Were hosted customer-management, inventory, antivirus, firewall, and reporting solutions subject to Illinois sales or service tax?

Plain-English summary

A provider described hosted customer-relationship, loyalty, inventory, antivirus, firewall, threat-management, monitoring, alert, and reporting solutions and asked how Illinois sales taxes applied.

IDOR said the described transactions appeared to be services. When no tangible personal property was transferred, Retailers' Occupation Tax, Use Tax, Service Occupation Tax, and Service Use Tax generally did not apply. Viewing, downloading, or electronically transmitting video, text, and other data was not a property transfer; a hardcopy report could change the result.

Canned computer software remained taxable tangible personal property regardless of delivery method. Custom software could be nontaxable, and a software license was nontaxable only if it satisfied all five conditions in 86 Ill. Adm. Code 130.1935(a)(1).

Separately sold optional maintenance agreements were generally not taxable when sold, but taxable canned-software updates bundled without separate statement and tax could make the entire agreement taxable.

What this means for you

Hosted functionality and electronic data access can be treated as services, but embedded software rights, downloads, hardcopy deliverables, and maintenance updates must be analyzed separately.

Common questions

Were purely hosted services taxable? Generally no, when no property or canned software was transferred.

Could a paper report create tax? Yes.

Was electronically delivered canned software taxable? Yes, generally.

Citations and references

• 86 Ill. Adm. Code 140.101.
• 86 Ill. Adm. Code 130.1935(a), (b), and (c).
• 86 Ill. Adm. Code 140.301(b)(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-15-0053-gil.pdf

Original ruling text

ST-15-0053 – GIL – August 25, 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. See 86 Ill. Adm. Code. (This is a GIL.)

August 25, 2015

Dear Ms. XXXX:
This letter is in response to your letter dated July 22, 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:
I would like to request a letter ruling.
With the changes in technology and the taxability on those areas in multiple states, we
are currently reviewing all items that we are doing business in to verify that we are
taxing customers correctly according to the most current state sales tax laws.
Can you please verify for me if the following third party services that we offer to our
customers are taxable or not taxable in the state of Illinois?
MSA – Manufacturer’s Software Agreement ensures customer the latest software
updates, enhancements and developments made available from our software vendors,
at no additional charge. Released updates and software development may include:
new feature enhancements, bug fixes, operational changes and changes for
government or private regulations that are modified within the POS industry. This does
not include COMPANY labor to complete the upgrades or bug fixes. (Type of MSA is
based on the customer’s software.)

CA/EDC – Credit Authorization/Electronic Draft Capture is credit card support – but not
the actual credit card processing. The credit card processing is done through a third
party. They work the customer, bank, vendor and customer network provider to provide
support that customer needs to retransfer, settle batches, recover transaction data, etc.
MYMICROS – Internet based product that provides an enterprise view of business
information and processes and can be accessed via a browser from anywhere with an
internet connection. Allows business owners to access reports and daily business
information from anywhere. (Web reporting tool)
ICARE – Customer Relationship Manager solution that provides customer analysis
reporting and loyalty/reward capabilities and offers stored value card (gift card) and
loyalty functionality.
MYINVENTORY – Provides tools for the daily tasks associated with managing in-store
and companywide inventories.
WEBROOT – Anti-virus, antispyware and endpoint protection for internet security.
SONICWALL – allows customer to achieve network protection from the gateway
firewall. (Allows customer to protect yourself from outside threats.) SonicWALL
provides Unified Threat Management allowing customer to manage their business
threats with a solution that combines Gateway Anti-Virus, Anti-Spyware, Intrusion
Prevention, and Content Filtering, all in one solution. In addition, our Global
Management Solution (GMS) provides a comprehensive foundation for PCI compliancy
by centrally providing real-time monitoring and alerts and delivering intuitive usage
reports, all from a single management interface.

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.
Service Transactions:

Retailers' Occupation and Use Taxes do not apply to sales of service. The transactions you
have described appear to be service transactions. 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)
(2)
(3)
(4)

separately stated selling price of tangible personal property transferred incident to
service;
50% of the serviceman's entire bill;
Service Occupation Tax on the serviceman's cost price if the serviceman is a registered
de minimis serviceman; or
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 (e.g., intuitive usage reports delivered to a customer in a hardcopy version, rather than sent
electronically), such service transactions are generally subject to tax liability under one of the four
methods set forth above.
If the transactions you are inquiring about do not involve the transfer of any tangible personal
property to the customer, then they generally would not be subject to Retailers’ Occupation Tax, Use
Tax, Service Occupation Tax, or Service Use Tax.
Computer Software:
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).
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.

In general, maintenance agreements that cover computer software are treated the same as
maintenance agreements for other types of tangible personal property. See 86 Ill. Adm. Code
130.1935(b). The taxation of maintenance agreements is discussed in subsection (b)(3) of Section
140.301 of the Department’s administrative rules under the Service Occupation Tax Act. See 86 Ill.
Adm. Code 140.301(b)(3). The taxability of agreements for the repair or maintenance of tangible
personal property depends upon whether charges for the agreements are included in the selling price
of the tangible personal property. If the charges for the agreements are included in the selling price
of the tangible personal property, those charges are part of the gross receipts of the retail transaction
and are subject to tax. In those instances, no tax is incurred on the maintenance services or parts
when the repair or servicing is performed. A manufacturer’s warranty that is provided without
additional cost to a purchaser of a new item is an example of an agreement that is included in the
selling price of the tangible personal property.
If agreements for the repair or maintenance of tangible personal property are sold separately from
tangible personal property, sales of those agreements are not taxable transactions. However, when
maintenance or repair services or parts are provided under those agreements, the service or repair
companies will be acting as service providers under provisions of the Service Occupation Tax Act that
provide that when service providers enter into agreements to provide maintenance services for
particular pieces of equipment for stated periods of time at predetermined fees, the service providers
incur Use Tax based on their cost price of tangible personal property transferred to customers
incident to the completion of the maintenance service. See 86 Ill. Adm. Code 140.301(b)(3). The
sale of an optional maintenance agreement or extended warranty is an example of an agreement that
is not generally a taxable transaction.
If, under the terms of a maintenance agreement involving computer software, a software
provider provides a piece of object code (“patch” or “bug fix”) to be inserted into an executable
program that is a current or prior release or version of its software product to correct an error or
defect in software or hardware that causes the program to malfunction, the tangible personal property
transferred incident to providing the patch or bug fix is taxed in accordance with the provisions
discussed above.

In contrast to a patch or bug fix, if the sale of a maintenance agreement by a software provider
includes charges for updates of canned software, which consist of new releases or new versions of
the computer software designed to replace an older version of the same product and which include
product enhancements and improvements, the general rules governing taxability of maintenance
agreements do not apply. This is because charges for updates of canned software are fully taxable
as sales of software under Section 130.1935(b). Please note that if the updates qualify as custom
software under Section 130.1935(c) they may not be taxable. Therefore, if a maintenance agreement
provides for updates of canned software, and the charges for those updates are not separately stated
and taxed from the charges for training, telephone assistance, installation, consultation, or other
maintenance agreement charges, then the whole agreement is taxable as a sale of canned software.
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