded electronically was not tangible personal property. A service without a transfer of tangible property was outside Service Occupation and Use Tax.

Canned software was different: it was taxable tangible personal property regardless of delivery by disk, card, download, or other electronic means. Custom software prepared to a customer's special order could be nontaxable, and canned-software updates were taxable unless the updates qualified as custom.

A software license could avoid Retailers' Occupation Tax only if all five requirements in Section 130.1935(a)(1) were met. The GIL emphasized that clicking a box accepting online terms did not satisfy the historical requirement for a written agreement signed by both licensor and customer.

Common questions

Was all electronically delivered content nontaxable? No. Electronic data was not tangible, but canned software remained taxable.

Was custom software taxable? It could be nontaxable if prepared to special order.

Did clickwrap satisfy the signed-license test? No, under the rule described in 2012.

Did IDOR decide the website invoice? No.

Citations and references

• 86 Ill. Adm. Code 130.2105(a)(3) and 130.1935
• 35 ILCS 120/2 and 105/3

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2012.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2012/st-12-0011.pdf

Original ruling text

ST 12-0011-GIL 02/29/2012 COMPUTER SOFTWARE
This letter concerns the taxation of computer software transactions. See 86 Ill. Adm. Code
130.1935. (This is a GIL.)

February 29, 2012

Dear Xxxxx:
This letter is in response to your letter dated January 30, 2012, 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 spoke with someone in your Business Taxation Department and asked them to help
me in regards to being charged by a supplier for a web site. The company charged me
state sales tax and the representative from the State of Illinois I spoke with said; she did
not believe the company should have charged me state sales tax. She suggested that I
contact your offices at:
IL Dept. of Revenue
101 West Jefferson Street
Springfield, IL 62702
She said for me to request a general information letter on non tangible [sic] goods, such
as web sites, whereby they should not be charged state sales tax.
Could you please send to me this information and any documents as to the statute #,
etc. and copy of such statutes that say that in order to be taxed goods have to be
tangible.
Thank you very much for your assistance.
request, I can be reached at #.

If you need to reach me to clarify my

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. 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 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.
Illinois Service 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. See 86 Ill. Adm. Code 140.101. 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 his activities.
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 must be prepared to the special order of the customer.
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.
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. 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 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.

Please note that it is very common for software to be licensed over the internet and the
customer to check a box that states that they accept 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.
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.
Very truly yours,

Richard S. Wolters
Associate Counsel
RSW:msk