Did checking an online box create the signed software-license agreement needed for Illinois's canned-software license exemption?

Plain-English summary

A software seller asked IDOR for a binding private letter ruling that its product was nontaxable. The Department declined, saying it no longer issued PLRs deciding whether a particular canned-software license met the five-part rule because the regulation was sufficiently clear.

IDOR instead gave general guidance. Canned software was taxable regardless of delivery method, including electronic download, unless the license satisfied all five requirements in 86 Ill. Adm. Code 130.1935(a)(1). Custom software prepared to a customer's special order might be nontaxable.

The Department specifically said that clicking an online box to accept terms did not satisfy the requirement for a written agreement signed by the licensor and customer. The agreement needed both written signatures.

The letter also explained that separately sold optional maintenance agreements generally were not taxable, but bundled new canned-software versions could make the whole agreement taxable when update charges were not separately stated and taxed.

Common questions

Did IDOR rule that the seller's product was exempt? No. It declined the requested PLR.

Was electronic delivery itself exempt? No. Canned software was generally taxable regardless of delivery method.

Did clickwrap acceptance count as both parties' signatures? No, under the rule described in this 2013 letter.

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-13-0023.pdf

Original ruling text

ST 13-0023-GIL 04/30/2013 COMPUTER SOFTWARE
If all the criteria listed in subsection (a)(1)(A)-(E) of Section 130.1935 are met, then
neither a transaction involving the licensing of computer software nor the subsequent
software updates will be considered a taxable retail sale subject to Retailers’
Occupation and Use Tax. See 86 Ill. Adm. Code 130.1935. (This is a GIL.)
April 30, 2013
Dear:
This letter is in response to your letter dated February 11, 2013, 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:
According to the contents of Title 86 Part 130, Section 130.1935 “Computer Software,”
we have determined the sale of our product as nontaxable. However, we would like to
request a private letter ruling to legally determine the taxability. Attached is a detailed
description of our product. If you have any further questions regarding our product
description, please contact Ms. Z at XXX.
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
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).
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

ST 13-0023-GIL
April 30, 2013
Page 2
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)
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 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.

ST 13-0023-GIL
April 30, 2013
Page 3
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
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,

Debra M. Boggess
Associate Counsel