How did Illinois tax HVAC retrofit hardware bundled with cloud monitoring and a SaaS subscription?

Plain-English summary

An HVAC manufacturer planned to sell retrofit hardware and a 12-month cloud subscription for equipment monitoring, control, analysis, and data access. Hardware could be installed by a third party or the manufacturer, and a reseller might buy both components.

IDOR did not provide a transaction-by-transaction answer. It said tangible hardware sold and delivered in Illinois was taxable unless the seller documented a resale or other exemption. A reseller purchasing the hardware for resale should provide a certificate satisfying Section 130.1405.

The subscription to access online data appeared to be a service. Viewing, downloading, or electronically transmitting data over the Internet was not a tangible-property transfer. If a service also transferred hardware or other property, the serviceman could incur liability under one of four methods based on separately stated property price, 50% of the bill, or property cost depending on registration and de minimis status.

IDOR expressly said it was still evaluating SaaS, cloud computing, application service providers, and similar transactions. Any later determination would operate prospectively.

What this means for you

Separate invoicing helped identify hardware and subscription components but did not produce a complete SaaS ruling. Hardware resale documentation, installation facts, transferred property, and the unresolved SaaS classification all required separate analysis.

Common questions

Was the retrofit hardware taxable? Yes, unless a resale or other exemption was documented.

Was online data itself tangible property? No.

Did IDOR decide SaaS taxability? No.

Citations and references

• 86 Ill. Adm. Code 130.101, 130.1405, and 150.101.
• 86 Ill. Adm. Code 140.101.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2015.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2015/st-15-0015.pdf

Original ruling text

ST 15-0015 GIL 03/16/2015 SALE OF SERVICE

If no tangible personal property is transferred to the customer, then no Illinois Retailers’
Occupation Tax or Service Occupation Tax would apply. See 86 Ill. Adm. Code Parts
130 and 140. (This is a GIL.)

March 16, 2015

Dear XXXX:

This letter is in response to your letter dated December 3, 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:

My question is in reference to the taxability of Service as a Software
(SaaS) or cloud computing.

We are a manufacturer of commercial HVAC equipment, and will be
selling a new product line that consists of two elements: hardware and
software as a service. Please see the product facts listed below:

e The solution provided by COMPANY provides facility and
equipment management, monitoring, control, analysis, and
decision-making via a secure, cloud-communicating machine-to-
machine gateway that captures, analyzes and delivers building and
equipment information, and third party content, to a user device via
wireless or local area network connection.

e solution consists of two elements: the hardware component on
each unit necessary to deliver power and other data to the cloud,
and the Software as a Service subscription necessary for
retrieving that information from the cloud.

e Hardware is available installed onto new equipment from the factory, and
included in the equipment cost at the time of billing. For existing units,
hardware can be purchased as a retrofit kit, and installed by a third party
service provider, or potentially COMPANY.

e Software as a Service is sold as a subscription package. Cost of cellular
access is included in the subscription.

e COMPANY will provide customer support, and will maintain software
capability located in STATE 1. The customer will not download software
onto their network, and will access data by cloud only. No customer
involvement in updating software, as all will be handled by COMPANY.

As a registered taxpayer in STATE 2, we are requesting guidance on determining
the taxability of four possible transaction scenarios.

1. Customer purchases hardware as a retrofit kit (installed by a third party
   hired by the customer), and a 12 month subscription to access data
   online. All items are separately stated on the invoice.

2. Customer purchases hardware as a retrofit kit (installed by COMPANY),
   and a 12 month subscription to access data online. All items are
   separately stated on the invoice.

3. Customer purchases a 12 month subscription service only.

4. Customer (a third party rep) purchases the hardware retrofit kit and
   subscription service, and will resale to the end user. The customer
   provides a valid STATE 2 resale certificate.

Please contact me at the mailing address, phone number and email
address listed below with any questions. Thank you for your assistance.

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 35 ILCS 120/2; 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 35 ILCS 105/3; 86 Ill. Adm.
Code 150.101. These taxes comprise what is commonly known as "sales" tax in Illinois.
If the purchases occur in Illinois, the purchasers must pay the Use Tax to the retailer at
the time of purchase. The retailers are then allowed to retain the amount of Use Tax
paid to reimburse themselves for their Retailers’ Occupation Tax liability incurred on
those sales. If the purchases occur outside Illinois, purchasers must self assess their
Use Tax liability and remit it directly to the Department.

When an Illinois retailer sells tangible personal property and delivers it in Illinois,
sales tax is due unless an exemption can be documented. The resale exemption is
applicable when making purchases of tangible personal property that the purchaser
intends to in turn sell. For general information regarding resale certificates, the

Department’s regulation entitled “Seller's Responsibility to Obtain Certificates of Resale
and Requirements for Certificates of Resale,” is found at 86 Ill. Adm. Code 130.1405.

Retailers’ Occupation and Use Taxes do not apply to sales of service. Some of
the transactions you have described appear to be service transactions (for example, a
subscription to access data online). 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. The serviceman’s liability may be calculated in one of four ways:

(1) separately stated selling price of tangible personal property transferred
incident to service;

(2) 50% of the serviceman's entire bill;

(3) | Service Occupation Tax on the serviceman's cost price if the serviceman
is a registered de minimis serviceman; or

(4) Use Tax on the serviceman's cost price if the serviceman is de minimis
and is not otherwise required to be registered under Section 2a of the
Retailers' Occupation Tax Act.

Note, the Department does not consider the viewing, downloading or
electronically transmitting of video, text and other data over the internet to be the
transfer of tangible personal property. However, if a company provides services that are
accompanied with the transfer of tangible personal property, such service transactions
are generally subject to tax liability under one of the four methods set forth above.

The Department is currently evaluating the taxability of Software as a Service
(SaaS), cloud computing, computer software Application Service Providers (ASPs) and
similar types of transactions. The Department has found that there is no universal
agreement regarding the nature of these transactions. When the Department makes a
determination regarding the taxability of these transactions, that determination will
operate prospectively only.

| 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

DMB:kd