How did IDOR answer a 2014 survey on sales-tax nexus, digital products, drop shipments, services, and SSUTA?

Plain-English summary

A tax publisher asked IDOR to complete a 2014 questionnaire on nexus-creating activities, digital property, cloud computing, drop shipments, service providers, and the Streamlined Sales and Use Tax Agreement.

IDOR refused to give the requested yes-or-no nexus matrix because nexus determinations were fact-specific. Under the historical framework stated in the letter, physical presence could include an Illinois agent or representative and repetitive delivery and installation. It also described the then-existing same-name product contract rule with a $10,000 preceding-four-quarter threshold.

Canned software was taxable regardless of delivery unless it was qualifying custom software or transferred under a license meeting all five conditions. Clicking to accept online terms did not satisfy the rule's signed-written-agreement condition. Viewing or downloading video, text, or other data was treated as an intangible transfer, but canned-software downloads remained taxable.

For drop shipments to Illinois customers, an Illinois supplier had to collect tax or document resale with a valid Certificate of Resale from its purchaser.

Pure services without tangible-property transfer were outside Illinois sales and use taxes described, while tangible property transferred incident to service could create Service Occupation Tax or Use Tax. The letter also stated that Illinois had not enacted the conforming legislation required for SSUTA membership as of that historical survey.

What this means for you

This is a broad historical snapshot based on law through 2013 and a letter issued in 2014, not current nexus or digital-tax confirmation. IDOR's central answer was that a survey checklist could not replace transaction-specific facts.

Common questions

Did IDOR complete the survey's nexus matrix? No.

Did click-through acceptance satisfy the software signature rule? No.

Was Illinois an SSUTA member under this 2014 response? No.

Citations and references

• 86 Ill. Adm. Code 150.201(i) and 150.801.
• 35 ILCS 105/2(1.2).
• 86 Ill. Adm. Code 130.1935.
• 86 Ill. Adm. Code 130.225 and 130.1405.
• Quill Corp. v. North Dakota, 112 S. Ct. 1904 (1992).

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2014.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2014/st-14-0028.pdf

Original ruling text

ST 14-0028-GIL 04/04/2014 NEXUS
This letter responds to a questionnaire regarding nexus. See Quill Corp. v. North Dakota,
112 S.Ct. 1904 (1992). (This is a GIL.)

April 4, 2014

Dear Xxxx:
This letter is in response to your email dated November 12, 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:
We are writing to ask you to complete the questionnaire for the COMPANY State Tax
Department Survey on behalf of your state. Attached is an Excel spreadsheet
containing questions. One column of the spreadsheet has all of your state’s responses
for 2013. An adjacent column is there for you to record your responses for 2014. To
avoid any errors, please fill out the 2014 column even if the answer has not changed
from 2013.
If you would like to add or change information you have previously recorded in the
comments section, please make those modifications in red font.
If you have any questions about this or if there is any way I can help you to complete
this year’s questionnaire, please contact me at xxxx or (xxx) xxx-xxxx.
The survey covers many of the gray areas of state tax law. Your responses will provide
useful guidance for taxpayers in complying with your state’s laws.
The questionnaire should be completed based on state law as of December 31,
2013.
Some new questions have been added to this year’s questionnaire. The new questions
and subsections are denoted in blue font.
As in previous years, the questionnaire asks you about nexus-creating activities for
sales tax purposes. In addition, it asks you to indicate the extent of your state’s
conformance to the Streamlined Sales and Use Tax Agreement.

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April 4, 2014

Your responses, along with the responses we receive from other states, will be
published by COMPANY, a leading publisher of international, federal, and state tax
analysis. More information about COMPANY can be found at xxxxx.
Please return your questionnaire to us by January 31, 2014. Your completed excel
spreadsheet should be emailed to me at xxxxxxxx.
I look forward to working with you.
......
In your questionnaire, you have stated, in part, as follows:
XI.

Sales Tax Nexus Policies

A.
B.
C.

Please identify any statute, regulation, or administrative pronouncement
that sets forth your state’s sales tax nexus policy.
Sourcing and Method of Delivery
Social Media Coupons

XII.

Sales Tax Nexus Creating Activities

Please indicate “Yes” or “No” to show whether each of the following activities or
relationships performed by an out-of-state corporation would, by itself, create
substantial nexus with your state for purposes of triggering the imposition of sales tax
collection requirements on the corporation.
When determining whether the listed activity/relationship would create substantial
nexus, assume that each item is the only activity/relationship the corporation has in your
state. Also assume that the out-of-state corporation has no property or employees
located in your state.
A “Yes” response means that an out-of-state corporation's performance of the listed
activity/relationship would, by itself, create substantial nexus and trigger the imposition
of sales tax collection requirements on the corporation. A “No” response means that an
out-of-state corporation's performance of the listed activity/relationship would not, by
itself, trigger nexus for purposes of your state's sales tax.
For the questions that you believe require more than a “Yes” or “No” answer, please set
forth in the comments section the factors that your state would consider in making a
nexus determination.
A.
B.
C.
D.
E.

General Activities
Remote Sales
Temporary or Sporadic Presence
Activities of Unrelated Parties
Financial Activities

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April 4, 2014

F.
G.
H.
I.
J.
K.
L.
M.
N.

Activities with Affiliates
Internet Activities
Activities Related to Digital Property
Distribution and Delivery
Third-Party Solicitation Activities and Attributional Nexus
Transactions Involving Franchise Agreements
Service Providers (New for 2014)
Cloud Computing (New for 2014)
Conformity to Streamlined Sales and Use Tax Agreement (SSUTA)
Provisions (as of Jan. 1, 2014)

DEPARTMENT’S RESPONSE:
We are unable to respond to your nexus survey in the format provided. Determinations
regarding nexus are very fact specific and cannot be addressed in the context of a General
Information Letter. However, we can provide you with basic guidelines that may be used to
determine whether a seller would be considered “an Illinois retailer” subject to Retailers’ Occupation
Tax liability or “a retailer maintaining a place of business in Illinois” subject to Use Tax collection
duties from their Illinois customers.
NEXUS
An “Illinois Retailer” is one who either accepts purchase orders in the State of Illinois or
maintains an inventory in Illinois and fills Illinois orders from that inventory. The Illinois Retailer is then
liable for Retailers' Occupation Tax on gross receipts from sales and must collect the corresponding
Use Tax incurred by the purchasers.
Another type of retailer is the retailer maintaining a place of business in Illinois. The definition
of a “retailer maintaining a place of business in Illinois” is described in 86 Ill. Adm. Code 150.201(i).
This type of retailer is required to register with the State as an Illinois Use Tax collector. See 86 Ill.
Adm. Code 150.801. The retailer must collect and remit Use Tax to the State on behalf of the
retailer’s Illinois customers even though the retailer does not incur any Retailers' Occupation Tax
liability.
The United States Supreme Court in Quill Corp. v. North Dakota, 112 S.Ct. 1904 (1992), set
forth the current guidelines for determining what nexus requirements must be met before a person is
properly subject to a state's tax laws. The Supreme Court has set out a 2-prong test for nexus. The
first prong is whether the Due Process Clause is satisfied. Due process will be satisfied if the person
or entity purposely avails itself or himself of the benefits of an economic market in a forum state. Quill
at 1910. The second prong of the Supreme Court's nexus test requires that, if due process
requirements have been satisfied, the person or entity must have physical presence in the forum
state to satisfy the Commerce Clause. A physical presence is not limited to an office or other physical
building. Under Illinois law, it also includes the presence of any agent or representative of the seller.
The representative need not be a sales representative. Any type of physical presence in the State of
Illinois, including the vendor’s delivery and installation of his product on a repetitive basis, will trigger
Use Tax collection responsibilities. Please refer to Brown’s Furniture, Inc. v. Zehnder, 171 Ill.2d 410,
(1996).

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April 4, 2014

The final type of retailer is the out-of-State retailer that does not have sufficient nexus with
Illinois to be required to submit to Illinois tax laws. A retailer in this situation does not incur Retailers’
Occupation Tax on sales into Illinois and is not required to collect Use Tax on behalf of its Illinois
customers. However, the retailer’s Illinois customers will still incur Use Tax liability on the purchase of
the goods and have a duty to self-assess and remit their Use Tax liability directly to the State.
Beginning July 1, 2011, the definition of a “retailer maintaining a place of business” was
amended to include additional types of retailers. A retailer maintaining a place of business also
includes a retailer having a contract with a person located in this State under which:
A. The retailer sells the same or substantially similar line of products as the person located in
this State and does so using an identical or substantially similar name, trade name, or
trademark as the person located in this State; and
B. The retailer provides a commission or other consideration to the person located in this
State based upon the sale of tangible personal property by the retailer. See 35 ILCS
105/2(1.2).

These provisions only apply if the cumulative gross receipts from sales of tangible personal
property by the retailer to customers in this State under all such contracts exceed $10,000 during the
preceding 4 quarterly periods. Please note that in Performance Mktg. Ass'n, Inc. v. Hamer, 998 N.E.
2d 54 (2013) the Illinois Supreme Court struck down 35 ILCS 105/2(1.1) and 35 ILCS 110/2(1.1), a
“click-thru nexus provision” enacted in 2011, but the above referenced provisions in 35 ILCS
105/2(1.2) remain good law.
COMPUTER SOFTWARE AND DIGITAL GOODS
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;

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April 4, 2014

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.
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.
The Department does not consider the viewing and downloading of video, text and other data
over the internet to be the transfer of tangible personal property. Therefore, such viewing and/or
downloading activity over the internet would not be subject to liability under the Retailers' Occupation
Tax Act, Use Tax Act, Service Occupation Tax Act, or Service Use Tax Act. Please note, however,
the transfer of any canned software (or update of canned software) is considered the transfer of
tangible personal property and will be subject to Retailers' Occupation Tax and Use Tax liability,
regardless of the means of delivery. See 86 Ill. Adm. Code 130.1935(a). The transfer or sale of
canned software downloaded electronically would be taxable.
DROP SHIPMENTS
The Department’s regulations regarding Drop Shipments can be found at 86 Ill. Adm. Code
130.225. A drop-shipment situation is normally one in which out-of-State purchaser (Purchaser)
makes a purchase for resale from a company (Company) which is registered with Illinois and has that
Company drop-ship the property to Purchaser’s customer (Customer) located in Illinois. For purposes
of this discussion, it is assumed that Purchaser is an out-of-State company that is not registered with
the State of Illinois and does not have sufficient nexus with Illinois to require it to collect Illinois Use
Tax.
Company, as a seller required to collect Illinois tax, must either charge and collect tax or
document appropriate exemptions when making deliveries in Illinois. In order to document the fact
that its sale to Purchaser is a sale for resale, Company is obligated by Illinois to obtain a valid
Certificate of Resale from Purchaser. See 86 Ill. Adm. Code 130.1405 for the requirements of a
Certificate of Resale.

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April 4, 2014

SOCIAL MEDIA COUPONS
We are examining this topic in order to issue regulations.
SERVICE PROVIDERS
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 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.
Under the Service Occupation Tax Act, businesses providing services (i.e. servicemen) are taxed
on tangible personal property transferred as an incident to sales of service. 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.

STREAMLINED SALES AND USE TAX AGREEMENT (SSUTA)
Illinois is not a member of the SSUTA. Public Act 92-221, effective August 2, 2001, created the
Simplified Sales and Use Tax Administration Act, which authorized Illinois to enter into multistate
discussions to review and/or amend the Streamlined Sales and Use Tax Agreement and which
authorized the Illinois Department of Revenue to enter into the Streamlined Sales and Use Tax
Agreement. Illinois has not enacted the conforming legislation required to be in compliance with the
Agreement. However, beginning on September 1, 2009, Illinois began taxing candy, soft drinks, and
grooming and hygiene products using definitions similar to SSUTA definitions.
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,

Cara Bishop
Associate Counsel
CB:lkm