Can an Illinois software reseller treat canned-software sales as exempt when the publisher, rather than the reseller, signs the license with the customer?

Plain-English summary

A reseller sold unmodified canned software, but the publisher—not the reseller—entered into the license agreement with each customer. IDOR said that structure did not automatically make the sale taxable.

If the publisher-customer agreement satisfied all five requirements in 86 Ill. Adm. Code 130.1935(a)(1), the reseller's transfer of the software and later updates were not subject to Retailers' Occupation Tax. The reseller had to obtain a copy of the signed agreement from each customer at or before the sale and keep it to document the exemption.

Canned software was otherwise generally taxable regardless of delivery method. A license failed the exemption if it did not meet every required condition.

Common questions

Did the reseller itself have to sign the license? No. The agreement could be between the publisher and the customer.

Was every publisher license exempt? No. It had to satisfy all five regulatory criteria.

What record did the reseller need? A copy of the customer's signed license agreement, obtained at or before the sale.

Citations and references

• 86 Ill. Adm. Code 130.101
• 86 Ill. Adm. Code 130.1935(a)(1), (c)(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-13-0032.pdf

Original ruling text

ST 13-0032-GIL 06/19/2013 COMPUTER SOFTWARE
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. (This is a GIL.)
June 19, 2013
Dear:
This letter is in response to your letter dated May 22, 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:
COMPANY is a reseller of software such as SOFTWARE1, SOFTWARE2,
SOFTWARE3 & others. We are strictly a reseller and in no way do we modify the
software that we purchase and sell. Our software sales are on a license basis and
therefore fall within Illinois Department of Revenue Code 130.1935 – sales of software
licenses. Our understanding is that sales that meet the five prong test laid out in the
code are exempt from sales tax.
The following are the tests to determine taxability: a) a written agreement between the
software licensor and the customer, b) restriction on the customer’s duplication and use
of the software, c) prohibitions on the customer from licensing, sublicensing or
transferring the software to a third party, d) the licensor has a policy of providing another
copy at minimal or no charge if the customer loses or damages the software or of
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 under penalties of perjury by the licensor; and the
vendor will provide another copy at minimal or no charge if the customer lose or
damages the software, and e) the customer must destroy or return all copies of the
software to the vendor at the end of the license period.
COMPANY is a reseller of software and is NOT the licensor. We do NOT have a written
agreement between our customer and COMPANY for each license sold to them.
Because of that fact, test (a) is not met. Therefore we do not believe that the
transactions between COMPANY and our customers are tax exempt.
We have been approached by numerous of our customers indicating that they believe
that we should NOT be charging them sales tax because they have a licensing

ST 13-0032-GIL
June 19, 2013
Page 2
agreement between the licensor (SOFTWARE1) and themselves and therefore they
should not be charged sales tax by COMPANY.
We have called the Illinois Department of Revenue as have some of our customers and
we each seem to get slightly different messages. As such, I have been compelled to
write this to Legal Services in order to obtain a General Information Letter clarifying the
position that we should be taking.
As such, please clarify the tax code 130.1935, indicating whether sales by a reseller of
software who is not the licensor should be exempt from sales tax or whether those sales
are subject to charging sales tax.
To clarify the facts one more time:
• COMPANY is a reseller of software;
• COMPANY does not change or modify the software in any way;
• The software that is sold is licensed between the publisher (not COMPANY) and
our customers;
• COMPANY does NOT have a license agreement between ourselves and our
customers;
• Our customers DO have license agreements between themselves and the
software publishers.
Please clarify whether we (COMPANY, the reseller) should be charging sales tax to our
customers on the sale of software or not.
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. The tax is measured by the seller's gross receipts from retail sales made in the
course of such business. "Gross receipts" means the total selling price or the amount of such sales.
The retailer must pay Retailers' Occupation Tax to the Department based upon its gross receipts, or
actual amount received, from the sale of the tangible personal property.
Generally, sales of “canned” computer software are taxable retail sales in Illinois. Canned computer
software is considered to be tangible personal property regardless of the form in which it is
transferred or transmitted, including tape, disc, card, electronic means, or other media. However, if
the computer software consists of custom computer programs, then the sales of such software may
not be taxable retail sales. 86 Ill. Adm. Code 130.1935. Computer software that is not custom
software is considered to be canned computer software, whether it is “stand-alone” or not. 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).

ST 13-0032-GIL
June 19, 2013
Page 3
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.

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 your letter you indicate that your customers have entered into licensing agreements directly with
the companies that write the computer software and sell it to you for resale. If the licensing
agreement between the companies that write the computer software and your customers meet the
requirements of Section 130.1935(a)(1), neither the transfer of the software by you to your customers
nor the subsequent software updates will be subject to Retailers' Occupation Tax. However, at or
before the time of sale, you must obtain for your records a copy of the signed licensing agreement
from each of your customers to document these exempt sales.
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