Were subscription SEO and marketing tools exempt from Illinois tax when subscribers might receive a downloadable toolbar or API?

Plain-English summary

A subscription company offered web-based tools for marketing, analytics, search-engine optimization, and business-listing accuracy. It said no tangible personal property was transferred, but its terms and follow-up emails appeared to provide subscribers with a downloadable toolbar and application programming interface (API).

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, cloud software never downloaded to a client and accessed only remotely was not taxable.

A toolbar, API, applet, desktop agent, or remote-access agent downloaded by a subscriber could be computer software under Illinois's broad definition. It was taxable as property transferred with the service even when not separately charged, unless the transfer satisfied every requirement for a nontaxable software license. A qualifying de minimis serviceman not otherwise required to register could elect to pay Use Tax on its cost price.

What this means for you

SaaS companies should compare their marketing claims with their terms of service and actual product delivery. A small downloadable access tool can change the tax analysis for an otherwise remote service.

Common questions

Were the remote web tools themselves taxable under this 2016 guidance? Not when no software or other property was downloaded or transferred.

Did a no-charge API matter? Yes. IDOR said software could be taxable even without a separate charge.

What could make the license nontaxable? It had to meet all five conditions 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-16-0035-gil.pdf

Original ruling text

ST 16-0035-GIL 08/17/16

COMPUTER SOFTWARE

A provider of software as a service is acting as a serviceman. If the provider does not 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 September 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.
In your letter you have stated and made inquiry as follows:
I am the authorized representative for the above-named taxpayer and am writing on its
behalf to request a private letter ruling on tax reporting instructions and tax liability
pursuant to Illinois Administrative Code Title 02, Part 1200, Section 200.110.
The issue the taxpayer requests the Department address is whether its services are
subject to the Illinois Retailer’s [sic] Occupation Tax or the Illinois Use Tax.
Pursuant to Section 1200.110, the taxpayer provides the following information.
Statement of the facts and other information
COMPANY is a software as a service company based in CITY, STATE. COMPANY
offers on a subscription basis web-based software tools for marketing, analytics, and
search engine optimization (SEO).

PRODUCT is a set of research and analytics tools that help increase search engine
visibility. A single price subscription to PRODUCT includes the following software tools:


TOOL 1 measures and improves website traffic, keyword rankings, and visibility.
This program automatically audits the user’s website, tracks rankings and link
metrics, provides industry comparisons, and highlights useful and actionable
insights.



TOOL 2 identifies content and link building opportunities. This tool also
researches and compares competitor backlinks, identifies top pages, views social
activity data, and analyzes anchor text.



TOOL 3 performs keyword research and page analysis from inside Chrome and
Firefox browsers. It includes TOOL 4 metrics and social data to help users
evaluate the popularity of the pages they visit.



TOOL 5 searches, segments, and compares Twitter users, and tracks follower
growth.



TOOL 6 finds new link building opportunities and monitors the internet for
mentions of the user’s brand, products, and competitors.



TOOL 7 produces reports on where pages or domains rank in search engines for
any given keyword.



TOOL 8 measures how difficult it is to rank for a specific term or phrase and
competitors who may be using those same terms or phrases.



TOOL 9 provides recommendations on page keyword usage with the goal of
ranking higher and optimizing targeted search terms.



TOOL 10 produces a site audit of up to ### pages against any public domain and
finds bad links, broken pages, and analyzes ## factors that may affect search
engine crawlability.

TOOL 11 is a software tool that allows users to manage business listings for accuracy.
Since the internet acts as the equivalent of the modern yellow pages, this software tool
sends user location data by geographic location to major data aggregators, which
allows search engines to find specific and separate locations. For example, a brick and
mortar retailer would use this tool to enter their different store locations, so local
searchers will show locations closest to the device searching for information.
No tangible personal property is transferred to the user as part of using any of the
COMPANY’s web-based software tools.
COMPANY is not registered with the Illinois Department of Revenue. It has no
employees or property in the state; it does not accept purchase orders in the state; it
does not maintain inventory in the state; and it does not maintain a place of business in

the state as described in 86 Ill. Adm. Code 150.201.
considering hiring an Illinois resident employee in the future.

However, COMPANY is

Contracts, licenses, agreements, and other documents relevant to the request
A copy of COMPANY’s terms of use of its web-based software tools is attached.
Identification of the tax periods at issue
COMPANY has no nexus with Illinois and is considering hiring an Illinois resident
employee in the future. Therefore, this private letter ruling would be prospective only.
No audit or litigation is pending with the Department.
Previous rulings by the Department to the taxpayer
To the best of the knowledge of both COMPANY and COMPANY’s representative, the
Department has not previously ruled on the same or a similar issue for COMPANY or a
predecessor, and COMPANY or any of its representatives have not previously
submitted the same or a similar issue to the Department but withdrawn it before a letter
ruling was issued.
Statement of authorities supporting the taxpayer’s views
COMPANY believes that its web-based software services are not subject to either the
Illinois Retailer’s [sic] Occupation Tax or the Illinois Use Tax, as no tangible personal
property is transferred as part of the service. The Department has issued several
General Information Letters that support COMPANY’s views.
In ST-07-0068-GIL, the question was whether an electronically downloaded book was
subject to the sales tax. The Department noted:
You are correct that information or data that is electronically downloaded
is not considered the transfer of tangible personal property in this State.
See 86 Ill. Adm. Code 130.2105(a)(3). Please note that canned computer
software is considered tangible personal property regardless of the form in
which it is transferred or transmitted, including tape, disc, card, electronic
means or other media. See 86 Ill. Adm. Code 130.1935.
It is our understanding that the electronic downloading of a book involves
only the transfer of data or information and does not involve the electronic
transfer of computer software. In such instances, the electronic download
of a book is not subject to Retailers’ Occupation Tax or Use Tax liability in
this State.
Similarly, in ST 13-0074-GIL the Department noted that web-based software was not
subject to Telecommunications Excise Tax, but also noted regarding the sales tax:

Note, in Illinois, information or data that is electronically transferred or
downloaded is not considered the transfer of tangible personal property in
this State. See 86 Ill. Adm. Code 130.2105(a)(3). However, canned
computer software is considered taxable tangible personal property
regardless of the form in which it is transferred or transmitted, including
tape, disc, card, electronic means or other media. See 86 Ill. Adm. Code
130.1935.
And recently, in ST 15-0053-GIL the taxpayer provideD a variety of web-based software
tools. The Department noted:
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…
…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….
Statement of authorities contrary to the taxpayer’s views
COMPANY cannot locate any authorities contrary to the taxpayer’s view.
Identification of trade secret information to be deleted
This private letter ruling request contains no trade secret information that would be
required to be deleted from any publically disseminated version of any ruling.
Properly executed power of attorney
A copy is attached.
If you have any questions regarding the above matter or need additional information,
please do hesitate to contact me at #### or [email protected].
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 subscriber of the service the Company provides does not receive
any tangible personal property or download any computer software. However, the Terms of Service
and your follow-up emails seem to indicate that the subscriber receives a downloadable toolbar and
application program interface (API) as part of the service. Computer software is defined broadly in
the Retailers’ Occupation Tax Act. If a provider of a service provides to the subscriber an API, applet,
desktop agent, or a remote access agent to enable the subscriber to access the provider’s network
and services, it appears the subscriber is receiving computer software. Although there may not be a
separate charge to the subscriber 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