How did Illinois tax a cloud-based hotel texting service and separately charged printer usage?

Plain-English summary

A provider planned to offer hotels a cloud system through which guests could text requests and receive custom or preset replies. No software download or installation was required. The provider also supplied printers for a separately stated usage fee and asked about sales, use, lease, and telecommunications taxes.

IDOR said a service transferring no tangible personal property generally was not subject to Retailers' Occupation, Use, Service Occupation, or Service Use Tax. Viewing or downloading text and similar Internet data was an intangible transfer, not tangible personal property.

The letter did not expressly decide whether this particular texting service was taxable telecommunications. It explained that Illinois's 2015 Telecommunications Excise Tax applied to retail intrastate and interstate telecommunications, while "value added services" using computer processing to act on the form, content, code, or protocol for purposes other than transmission were excluded. When a telecommunications retailer supplied both, the charges had to be disaggregated and separately stated in its books and records or the entire charge was taxable as telecommunications.

For printers, a conditional sale—such as a lease with a nominal purchase option—was treated as a taxable sale, and receipts were subject to Retailers' Occupation Tax. Under a true lease, the lessor was the end user and owed Use Tax on cost; Illinois imposed no tax on rental receipts. The lessor could not pass its obligation through as a "tax," but the parties could privately agree that the lessee would reimburse the lessor.

What this means for you

Cloud delivery alone did not answer the telecommunications question. The provider needed to determine whether it sold transmission or qualifying value-added processing and maintain separate records for mixed charges. Printer contracts also had to be classified as true leases or conditional sales.

Common questions

Did the GIL conclusively classify the texting service for telecommunications tax? No.

Were online text and similar data tangible personal property? No.

Could a lessor charge tax on true-lease printer receipts? No. The lessor owed Use Tax on cost, although a private reimbursement agreement was allowed.

Citations and references

• 86 Ill. Adm. Code 130.2105.
• 35 ILCS 630/2, 3, and 4.
• 35 ILCS 636/5-10 and 5-15.
• 86 Ill. Adm. Code 130.220 and 130.2010.
• 86 Ill. Adm. Code 150.310(a)(3).

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-15-0046-gil.pdf

Original ruling text

ST 15-0046 GIL 07/10/2015 TELECOMMUNICATIONS EXCISE TAX
The Telecommunications Excise Tax is imposed upon the act or privilege of originating or receiving
intrastate or interstate telecommunications in Illinois. See 35 ILCS 630/1 et seq.

July 10, 2015

Dear Mr. XXXX:
This letter is in response to your letter March 19, 2015, 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 seeking a letter ruling on whether or not our client’s fees for texting services run
through a cloud based software system and printer usage fees are subject to sales/use
tax in Illinois.
Facts
Our Client, COMPANY, whose business is based in CITY, STATE, will be providing a
texting service. This is a cloud based software service and does not require any
downloads or tangible software installation for use. This is how it works, COMPANY
has a customer such as a hotel, the hotel’s customers can text in a request for anything
from an order to a question to a service request such as room reservation request. The
hotel receives the text (through COMPANY’s cloud based software service) and the
business is able to respond to their customer via text with a custom message or preset
reply. The customer receives confirmation of their order or question via text.
Additionally, if COMPANY’s customers need to print, COMPANY provides a printer for
this purpose. COMPANY purchases the printers ex-tax and provides them to their
customers for a separately stated “Usage Fee”.
Our research shows that electronic transfers of data in your state are taxable. However,
we do not know if this applies to our services as described above.
We respectfully request a written determination of the following: (Please assume that
we have nexus in your state when making your determination.)

1. Are these cloud based software texting services subject to sales/use tax in
your state?

2. Are the separately listed printer usage fees subject to sales/use tax in your
   state?
   Since COMPANY operates in many states, it would be cumbersome to separate out
   inventory items that will be leased/rented in your state and pay use tax on those items
   prior to the lease/rental of the item in your state. We did read on the Department of
   Revenues [sic] website in some previously issued letter rulings (ST-15-0018 GIL, ST12-0035 GIL and ST-12-005 GIL) that the lessor and lessee can make a private
   agreement for reimbursement of the tax to be paid by the lessee. If we purchase our
   printers ex-tax can we enter into a private agreement with the lessee for reimbursement
   of the tax by charging the lessee sales tax on the lease/rental amount? If so, do we
   need to have specific language on the invoice or in the lease agreement. Finally, can
   we separately state the tax on our invoices to the lessee?
3. Are there any other taxes, other than sales/use taxes, that these services as
   described above would be subject to in your state? (i.e. a separate telecommunications
   tax.)
   COMPANY does not currently have nexus in your state. However, they anticipate
   entering your state in the near future. As such, if you could expedite your response it
   would be greatly appreciated.
   Thank you for your considerations to these matters.

DEPARTMENT’S RESPONSE:
Sales Tax
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.
Retailers' Occupation and Use Taxes do not apply to sales of service. The Service Occupation
Tax Act and Service Use Tax are imposed on the transfer of tangible personal property incident to
sales of service. See 86 Ill. Adm. Code 140.101 and 160.101. If the transactions you are inquiring
about do not involve the transfer of any tangible personal property to your customers, then they
generally would not be subject to Service Occupation Tax or Service Use Tax.

I noted in your letter you stated “Our research shows that electronic transfers of data in your
state are taxable.” I am not entirely clear exactly what that statement means, but I wanted to point
out that the Department does not consider the viewing and downloading of text and similar data over
the Internet such as downloaded books, musical recordings, newspapers or magazines 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. See 86 Ill. Adm. Code
130.2105.
Telecommunications Excise Tax
The Illinois Telecommunications Excise Tax Act imposes a tax on the act or privilege of
originating or receiving intrastate or interstate telecommunications by persons in Illinois at the rate of
7% of the gross charges for such telecommunications purchased at retail from retailers by such
persons. 35 ILCS 630/3 and 4. The Simplified Municipal Telecommunications Tax Act allows
municipalities to impose a tax on the act or privilege of originating in such municipality or receiving in
such municipality intrastate or interstate telecommunications by persons in Illinois at a rate not to
exceed 6% for municipalities with a population of less than 500,000, and at a rate not to exceed 7%
for municipalities with a population of 500,000 or more, of the gross charges for such
telecommunications purchased at retail from retailers by such persons. 35 ILCS 636/5-10 and 5-15.
The incidence of the tax is on the person who originates or terminates intrastate or interstate
telecommunications, and the tax is collected and remitted to the Department by the retailer of the
telecommunications.
“Telecommunications,” in addition to the meaning ordinarily and popularly ascribed to it,
includes, without limitation, messages or information transmitted through use of local, toll and wide
area telephone service; private line services; channel services; telegraph services; teletypewriter;
computer exchange services; cellular mobile telecommunications service; specialized mobile radio;
stationary two way radio; paging service; or any other form of mobile and portable one-way or twoway communications; or any other transmission of messages or information by electronic or similar
means, between or among points by wire, cable, fiber-optics, laser, microwave, radio, satellite or
similar facilities. “Telecommunications” do not include “value added services in which computer
processing applications are used to act on the form, content, code and protocol of the information for
purposes other than transmission.” See 35 ILCS 630/2(a) and 2(c). If telecommunications retailers
provide these services, the charges for each service must be disaggregated and separately stated
from telecommunications charges in the books and records of the retailers. If these charges are not
thus disaggregated, the entire charge is taxable as a sale of telecommunications.
Leases
The State of Illinois taxes leases differently for Retailers’ Occupation Tax and Use Tax
purposes than the majority of other states. For Illinois sales tax purposes, there are two types of
leasing situations: conditional sales and true leases. A conditional sale is usually characterized by a
nominal or one dollar purchase option at the close of the lease term. Stated otherwise, if a lessor is
guaranteed at the time of the lease that the leased property will be sold, that transaction is considered
to be a conditional sale at the outset of the transaction. Persons who purchase items for resale under
conditional sales contracts can avoid paying tax to suppliers by providing certificates of resale that
contain all the information set forth in 86 Ill. Adm. Code 130.1405. All receipts received by a
lessor/retailer under a conditional sales contract are subject to Retailers’ Occupation Tax. See 86 Ill.
Adm. Code 130.2010. The lessors/retailers generally owe Retailers’ Occupation Tax on any
installment payments when they are received by the lessors/retailers. The lessees/purchasers owe

corresponding Use Tax on the amount of the installment payments that are collected by the
lessors/retailers.
A true lease generally has no buy out provision at the close of the lease. If a buy-out provision
does exist, it must be a fair market value buy-out option in order to maintain the character of the true
lease. Lessors of tangible personal property under true leases in Illinois are deemed end users of the
property to be leased. See 86 Ill. Adm. Code 130.220. As end users of tangible personal property
located in Illinois, lessors of a true lease owe Use Tax on their cost price of such property. The State
of Illinois imposes no tax on rental receipts. Consequently, lessees incur no tax liability. As stated
above, in the case of a true lease, the lessors of the property being used in Illinois would be the
parties with Use Tax obligations. The lessors would either pay their suppliers, if their suppliers were
registered to collect Use Tax, or would self-assess and remit the tax to the Department. If the lessors
already paid taxes in another state with respect to the acquisition of the tangible personal property,
they would be exempt from Use Tax to the extent of the amount of such tax properly due and paid in
such other state. See subsection (a)(3) of 86 Ill. Adm. Code 150.310.
Under Illinois law, lessors may not “pass through” their tax obligation to lessees as taxes.
However, lessors and lessees may make private contractual arrangements for a reimbursement of
the tax to be paid by the lessees. If lessors and lessees have made private agreements where the
lessees agree to reimburse the lessors for the amount of the tax paid, then the lessees are obligated
to fulfill the terms of the private contractual agreements.
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
DMB:mdb