How did Illinois tax forensic data-collection services delivered online, with no results, or on a hard drive, disc, or thumb drive?

Plain-English summary

A forensic-services company collected documents, email, and other stored information from devices. It could deliver extracted results on physical media, upload them to a hosting website, or find no responsive information.

IDOR said viewing or downloading text and similar data online was an intangible transfer, so no tangible personal property was transferred. Likewise, when a service transferred no property, Illinois sales, use, and service taxes tied to tangible property did not apply.

Providing the results on a hard drive, CD/DVD, thumb drive, or other physical medium was different. That was a transfer of tangible personal property incident to service and was subject to Service Occupation Tax or Use Tax under the applicable serviceman method.

The four methods were: tax on a separately stated selling price for the property; tax using 50% of the entire bill; Service Occupation Tax on cost for a registered de minimis serviceman; or Use Tax on cost for a qualifying unregistered de minimis serviceman. The de minimis test was annual, not transaction-by-transaction.

What this means for you

Delivery format changed the tax result. Online access to extracted data did not itself transfer tangible property, while a drive or disc did and required the provider to apply the correct serviceman tax method.

Common questions

Was hosted online delivery taxable as tangible property? No.

Was delivery on physical media taxable? Yes, under Service Occupation Tax or Use Tax rules.

Could de minimis status be tested per job? No.

Citations and references

• 86 Ill. Adm. Code 140.101, 140.106, 140.108, and 140.109.
• 86 Ill. Adm. Code 130.101, 150.101, and 160.101.

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-14-0032.pdf

Original ruling text

ST 14-0032-GIL 07/07/2014 SERVICE OCCUPATION TAX
The Service Occupation Tax is a tax imposed upon servicemen engaged in the business of making
sales of service in this State, based on the tangible personal property transferred incident to sales of
service. See 86 Ill. Adm. Code Part 140. (This is a GIL.)

July 7, 2014

Dear Xxxx:
This letter is in response to your letter dated May 21, 2014, 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 respectfully requests a Private Letter Ruling from the Department of
Revenue regarding the collection of Sales Tax for services provided in the State of
Illinois.
Taxpayer:

COMPANY
ADDRESS
CITY, STATE, ZIP CODE
xx-xxxxxxx
IL Account ID: xxxx-xxxx

Nature of Business: COMPANY provides forensic and collection services.
Forensic and collection service involves the identification of documents, emails, or any
electronically stored information from cell phones, laptops, tablets, computer and/or
hard drives. The customer provides the specific parameters of what is to be located:
i.e. Dates, name, etc… Once the information is identified by a COMPANY EMPLOYEE
the information may be provided to the customer is [sic] several ways.
Option 1: Customers may request to receive a hard drive, CD/DVD, thumb drive or any
other form of media with copies of the documents and/or information extracted from the
device. This media is billed separately at COMPANY standard pricing.

COMPANY
Page 2
July 7, 2014

Option 2: Customers may request that the extracted information be uploaded to the
COMPANY Hosting website. The customer can then login to the website and review
the information via the internet.
Option 3: No information is found.
COMPANY would like a ruling as to the assessment of sales tax on each option with
regard to the service and any deliverable provided.
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. 86 Ill. Adm.
Code 130.101. The Use Tax Act imposes a tax upon the privilege of using in this State tangible
personal property purchased at retail from a retailer. 86 Ill. Adm. Code 150.101. If no tangible
personal property is being transferred to the customers, then neither Illinois Retailers’ Occupation Tax
nor Use Tax would apply. Likewise, the Service Occupation Tax Act and Service Use Tax are
imposed on the transfer of tangible personal property incident to sales of service. 86 Ill. Adm. Code
140.101 and 160.101. If no tangible personal property is being transferred to customers incident to
the services being provided then no Illinois Service Occupation Tax or Service Use Tax would apply.
The Department does not consider the viewing or downloading of text and similar data over the
Internet to be the transfer of tangible personal property. These types of transactions represent the
transfer of intangibles and are thus not subject to Retailers' Occupation and Use Tax. However,
when items such as a hard drive, CD/DVD, or thumb drive are transferred incident to a sale of
service, the Department considers that to be a transfer of tangible personal property subject to either
the Service Occupation Tax Act or the Use Tax Act.
Whether the purchase of tangible personal property that is transferred to service customers is
subject to Service Occupation Tax liability or Use Tax liability for the servicemen, depends upon
which tax base the servicemen use to calculate their liability. Servicemen may calculate their tax base
in one of four ways: (1) separately stated selling price; (2) 50% of the entire bill; (3) Service
Occupation Tax on cost price if they are registered de minimis servicemen; or, (4) Use Tax on cost
price if the servicemen are de minimis and are not otherwise required to be registered under Section
2a of the Retailers’ Occupation Tax Act.
Using the first method, servicemen may separately state the selling price of each item
transferred as a result of sales of service. The tax is based on the separately stated selling price of
the tangible personal property transferred. If servicemen do not wish to separately state the selling
price of the tangible personal property transferred, those servicemen must use the second method
where they will use 50% of the entire bill to their service customers as the tax base. Both of the
above methods provide that in no event may the tax base be less than the cost price of the tangible
personal property transferred. Under these methods, servicemen may provide their suppliers with
Certificates of Resale when purchasing the tangible personal property to be transferred as a part of
the sale of service. Upon selling their product, they are required to collect the corresponding Service
Use Tax from their customers. See 86 Ill. Adm. Code 140.106.

COMPANY
Page 3
July 7, 2014

The third way servicemen may account for their tax liability only applies to de minimis
servicemen who have either chosen to be registered or are required to be registered because they
incur Retailers’ Occupation Tax liability with respect to a portion of their business. Servicemen may
qualify as de minimis if they determine that their annual aggregate cost price of tangible personal
property transferred incident to sales of service is less than 35% of their annual gross receipts from
service transactions (75% in the case of pharmacists and persons engaged in graphic arts
production). See 86 Ill. Adm. Code 140.101(f). This class of registered de minimis servicemen are
authorized to pay Service Occupation Tax (which includes local taxes) based upon the cost price of
tangible personal property transferred incident to sales of service. Servicemen that incur Service
Occupation Tax collect the Service Use Tax from their customers. They remit the tax to the
Department by filing returns and do not pay tax to suppliers. They provide suppliers with Certificates
of Resale for the property transferred to service customers. See 86 Ill. Adm. Code 140.108.
The final method of determining tax liability may be used by de minimis servicemen not
otherwise required to be registered under Section 2a of the Retailers' Occupation Tax Act.
Servicemen may qualify as de minimis if they determine that their annual aggregate cost price of
tangible personal property transferred incident to sales of service is less than 35% of their annual
gross receipts from service transactions (75% in the case of pharmacists and persons engaged in
graphic arts production). Such de minimis servicemen may pay Use Tax to their suppliers or may self
assess and remit Use Tax to the Department when making purchases from unregistered out-of-State
suppliers. Those servicemen are not authorized to collect “tax” from their service customers because
they, not their customers, incur the tax liability. Those servicemen are also not liable for Service
Occupation Tax. It should be noted that servicemen do not have the option of determining whether
they are de minimis using a transaction-by-transaction basis. See 86 Ill. Adm. Code 140.109.
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

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