Did Illinois sales tax apply to application-monitoring and consulting services delivered without tangible property?

Plain-English summary

An application-performance-monitoring provider asked whether it had to collect Illinois sales tax. It helped software developers diagnose problems, analyze root causes, and identify bottlenecks, but did not fix their software. The company also had a data center in Illinois.

IDOR responded with general classification rules rather than a fact-specific binding decision:

• Professional or consulting services that did not transfer tangible personal property did not create Service Occupation Tax or Use Tax liability.
• Electronically transferred or downloaded information and data were not treated as tangible personal property.
• Transferring written reports, CDs, training manuals, or other tangible property with a service could create Service Occupation Tax or Use Tax liability.
• Canned software was taxable tangible personal property regardless of whether it was delivered on media or electronically.
• Custom software could be nontaxable if prepared to a customer's special order and meeting the rule's requirements.
• A canned-software license and later updates were nontaxable only if the license met all criteria in Section 130.1935(a)(1). Canned-software updates were otherwise taxable, and a maintenance agreement bundling taxable updates without separately stating and taxing them was fully taxable.

Common questions

Were pure monitoring or consulting services taxable? Not when they involved no transfer of tangible personal property.

Was electronically delivered information treated as tangible property? No.

Was electronically delivered canned software taxable? Yes, unless the licensing transaction met every exemption criterion.

Could a report or training manual change the result? Yes. Tangible reports, media, or manuals transferred with the service could create tax liability.

Citations and references

• 86 Ill. Adm. Code 140.101 through 140.109
• 86 Ill. Adm. Code 130.2105(a)(3)
• 86 Ill. Adm. Code 130.1935(a)(1), (c)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2013.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2013/st-13-0003.pdf

Original ruling text

ST 13-0003-GIL 01/18/2013 SERVICE OCCUPATION TAX
This letter concerns the taxation of tangible personal property transferred incident to
sales of service. See 86 Ill. Adm. Code 140.01. (This is a GIL.)
January 18, 2013
Dear:
This letter is in response to your letter received September 21, 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 just called your tax line and talked to a tax specialist. They requested me to write to
your department so that I can get our services classified correctly and obtain a legal
ruling in writing.
Our company, COMPANY1 based in CITY1, STATE provides SERVICE application
performance monitoring services for APPLICATION1, APPLICATION2, APPLICATION3
and APPLICATION4. Our services allow the developers of the application to diagnose
the problems with their applications, to assist them with root cause analysis, and to
identify bottleneck of their applications. We do not do fixes for their software. We help
them monitor the application’s performance and point out any issues. To get a deeper
understanding of the different services we provide please visit our website at X.
We currently have a datacenter physically located in CITY2, Ill. Can you please let us
know the sales taxability of our services (do we need to collect sales tax under your
state current law)? If you have any questions please feel free to reach me at XX or
through email at XXX.
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

ST 13-0003-GIL
January 18, 2013
Page 2
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 of 86
Ill. Adm. Code 140.101 through 140.109 regarding sales of service and Service Occupation Tax.
The provision of professional or consulting services that do not include the transfer of tangible
personal property with the provision of such services does not result in Service Occupation Tax or
Use Tax liability. The transfer of any tangible personal property such as, for example, written reports,
tangible media (CDs) and training manuals incident to a sale of service would result in Service
Occupation Tax liability or Use Tax liability. See 86 Ill. Adm. Code 140.01 et seq.
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.
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.
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