Does providing cloud-based software (like software as a service, an API, or a remote access agent) trigger Illinois Retailers' Occupation, Use, or Service Occupation Tax, and can an Illinois-based automated call-center service create sales tax nexus for its out-of-state clients?

Plain-English summary

This General Information Letter answers two related questions from a tax adviser representing an Illinois-based company that hosts a voice-automated call center. The company routes inbound and outbound calls and texts for out-of-state retail clients — things like directing customers to the right department, sending account-status calls, answering automated customer service questions, and accepting payment information. The adviser wanted to know whether providing these automated services from Illinois creates Illinois sales tax nexus for the out-of-state retail clients who use the call center, and separately, how Illinois taxes the underlying software and hosting arrangement itself.

On the nexus side, the Department walked through the different categories of "retailer" under Illinois law — retailers with a physical presence in Illinois, retailers "maintaining a place of business" in Illinois (including through certain in-state agents or click-through/affiliate-type contracts), and out-of-state retailers with no Illinois nexus at all. It reiterated the constitutional backdrop from Quill Corp. v. North Dakota (physical presence needed to satisfy the Commerce Clause) and Brown's Furniture, Inc. v. Zehnder (any in-state agent or representative can count as physical presence), plus the Hartney Fuel Oil decision that reshaped the Department's "retailer occupation" sourcing regulations. Notably, the Department did not directly resolve whether this specific call-center arrangement is a "protected activity" under 86 Ill. Adm. Code 100.9720 — it summarized the general nexus framework rather than issuing a yes/no answer on the taxpayer's specific fact pattern, which is typical for a GIL rather than a binding Private Letter Ruling (PLR).

On the software side, the Department explained how Illinois taxes computer software and software-as-a-service (SaaS) arrangements. A business that sells services (a "serviceman") is not subject to Retailers' Occupation Tax on the service itself, but can owe Service Occupation Tax or Use Tax on any tangible personal property — including computer software — that is transferred along with the service. If a transaction involves no transfer of tangible personal property at all, it generally is not taxed under any of the four sales/use tax acts. Viewing, downloading, or streaming data over the internet is not, by itself, treated as a transfer of tangible personal property.

Applying that framework to cloud computing specifically, the Department confirmed that computer software delivered through a cloud-based system — where the software is never downloaded to the customer's computer and is only accessed remotely — is not currently subject to tax (though the Department noted it continues to review cloud arrangements and would only apply any change prospectively). However, if the provider gives the subscriber something that gets installed or transferred to the subscriber's own systems — an API, applet, desktop agent, or remote access agent used to reach the provider's network — that transfer is treated as a transfer of taxable computer software, unless it qualifies as a nontaxable license under the five-part test in 86 Ill. Adm. Code 130.1935(a)(1).

What this means for you

If you sell software as a service (SaaS) or cloud-hosted services

• Pure cloud access with nothing downloaded to the customer's device generally is not subject to Illinois Retailers' Occupation, Use, Service Occupation, or Service Use Tax under current Department guidance.
• If your product requires the customer to install or receive an API, applet, desktop agent, or remote access agent to reach your network, the Department treats that as a transfer of computer software — and computer software is taxable unless it meets the five-part nontaxable license test (written agreement, restrictions on duplication/use, no unauthorized sublicensing, a replacement-copy/archival-copy policy, and return or destruction of all copies at the end of the license).
• Watch for future guidance: the Department stated it was still reviewing cloud-based arrangements as of this 2017 letter and said any change in position would only apply prospectively — so it's worth confirming current Department guidance hasn't since evolved.

If you operate (or use) an Illinois-based call center or automated customer-service platform

• The letter does not give a definitive answer on whether a given call center's activities are a "protected" or "unprotected" activity under 86 Ill. Adm. Code 100.9720 — it instead recaps the general nexus rules (physical presence, in-state agents, click-through/referral contracts, and the $10,000 gross-receipts thresholds under 35 ILCS 105/2(1.1) and (1.2)).
• Because an in-state "agent or representative" of an out-of-state seller can itself create physical-presence nexus for that seller (per Brown's Furniture), businesses using in-state call-center vendors for functions beyond simply relaying inquiries (e.g., accepting payment on delinquent accounts) should evaluate nexus risk carefully with a tax professional.

Common questions

Q: Does using cloud-based SaaS automatically avoid Illinois sales tax?
A: Not automatically — it depends on what, if anything, gets transferred to the customer. If nothing is downloaded and access is purely remote, the Department says it's currently not taxed. But if the customer receives an API, applet, desktop agent, or remote access agent, that is treated as taxable computer software.

Q: What's the difference between a taxable and a nontaxable software license in Illinois?
A: Under 86 Ill. Adm. Code 130.1935(a)(1), a license of canned software escapes Retailers' Occupation Tax only if it meets all five conditions: it's a signed written agreement, it restricts duplication/use, it bars unauthorized sublicensing/transfer, the licensor has a policy of replacing lost/damaged copies (or allows an archival copy), and the customer must destroy or return all copies at the end of the license (automatically satisfied for a perpetual license).

Q: Can an Illinois call center create sales tax nexus for its out-of-state clients?
A: The Department describes the general nexus framework (physical presence, in-state agents/representatives, and specific statutory thresholds for referral-based "click-through" contracts) but does not issue a specific yes/no determination for this taxpayer's exact call-center fact pattern in this GIL.

Q: Is this letter legally binding on the Department?
A: No. This is a General Information Letter (GIL) issued under 2 Ill. Adm. Code 1200.120, which directs the taxpayer to relevant regulations and general principles but is not a statement of Department policy and is not binding — unlike a Private Letter Ruling (PLR) issued under 2 Ill. Adm. Code 1200.110, which is binding on the Department but only as to the specific requesting taxpayer.

Citations and references

• 35 ILCS 120/2 and 35 ILCS 120/2-25 — Retailers' Occupation Tax Act, including the statutory definition of "computer software"
• 35 ILCS 105/3, 105/2(1.1), 105/2(1.2) — Use Tax Act, including "retailer maintaining a place of business" and click-through/referral nexus provisions
• 35 ILCS 115/3 — Service Occupation Tax Act
• 86 Ill. Adm. Code 130.101, 130.1935, 130.1935(c)(3) — Retailers' Occupation Tax regulations on general liability and taxation of computer software (canned vs. custom)
• 86 Ill. Adm. Code 140.101 — Service Occupation Tax regulation on tangible personal property transferred incident to a sale of service
• 86 Ill. Adm. Code 150.101, 150.201(i), 150.801 — Use Tax regulations on retailer liability and "retailer maintaining a place of business in Illinois"
• 86 Ill. Adm. Code 100.9720 — Income tax regulation on protected activities (referenced in the taxpayer's nexus question)
• 2 Ill. Adm. Code 1200.110 and 1200.120 — Department procedures distinguishing binding Private Letter Rulings (PLRs) from non-binding General Information Letters (GILs)
• Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130 — Illinois Supreme Court decision that prompted amendment of the Department's retailer-sourcing regulations
• Quill Corp. v. North Dakota, 112 S.Ct. 1904 (1992) — U.S. Supreme Court two-prong nexus test (Due Process and Commerce Clause/physical presence)
• Brown's Furniture, Inc. v. Zehnder, 171 Ill.2d 410 (1996) — Illinois Supreme Court holding that any in-state agent or representative can establish physical-presence nexus
• Performance Mktg. Ass'n, Inc. v. Hamer, 998 N.E.2d 54 (2013) — Illinois Supreme Court decision striking down the original 2011 "click-through nexus" provision, prompting the revised 2015 provisions

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2017.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2017/st-17-0006-gil.pdf

Original ruling text

ST 17-0006-GIL 03/02/2017 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.)

March 2, 2017

Dear Xxxxx:
This letter is in response to your letter dated January 31, 2017, in which you requested
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 am requesting a General Information Letter for my client COMPANY. The issue
involves the creating of sales and use tax nexus for COMPANY’s out of state
customers.
COMPANY’s business consists of a Voice Automated call center Hosting that is located
in Illinois. Various services are provided to their customers. The services include
inbound calls, outbound calls and/or two-way texting. The following further describes
these services.
-

Through telephone channel and cloud-based technology they provide
self-service and ecommerce to their client’s customers by directing
incoming calls to the appropriate department or individual. High quality
natural language speech service and real-time customer data are
utilized.

-

COMPANY’s software send outbound calls to all or to individual clients
of their customers depending on the nature of the message. Calls to
individual clients would include information related to their accounts,
i.e. account status or order status.

ST 17-0006-GIL
Page 2

-

COMPANY’s system receives incoming calls to answer automated
customer service questions from client customers and accept account
payment information.
Inbound calls would include surveys,
components of order/member processing, applications, scheduling and
customer account details.

-

They also respond to text messages coming in or send out text
messages.

Assuming that COMPANY’s clients have some sales to Illinois customers, Would the
automated services provided by COMPANY create sales tax nexus for it’s out of state
clients in the following situation? (This would assume that COMPANY’s client has no
other activity in IL all delivery is made via common carrier, orders are accepted and
process outside of Illinois.).
1) If we only provide protected activities (as identified Illinois Regulation
100.9720) such allowing the customer to track or update the status of
an order, passing inquiries and complaints to the home office that
these activities would not create nexus for our customers.
2) Will routing a call to a technical service agent outside of Illinois qualify
as a protect activity under passing inquiries and complaints to the
home office?
3) If COMPANY provides an unprotected activity such as acceptance of
payment on the collection of a delinquent account, that activity may
create Nexus in Illinois for our customer, as we are an agent located in
Illinois providing an unprotected activity.
Can you please provide some guidance, as the regulations were written prior to the
modernization of the call center.

DEPARTMENT’S RESPONSE:
Nexus
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

ST 17-0006-GIL
Page 3

purchases occur outside Illinois, purchasers must self-assess their Use Tax liability and remit it
directly to the Department.
An “Illinois Retailer” is one who makes sales of tangible personal property in Illinois. The
Illinois Retailer is then liable for Retailers' Occupation Tax on gross receipts from sales and must
collect the corresponding Use Tax incurred by the purchasers. Our regulations were amended in
response to the Illinois Supreme Court’s decision in Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130.
The regulations specify the selling activities that trigger Retailers’ Occupation Tax liability in Illinois.
Another type of retailer is the retailer maintaining a place of business in Illinois. The definition
of a “retailer maintaining a place of business in Illinois” is described in 86 Ill. Adm. Code 150.201(i).
This type of retailer is required to register with the State as an Illinois Use Tax collector. See 86 Ill.
Adm. Code 150.801. The retailer must collect and remit Use Tax to the State on behalf of the
retailer’s Illinois customers even though the retailer does not incur any Retailers' Occupation Tax
liability.
The United States Supreme Court in Quill Corp. v. North Dakota, 112 S.Ct. 1904 (1992), set
forth the current guidelines for determining what nexus requirements must be met before a person is
properly subject to a state's tax laws. The Supreme Court has set out a 2-prong test for nexus. The
first prong is whether the Due Process Clause is satisfied. Due process will be satisfied if the person
or entity purposely avails itself or himself of the benefits of an economic market in a forum state. Quill
at 1910. The second prong of the Supreme Court's nexus test requires that, if due process
requirements have been satisfied, the person or entity must have physical presence in the forum
state to satisfy the Commerce Clause. A physical presence is not limited to an office or other
physical building. Under Illinois law, it also includes the presence of any agent or representative of
the seller. The representative need not be a sales representative. Any type of physical presence in
the State of Illinois, including the vendor’s delivery and installation of his product on a repetitive basis,
will trigger Use Tax collection responsibilities. Please refer to Brown’s Furniture, Inc. v. Zehnder, 171
Ill.2d 410 (1996).
The final type of retailer is the out-of-State retailer that does not have sufficient nexus with
Illinois to be required to submit to Illinois tax laws. A retailer in this situation does not incur Retailers’
Occupation Tax on sales into Illinois and is not required to collect Use Tax on behalf of its Illinois
customers. However, the retailer’s Illinois customers will still incur Use Tax liability on the purchase
of the goods and have a duty to self-assess and remit their Use Tax liability directly to the State.
Beginning July 1, 2011, the definition of a “retailer maintaining a place of business” was
amended to include additional types of retailers. A retailer maintaining a place of business also
includes a retailer having a contract with a person located in this State under which:
A.

The retailer sells the same or substantially similar line of products as the person located
in this State and does so using an identical or substantially similar name, trade name, or
trademark as the person located in this State; and

B.

The retailer provides a commission or other consideration to the person located in this
State based upon the sale of tangible personal property by the retailer. See 35 ILCS
105/2(1.2).

ST 17-0006-GIL
Page 4

These provisions only apply if the cumulative gross receipts from sales of tangible personal property
by the retailer to customers in this State under all such contracts exceed $10,000 during the
preceding 4 quarterly periods. Please note that in Performance Mktg. Ass'n, Inc. v. Hamer, 998
N.E.2d 54 (2013) the Illinois Supreme Court struck down 35 ILCS 105/2(1.1) and 35 ILCS 110/2(1.1),
a “click-thru nexus provision” enacted in 2011. However, new provisions became effective January 1
2015. The following provisions address the court’s concerns in Performance Mktg. Ass'n, Inc. v.
Hamer, 998 N.E. 2d 54 (2013).
Beginning January 1, 2015, a retailer maintaining a place of business also includes a retailer
having a contract with a person located in this State under which the person, for a commission or
other consideration based upon the sale of tangible personal property by the retailer, directly or
indirectly refers potential customers to the retailer by providing to the potential customers a
promotional code or other mechanism that allows the retailer to track purchases referred by such
persons.
Examples of mechanisms that allow the retailer to track purchases referred by such persons include
but are not limited to the use of a link on the person's Internet website, promotional codes distributed
through the person's hand-delivered or mailed material, and promotional codes distributed by the
person through radio or other broadcast media. These provisions apply only if the cumulative gross
receipts from sales of tangible personal property by the retailer to customers who are referred to the
retailer by all persons in Illinois under such contracts exceed $10,000 during the preceding 4 quarterly
periods ending on the last day of March, June, September, and December. A retailer meeting these
requirements shall be presumed to be maintaining a place of business in Illinois but may rebut this
presumption by submitting proof that the referrals or other activities pursued within this State by such
persons were not sufficient to meet the nexus standards of the United States Constitution during the
preceding 4 quarterly periods. See 35 ILCS 105/2(1.1).
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.

ST 17-0006-GIL
Page 5

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

ST 17-0006-GIL
Page 6

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.
A provider of software as a service is acting as a serviceman. As a serviceman, the seller
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 cloud-based
arrangements. If, after review, the Department determines that these transactions are subject to tax,
it will only apply this determination prospectively.
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, the subscriber
may be 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 nontaxable 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 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,

Richard S. Wolters
Associate Counsel

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