Did IDOR decide whether the software license attached to ST 13-0015-GIL qualified for Illinois's canned-software exemption?

Plain-English summary

A software licensor asked IDOR to rule that its attached license agreement qualified for Illinois's canned-software license exemption, partly because a customer was under audit.

IDOR did not decide the agreement's taxability. It said it no longer issued PLRs determining whether a particular canned-software license met 86 Ill. Adm. Code 130.1935(a)(1), because the regulation was sufficiently clear for the parties to apply.

The Department gave general guidance: canned software was taxable regardless of delivery method unless every one of the five license requirements was met. Online checkbox acceptance did not satisfy the requirement for a written agreement signed by both licensor and customer.

Separately sold optional maintenance agreements generally were not taxable, but new canned-software releases were taxable. If update charges were bundled with support or other services without being separately stated and taxed, the whole agreement was taxable.

Common questions

Did IDOR approve the attached license? No.

Did a click-through acceptance count as both written signatures? No, under this 2013 GIL.

Could bundled new software versions make maintenance taxable? Yes.

Citations and references

• 2 Ill. Adm. Code 1200.110(a)(3)(D), (a)(4)
• 86 Ill. Adm. Code 130.1935(a) through (c)
• 86 Ill. Adm. Code 140.301(b)(3)

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-13-0015.pdf

Original ruling text

ST 13-0015-GIL 03/31/2013 COMPUTER SOFTWARE
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. See 86 Ill.
Adm. Code 130.1935. (This is a GIL.)
March 31, 2013
Dear:
This letter is in response to your letter dated November 6, 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:
We are writing you to get an official letter ruling from the Illinois Department of Revenue
stating whether our software is taxable or not. We do require our customer’s to sign a
software license agreement for the use of our software. Section 130.1935 under a) 1,
states that 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, and continues through letter
E.
We have attached the actual Software License Agreement and Software Maintenance
Agreement, that our customer in question, is referring to regarding whether or not our
software should be taxable or not. Our customer is being audited by Ms. Z and she is
telling our customer that she has reviewed our license agreement and believes our
software to be taxable.
We need an official letter ruling from the Illinois Department of Revenue stating if our
software is taxable or not. Our attached software license states all the facts under
130.1935 number 1 A – E, which leads us to believe that our software is not taxable.
Please send your letter ruling as soon as you can, so that we can charge sales tax
correctly to our Illinois customers who purchase the right to use our software under the
agreement of our license.
DEPARTMENT’S RESPONSE:
The Department’s regulation “Public Information, Rulemaking and Organization” provides that
“[w]hether to issue a private letter ruling in response to a letter ruling request is within the discretion of

ST 13-0015-GIL
March 31, 2013
Page 2
the Department. The Department will respond to all requests for private letter rulings either by
issuance of a ruling or by a letter explaining that the request for ruling will not be honored.” 2 Ill. Adm.
Code 1200.110(a)(4). Further, the Department’s regulations regarding Private Letter Rulings provide
that “[i]f there is case law or there are regulations dispositive of the subject to the request, the
Department will decline to issue a letter ruling on the subject." 86 Ill. Adm. Code 1200.110(a)(3)(D).
We understand your letter as a request regarding whether the contract that was attached to that letter
qualified as a nontaxable license of prewritten computer software under the provisions of 86 Ill. Adm.
Code 130.1935 of the Department’s administrative rules. The Department has determined that it will
no longer issue Private Letter Rulings regarding whether a specific license of prewritten (canned)
computer software meets the requirements of subsection (a)(1) of 86 Ill. Adm. Code 130.1935. It is
the Department’s position that its regulation at 86 Ill. Adm. Code 130.1935 is sufficiently clear for a
licensee or licensor to determine whether a specific license of prewritten computer software meets
the requirements of subsection (a)(1) of that rule. Although we cannot provide you with a Private
Letter Ruling, we hope the following general information will be of assistance.
Generally, retail sales or transfers of “canned” computer software are taxable in Illinois regardless of
the means of delivery. For instance, the sale or transfer of canned computer software downloaded
electronically would be taxable. However, if the computer software consists of custom computer
programs, then the sales of such software may not be taxable retail sales. See 86 Ill. Adm. Code
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.

ST 13-0015-GIL
March 31, 2013
Page 3
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.
A license of canned software is subject to Retailers' Occupation Tax liability if all of the criteria set out
in 86 Ill. Adm. Code 130.1935(a)(1) are not met.
In general, maintenance agreements that cover computer software are treated the same as
maintenance agreements for other types of tangible personal property. See 86 Ill. Adm. Code
130.1935(b). The taxation of maintenance agreements is discussed in subsection (b)(3) of Section
140.301 of the Department’s administrative rules under the Service Occupation Tax Act. See 86 Ill.
Adm. Code Sec. 140.301(b)(3). The taxability of agreements for the repair or maintenance of tangible
personal property depends upon whether charges for the agreements are included in the selling price
of the tangible personal property. If the charges for the agreements are included in the selling price of
the tangible personal property, those charges are part of the gross receipts of the retail transaction
and are subject to tax. In those instances, no tax is incurred on the maintenance services or parts
when the repair or servicing is performed. A manufacturer’s warranty that is provided without
additional cost to a purchaser of a new item is an example of an agreement that is included in the
selling price of the tangible personal property.
If agreements for the repair or maintenance of tangible personal property are sold separately from
tangible personal property, sales of those agreements are not taxable transactions. However, when
maintenance or repair services or parts are provided under those agreements, the service or repair
companies will be acting as service providers under provisions of the Service Occupation Tax Act that
provide that when service providers enter into agreements to provide maintenance services for
particular pieces of equipment for stated periods of time at predetermined fees, the service providers
incur Use Tax based on their cost price of tangible personal property transferred to customers
incident to the completion of the maintenance service. See 86 Ill. Adm. Code Sec. 140.301(b)(3).
The sale of an optional maintenance agreement or extended warranty is an example of an agreement
that is not generally a taxable transaction.
If, under the terms of a maintenance agreement involving computer software, a software provider
provides a piece of object code (“patch” or “bug fix”) to be inserted into an executable program that is
a current or prior release or version of its software product to correct an error or defect in software or
hardware that causes the program to malfunction, the tangible personal property transferred incident
to providing the patch or bug fix is taxed in accordance with the provisions discussed above.
In contrast to a patch or bug fix, if the sale of a maintenance agreement by a software provider
includes charges for updates of canned software, which consist of new releases or new versions of
the computer software designed to replace an older version of the same product and which include
product enhancements and improvements, the general rules governing taxability of maintenance
agreements do not apply. This is because charges for updates of canned software are fully taxable
as sales of software under Section 130.1935(b). (Please note that if the updates qualify as custom
software under Section 130.1935(c) they may not be taxable). Therefore, if a maintenance agreement
provides for updates of canned software, and the charges for those updates are not separately stated

ST 13-0015-GIL
March 31, 2013
Page 4
and taxed from the charges for training, telephone assistance, installation consultation, or other
maintenance agreement charges, then the whole agreement is taxable as a sale 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.
Very truly yours,

Richard S. Wolters
Associate Counsel