Were cloud-based web collaboration services exempt from Illinois tax when customers might download access software?

Plain-English summary

A company offered cloud-based online meetings, training, large events, collaboration, and support services. It said customers supplied their own equipment and software, but its terms also indicated that customers might have to download producer software.

IDOR treated the company as a serviceman. A service involving no transfer of tangible personal property generally was not subject to Retailers' Occupation, Use, Service Occupation, or Service Use Tax. At the time of the letter, software never downloaded to the customer's computer and accessed only through a cloud system was not taxable.

The result changed if the customer received software. IDOR said the statutory definition was broad enough to include an API, applet, desktop agent, producer software, or remote-access agent used to reach the provider's network. That transfer was taxable under the service-transaction rules even without a separate charge unless it satisfied every condition for a nontaxable software license.

IDOR could not determine the nature of the possible producer-software download, so it did not give the company a definitive transaction-level answer.

What this means for you

Cloud providers should inventory everything installed or downloaded on a customer's device. Calling the main product SaaS or making the access component free does not remove a transferred software component from Illinois's service-transaction analysis.

Common questions

Was remote-only cloud access taxable under this 2016 letter? No, when software was never downloaded and was only accessed remotely.

Did a free access agent count as software? It could. IDOR said the lack of a separate charge did not prevent tax.

Could a software license be nontaxable? Yes, only if it met all five requirements in Section 130.1935(a)(1).

Citations and references

• 35 ILCS 120/2 and 120/2-25; 35 ILCS 105/3; 35 ILCS 115/3.
• 86 Ill. Adm. Code 130.1935 and 140.101.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2016.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2016/st-16-0034-gil.pdf

Original ruling text

ST 16-0034-GIL 08/17/2016

COMPUTER SOFTWARE

A provider of software as a service is acting as a serviceman. If the provider does not the
transfer any tangible personal property to the customer, then the transaction generally would
not be subject to Retailers’ Occupation Tax, Use Tax, Service Occupation Tax, or Service Use
Tax. If the provider transfers to the customer an API, applet, desktop agent, or a remote
access agent to enable the customer to access the provider’s network and services, it appears
the subscriber is receiving computer software that is subject to tax. See 86 Ill. Adm. Code
Parts 130 and 140. (This is a GIL.)
August 17, 2016

RE:

COMPANY

Dear Xxxxx:
This letter is in response to your letter dated June 13, 2014, and email dated July 9, 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.
In your letter you have stated and made inquiry as follows:
On behalf of our COMPANY (hereinafter "COMPANY"), we are requesting a Private
Letter Ruling ("PLR") regarding the application of Retailers' Occupation Tax and related
taxes to their Web collaboration services. An executed Power of Attorney form
authorizing FIRM ("FIRM") to represent the COMPANY in this matter is enclosed. To
the best of COMPANY and FIRM's knowledge: (1) the Illinois Department of Revenue
("Department") has not previously ruled on the same or similar issue for COMPANY or
a predecessor; (2) the same or similar issue was not previously submitted and
withdrawn by COMPANY or FIRM prior to the Department's issuance of a PLR; and (3)
COMPANY is not under audit by or involved in litigation with the Department for
transactions from January 1, 20XX to the present.
Background
COMPANY offers Web collaboration services ("Services") through the COMPANY cloud.
No tangible personal property is provided to the customer as part of the Services.
Customers utilize their own hardware, software and Internet connectivity to utilize the
Services. A description of these Services is as follows:

PRODUCT 1
PRODUCT 1 is an integrated collaboration solution that enables rich online meeting
experiences by incorporating audio, video and real-time content sharing. PRODUCT 1
enables people to attend meetings inside and outside corporate firewalls, on a broad
variety of platforms – including mobile devices. PRODUCT 1 helps streamline the
meeting process by providing a secure, centralized online space for organizing and
sharing all meeting-related activities and information. PRODUCT 1 is a software-as-aservice (SaaS) solution delivered through the COMPANY cloud – a highly available and
secure service delivery platform.
PRODUCT 2
PRODUCT 2 is an integrated service designed for interactive online meetings. It
enables the sharing of documents, applications and desktops over the Web.
PRODUCT 2 can be provisioned without needing information technology professionals.
PRODUCT 2 allows users to give presentations, demonstrate software, view and
annotate any document electronically, and includes tightly integrated audio and video
communications. In addition, PRODUCT 2 has additional features such as record and
playback and the ability to attend a meeting from select smartphones.
PRODUCT 3
PRODUCT 3 is an integrated service designed for online training and e-learning
applications delivered over the Web. It enables users to coordinate training from
announcement, to enrollment, to follow-up. PRODUCT 3 allows users to deliver live
instruction from a variety of sources directly to learners’ desktops and give
presentations that include integrated audio, video and interactive multimedia.
PRODUCT 3 allows users to administer tests, organize multiple simultaneous breakout
sessions, hands-on labs, and record and playback entire sessions for future use.
PRODUCT 4
PRODUCT 4 is an integrated service designed for large online events such as press
briefings, product announcements and marketing events delivered over the Web.
PRODUCT 4 combines interactive meeting capabilities such as the sharing of
documents, applications and desktops with pre-program, post-program and campaign
management. PRODUCT 4 includes customized attendee registration, automated
email invitations, reminders, audience feedback collection through polling and Q&A, live
chat, recording and archiving of seminars for on-demand playback, and lead source
tracking enrollment/lead scoring.
PRODUCT 5 is a suite of support services delivered over the Web. The PRODUCT 5
services are each available for purchase individually or in combination, or as follows:
PRODUCT 6
PRODUCT 6 is a service that is designed to provide remote technical support and
customer service. It allows users to support remote and end-users through the Web,
with no requirement for pre-installed software on either computer. PRODUCT 6

incorporates a custom user interface to simplify support interactions for both the support
agent and the end-user. It also provides tools for quick technical support resolution
such as viewing system requirements, transferring files, logging on as a System
Administrator and rebooting and re-connecting to a remote computer.
PRODUCT 7
PRODUCT 7 service, formerly known as PRODUCT 8, is a service designed to
remotely manage and administer a company-wide set of computers using a secure,
Web-based tool. PRODUCT 7 allows a user, such as IT or support organization, to
access remote computers without needing the computer owner's presence at the
machine. It allows functionality to install upgrades, perform maintenance, troubleshoot
problems, and engage in proactive support.
PRODUCT 9 by COMPANY 1
PRODUCT 9 by COMPANY 1 is designed to track, route, and manage support tickets
from a centralized dashboard over the Web. It has a set of different modules for
tracking support activities, document management, incident (ticket) management,
knowledge base management, relationship management, report management and a
Self-Service portal. Additional modules that can be purchased include product, survey
and forum modules.
PRODUCT 10
PRODUCT 10 is a bundle that includes four of COMPANY collaboration services: 1)
PRODUCT 1 or PRODUCT 2, 2) PRODUCT 3, 3) PRODUCT 4, and 4) PRODUCT 5 or
PRODUCT 6. This bundle of services offers a comprehensive solution for collaboration
across four distinct business-specific processes: meetings, training, online events and
support.
PRODUCT 11
PRODUCT 11 brings together instant messaging, team spaces and widgets into a
single interface. It provides presence, secure instant messaging, one-to-one video, PCto-PC VoIP calls and desktop share.
Team spaces include persistent group
discussions, document sharing and out of the box widgets like Address Book,
Bookmarks, Browser, Bulletin Board, Calendar, Calendar Dashboard, Debug Viewer,
Document Manager, Getting Started, Library Management, Meeting Recording, Profile,
RSS Reader, Space Management, Space Member, Table, and What's New.
PRODUCT 12
PRODUCT 12 is a feature designed to capture COMPANY meeting recordings including
COMPANY integrated audio or third-party audio to archive or share for future use.
PRODUCT 12 recordings can capture all or part of meeting as desired by the meeting
host. PRODUCT 12 recordings are stored in the proprietary PRODUCT 13. The
following COMPANY 1 services include this functionality: PRODUCT 1, PRODUCT 2,
PRODUCT 3, PRODUCT 4 and PRODUCT 5.

PRODUCT 14
PRODUCT 14 recordings accessible in the My Files directory or through the Meeting
Spaces in PRODUCT 1, and can be played back by a direct stream or through a link.
Different packages and subscription models include different amounts of storage.
Committed PRODUCT 14 can also be purchased.
PRODUCT 15
PRODUCT 15, formerly known as PRODUCT 16, is a service allowing the user to
access a remote computer from any location in the world, where the user only needs a
Web browser and an Internet connection and without the user needing to open any
ports in a firewall protecting the computer. For example, the PRODUCT 15 user can
run any application or access the entire desktop of her remote computer, transfer files to
and from the remote computer, or print a document from the remote computer on a
printer located at the user's location. PRODUCT 15 has several security features
including end-to-end Secure Socket Layer (SSL) encryption, two levels of required
authentication and each of the following: (i) the ability to blank the screen of the work or
home computer so no one can see what the remotely-located user is doing, (ii) the
ability to lock the keyboard and mouse of the remote computer so no one can interrupt
the user's use, and (iii) the ability to logout or screen-lock the remote computer after the
user's session is complete.
PRODUCT 17
PRODUCT 17 is a service that is designed to create and deliver multimedia content for
on-demand access over the Web. With PRODUCT 17, users can create presentations
that include, and integrate as desired, audio content, video content and digital
presentation software content such as presentations created with Microsoft PowerPoint
software. Presentations created with PRODUCT 17 can be viewed over the Web or can
be downloaded to a laptop or a personal digital assistant.
PRODUCT 18
PRODUCT 18 integrates certain COMPANY asynchronous and real-time collaboration
capabilities into one unified suite designed for project teams to work more effectively.
PRODUCT 18 provides a collaboration suite including a document manager, group
calendar, database manager, task manager and several other collaborative business
tools, and is designed to meet the collaboration and web meeting needs of project
teams.
The following services are also available as add-ons to purchase with one or more of
the services described above:
PRODUCT 19
PRODUCT 19 services are fully integrated with PRODUCT 2. PRODUCT 19 is not
offered or available or sold on a stand-alone basis. Options for purchase include:






Call-in: A single conference call-in number is provided to participants to join the
PRODUCT 1.
Callback: Participants can join the PRODUCT 1 by having the PRODUCT 1
session call them at the number they specify once they've joined the meeting via
the web.
Integrated VoIP: Participants can join a PRODUCT 1 from their computer, using
a computer headset with a microphone and speaker.
Call Me Back: Gives customers the option to request a call back when
requesting an online support request through PRODUCT 6.

PRODUCT 20
A Web based service for monitoring usage of PRODUCT 1 services such as statistics of
active and past COMPANY sessions and the number of attendees in a SERVICE
meeting. Reporting options are also included.
PRODUCT 21
PRODUCT 22 provides Tier 1 technical support, .WRF recording and reporting
services. Options for purchase include:










Standard Meeting Conferencing Service: SERVICE Producer joins the host
online 30 minutes prior to start time, one-hour in-meeting support, no recording.
Additional support hours are available for purchase.
Premium Meeting Conferencing Service: SERVICE Producer joins the host
online 30 minutes prior to start time, one-hour in-meeting support and recording.
Recordings are available with 24 hours. Additional support hours are available
for purchase.
Standard Training Conferencing Service: SERVICE Producer joins the host
online 30 minutes prior to start time, one-hour in-session support, no recording.
Additional support hours are available for purchase.
Premium Training Conferencing Service: SERVICE Producer joins the host
online 30 minutes prior to start time, one-hour in-session support and recording.
Recordings are available within 24 hours. Additional support hours are available
for purchase.
Standard Event Conferencing Service: SERVICE Producer joins the host online
30 minutes prior to start time, one hour in-event support and recording.
Recording and reports are available within 24 hours. Additional support hours
are available for purchase.
Premium Event Conferencing Service Consultation: Event strategy and creation;
Dry Run: Event timeline and technical run-through; Live Event SERVICE
Producer starts online event 30 minutes prior to start time, one-hour in-event
support and recording. Recording and reports are available within 24 hours.
Additional support hours are available for purchase.

How COMPANY PRODUCT 1 Works
As the predominate source of revenue, we would like to explain how a customer uses
PRODUCT 1. As described above, PRODUCT 1 is a cloud-based web conferencing

application that permits desktop sharing through a Web browser with audio and video
capabilities. PRODUCT 1 operates through a participant's computer or mobile device.
Audio functionality is either through the computer, mobile device or telephone. Video
functionality is through a webcam or mobile device camera but video is not required to
participate in the meeting. All participants provide their own hardware and Internet or
telephone connection and no hardware or software is provided by PRODUCT 1. No
separate charge is made for these downloads.
PRODUCT 1 is offered on a subscription basis (monthly or annually) with plans based
on the number of hosts and participants. Once a potential Subscriber chooses a plan
that meets their business needs and agrees to the Terms & Conditions of Service they
can use the service. As an option, a subscriber may add a SERVICE Producer plan
which provides call back functionality as well as a toll-free number for participants to
use. The PRODUCT 23 option has several plans which vary based on the number of
minutes per month. If a subscriber goes over the allotted number of minutes in their
plan, additional minutes are billed on a per minute basis.
To schedule a meeting, a subscriber logs on to the COMPANY website and enters a
meeting name, date and time, meeting length as well as the email address of meeting
participants. Participants then receive a meeting invitation email with the meeting
name, date, time, link to the meeting and a toll dial-in number is provided with a meeting
ID and access code. For subscribers with the optional PROCUCT 23 plan, a toll-free
dial-in number is provided in the meeting invitation.
To join the meeting, the participant clicks on the link and enters their contact information
and either uses their computer's microphone and speakers or calls the dial-in number.
Participants with cameras may also project video of themselves to other participants
during the meeting. For mobile devices, the COMPANY app allows subscribers to
create and start meetings and allows attendees to join meetings. During the meeting,
subscribers have the ability to share content from their computer with participants or
hand off control to another participant so that they can share their content with other
participants of the meeting.
Our Analysis
The Services offered by COMPANY are non-taxable services and does [sic] not
constitute the lease or license of software. No hardware or software is provided to the
customer.
The Illinois Retailers' Occupation Tax ("ROT") is imposed on persons engaged in the
business of selling tangible personal property at retail unless specifically exempted from
tax. See 86 Ill. Adm. Code 130.101. However, the ROT and Use Tax does [sic] 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, the Service Occupation Tax or Use Tax will apply to the serviceman, see 86 Ill.
Adm. Code 140.101 through 140.109.
Information or data transferred electronically is not considered tangible personal
property, see 86 Ill. Adm. Code 130.2105(a)(3). In this case, the Services offered by
the COMPANY do not involve the transfer of tangible personal property, only

information or data electronically through their cloud. As such, the Services are not
subject to Illinois sales or use taxes.
Requested Action
We request that the Illinois Department of Revenue review the stated facts to issue a
private letter ruling that the Taxpayer's Services are not subject to Illinois sales or use
taxes.
Please contact me if you have any questions in the important matter.
DEPARTMENT’S RESPONSE:
The Department’s regulation “Public Information, Rulemaking and Organization” provides that
“[w]hether to issue a private letter ruling in response to a letter ruling request is within the discretion of
the Department. The Department will respond to all requests for private letter rulings either by
issuance of a ruling or by a letter explaining that the request for ruling will not be honored.” 2 Ill. Adm.
Code 1200.110(a)(4). The Department recently met and determined that it would decline to issue a
Private Letter Ruling in response to your request. We hope, however, the following General
Information Letter will be helpful in addressing your question.
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 Tax and Use Tax do not apply to sales of service. 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.

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,
including computer software, such service transactions are generally subject to tax liability under one
of the four methods set forth above.
If a transaction does not involve the transfer of any tangible personal property to the customer,
then it generally would not be subject to Retailers’ Occupation Tax, Use Tax, Service Occupation
Tax, or Service Use Tax.
Computer Software
“‘Computer software’ means a set of statements, data, or instructions to be used directly or
indirectly in a computer in order to bring about a certain result in any form in which those statements,
data, or instructions may be embodied, transmitted, or fixed, by any method now known or hereafter
developed, regardless of whether the statements, data, or instructions are capable of being perceived
by or communicated to humans, and includes prewritten or canned software.” 35 ILCS 120/2-25.
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. 86 Ill. Adm.
Code 130.1935. However, if the computer software consists of custom computer programs, then the
sales of such software may not be taxable retail sales. 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 86 Ill.
Adm. Code 130.1935(c)(3). Computer software that is not custom software is considered to be
canned computer software.
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.

If a license of canned computer software does not meet all the criteria the software is taxable.
It appears from your letter that the Company is making sales of service and is a serviceman.
As a serviceman, the Company does not incur Retailers’ Occupation Tax. Service Occupation Tax is
imposed upon all persons engaged in the business of making sales of service on all tangible personal
property transferred incident to a sale of service, including computer software (35 ILCS 115/3), and is
calculated as explained above. Currently, computer software provided through a cloud-based
delivery system – a system in which computer software is never downloaded onto a client’s computer
and is only accessed remotely – is not subject to tax. The Department continues to review cloudbased arrangements. If, after review, the Department determines that these transactions are subject
to tax, it will only apply this determination prospectively.
You state in your letter that a customer of the services the Company provides does not receive
any tangible personal property as part of the service. You also state that customers “utilize their own
hardware, software and Interconnect connectivity to utilize the Services.” In your description how the
PRODUCT 1 works, you once again state, “All participants provide their own hardware and Internet or
telephone connection and no hardware or software is provided by COMPANY” You further state, “No
separate charge is made for these downloads.” The Terms of Service also state that customer may
be required to download and install SERVICE Producer software. The Department does not
understand the nature of the software that may be provided by PRODUCT 23 and downloaded by a
customer. However, the Department wishes to point out that “computer software” is defined broadly
in the Retailers’ Occupation Tax Act. Even if a provider of a service only provides to the customer an
API, applet, desktop agent, or a remote access agent to enable the customer to access the provider’s
network and services, it appears the customer is receiving computer software. Although there may
not be a separate charge to the customer for the computer software, it is nonetheless subject to tax,
unless the transfer qualifies as a non-taxable license of computer software. If the provider, as a
serviceman, is not otherwise required to be registered under Section 2a of the Retailers' Occupation
Tax Act and qualifies as a de minimis serviceman, the provider could elect to pay Use Tax on its cost
price of the computer software.
I hope this information is helpful. If you have further questions related to the Illinois sales tax
laws, please visit our website at www.tax.illinois.gov or contact the Department’s Taxpayer
Information Division at (217) 782-3336.
Very truly yours,

Richard S. Wolters
Associate Counsel
RSW:bkl