Are charges for web-based Cloud Collaboration Service, an add-on Audio Conference Bridging Service, and a bundle of the two subject to the Illinois Telecommunications Excise Tax?

Subject

Telecommunications

Plain-English summary

This is an Illinois Department of Revenue General Information Letter (GIL) — not a Private Letter Ruling — so by the Department's own description it "is not a statement of Department policy and is not binding on the Department." It's a general pointer to the relevant rules, not a guarantee for this specific taxpayer.

A company that sells web/audio conferencing products asked how three of its offerings were taxed under the Illinois Telecommunications Excise Tax Act (35 ILCS 630) and the related Telecommunications Infrastructure Maintenance fee:

• Product A — a stand-alone, web-based "Cloud Collaboration Service" (a desktop-style app that lives on the vendor's server and is accessed remotely, with features like screen sharing).
• Product B — an "Audio Conference Bridging Service" add-on that layers phone-based audio conferencing onto the Cloud Collaboration Service.
• Product C — a bundle of A and B sold together.

The Department's answer split along two different tax regimes:

On the software side (Product A): Cloud-based software that is never downloaded to the customer's computer — only accessed remotely — is generally not subject to (sales) tax. Illinois taxes "canned" (prewritten) computer software as tangible personal property when it's transferred to the customer, but a purely cloud-delivered service doesn't involve that kind of transfer, so it escapes tax. Software delivered by physical download/transfer can still be taxable unless it qualifies as a non-taxable license under 86 Ill. Adm. Code 130.1935(a)(1), which requires (among other things) a signed written license agreement — an "I agree" click-through does not qualify.

On the telecommunications side (Product B): The Telecommunications Excise Tax Act taxes "the act or privilege of originating or receiving intrastate or interstate telecommunications" at 7% of gross charges (35 ILCS 630/3, 4). Audio conference bridging services that resell telephone service are subject to this tax. But a company that provides conferencing services and does not separately charge customers for the line/transmission charges is generally not itself a "telecommunications retailer" — it just pays tax to its own telecom provider as a consumer. If it does separately charge customers for those line charges, it should instead give its telecom provider a resale certificate and collect/remit the tax itself. Purely web-based audio conferencing (as opposed to dial-in telephone bridging) is generally not subject to the Telecommunications Excise Tax at all, because the provider is just a consumer of the telecom services it uses to deliver a web-based product; some teleconference services can also qualify as non-taxable "value-added services."

On the bundle (Product C): If the audio conferencing bridging piece is taxable, the Cloud Collaboration Service piece can still escape tax — but only if its charges are broken out and separately stated from the taxable audio conferencing charges.

What this means for you

Web/audio conferencing providers

Whether you owe Telecommunications Excise Tax turns on what you're actually selling, not on marketing labels. Pure web-conferencing/software access, delivered from the cloud without a download, generally isn't taxed as software, and generally isn't a "telecommunications" service either. But the moment your product includes reselling phone lines or transmission capacity to let customers dial into a conference, that piece can be taxed at the 7% Telecommunications Excise Tax rate (plus any applicable municipal telecommunications tax under 35 ILCS 636/5-10, 5-15).

Companies bundling software with telecom add-ons

If you sell a bundle like Product C, don't lump the software and the audio-bridging charges into one line. The letter states plainly that the Cloud Collaboration Service "would not be taxable if those charges are disaggregated and separately identified from the taxable audio conferencing bridging services." Combine them into a single undifferentiated charge, and you risk the whole bundle being treated as taxable gross charges under 35 ILCS 630/2(a).

Deciding who collects and remits

If you charge your customers separately for the underlying phone line or transmission service used in audio conferencing, you're expected to give your telecommunications provider a resale certificate and to collect and remit the Telecommunications Excise Tax yourself on what you charge your customers. If you don't pass along a separate line charge, you instead just pay tax to your own telecom provider as the consumer of that service — the incidence lands on you rather than flowing through to your customers.

Common questions

Q: Is web-based video/audio conferencing software subject to Illinois sales or telecommunications tax?
A: Generally no. Cloud-delivered software that's only accessed remotely (never downloaded) is not subject to tax, and purely web-based conferencing is generally not subject to the Telecommunications Excise Tax because the provider is treated as the consumer, not the reseller, of the telecom services it uses.

Q: When does an audio conferencing service become taxable under the Telecommunications Excise Tax Act?
A: When the gross charges include reselling telephone/line services — i.e., the provider is charging for the transmission itself, not just a value-added conferencing layer. In that case the 7% excise tax under 35 ILCS 630/3 and 4 applies to those gross charges.

Q: If a conferencing company doesn't separately bill for phone lines, does it owe the tax itself?
A: The company itself isn't treated as a telecommunications retailer in that scenario. Instead, it simply pays the Telecommunications Excise Tax to its own telecommunications provider as a consumer of that underlying service.

Q: How should a bundled software-plus-audio-conferencing package be priced to minimize tax exposure?
A: Per the letter, the software (Cloud Collaboration Service) portion stays untaxed only if its charges are disaggregated and separately identified from the taxable audio conferencing bridging charges. Bundling everything into one undifferentiated fee risks having the whole charge treated as taxable.

Q: Can this letter be relied on as binding guidance?
A: No. It's a General Information Letter, which by regulation (2 Ill. Adm. Code 1200.120) is not a statement of Department policy and is not binding on the Department — unlike a Private Letter Ruling, which can bind the Department as to the specific requesting taxpayer.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2018.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2018/st-18-0037-gil.pdf

Original ruling text

ST 18-0037-GIL 12/05/2018

TELECOMMUNICATIONS

This letter discusses audio conferencing services. See 35 ILCS 630. (This is a GIL.)

December 5, 2018
Dear Xxxx
This letter is in response to your letter received September 25, 2018, 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:
COMPANY supplies tax compliance software to the telecommunication industry.
OVERVIEW
We are currently researching the taxability of Web Conferencing which includes as a
major component a web-based “Cloud Collaboration Service” that provides participants
of a video conference meeting with various enhanced features such as screen sharing.
It is our understanding that such a “Cloud Collaboration Service” basically consists of a
desktop software application that resides on the vendor’s server & is thus accessed
remotely.
It is our further understanding that such a “Cloud Collaboration Service” can be
subscribed to on either a stand-alone basis or bundled together with an audio
conference bridging service component which the desktop application is layered upon.
Please note that in the absence of purchasing the audio bridging service plug-in
component, a corporate subscriber must make arrangements with their own
telecommunications supplier in order to integrate audio conferencing capability in
conjunction with the desktop features.
Fact Pattern
COMPANY sells the following product offerings:

ST 18-0037-GIL
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•
•
•

Stand-alone Cloud Collaboration Service [Product A] = $$$ Per Month
Audio Conference Bridging Service Add-On [Product B] = $$$ Per Month
Bundled Package [Product C] = $$$ Per Month

QUESTIONS
Based on the above we have the following questions:

1. Are charges for the stand-alone Cloud Collaboration Service (Product A)
   provided independently of the Audio Conference Bridging Service add-on subject
   to the Illinois Telecommunications Excise Tax and the Telecommunications
   Infrastructure Maintenance fee?
2. If yes, what is the basis of such taxability status? (Examples: Product A is
   taxable as a standard telecommunication service, taxable as remote access to
   canned software, etc.)
3. Are charges for the Audio Conference Bridging Service add-on (Product B)
   subject to the Illinois Telecommunications Excise Tax and the
   Telecommunications Infrastructure Maintenance fee when stated separately on
   the subscriber’s invoice?
4. What is the taxability status of the bundled service offering (i.e., Product C)?
   DEPARTMENT’S RESPONSE:
   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;

ST 18-0037-GIL
Page 3

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.
In order to comply with the requirements as set out in Section 130.1935(a)(1), there must be a
written “signed” agreement. A license agreement in which the customer electronically accepts the
terms by clicking “I agree” does not comply with the requirement of a written agreement signed by the
licensor and customer. The Department previously held that an electronic signature did not comply
with the requirement of Section 130.1935(a)(1)(A) that the license be evidenced by a written
agreement signed by the licensor and the customer. ST 06-0005-PLR (December 16, 2006). In ST
18-0003-PLR (February 8, 2018), the Department decided that an electronic license agreement in
which the customer accepts the license by means of a signature in electronic form that is attached to
or is part of the license, is verifiable, and can be authenticated will comply with the requirement of a
written agreement signed by the licensor and customer. See ST 18-0010-PLR (September 26, 2018)
for examples of acceptable written signatures. A license agreement in which the customer
electronically accepts the terms by clicking “I agree” remains unacceptable.
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.
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, 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.
Telecommunications
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

ST 18-0037-GIL
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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 Act defines gross charges as including the amount paid for the act or privilege of
originating or receiving telecommunications in this State and for all services and equipment provided
in connection therewith by a retailer. 35 ILCS 630/2(a). The Act does exclude charges for customer
equipment, including equipment that is leased or rented by the customer from any source, when
those charges are disaggregated and separately identified from other charges. 35 ILCS 630/2(a)(4).
The gross charges for audio conferencing bridging services that include the reselling of
telephone services are subject to the Telecommunications Excise Tax Act. When teleconferencing
providers are reselling telephone services, they can provide resale certificates to the telephone
service providers.
Generally, persons that provide conference services and who do not, as part of that service,
charge customers for the line or other transmission charges that are used to obtain these services are
not considered to be telecommunications retailers from these activities. Consequently, a company
that provides audio conference services may pay its telecommunications provider the tax for
telecommunications services it uses to provide the services. If, however, the company separately
charges customers for the line or other transmission charges, they should provide their
telecommunications providers with Certificates of Resale and should themselves collect and remit
tax.
Some companies now are providing web-based audio conference services. Generally, webbased services are not subject to Telecommunications Excise Tax, and a person providing the web-based
services is the consumer of any telecommunications services it purchases and uses to provide the webbased services. See ST 13-0048-GIL. Teleconference services may also be classified as valueadded services in some cases and not subject to tax. See ST 15-0001-PLR.
If the Company is providing taxable audio conferencing bridging services, the Cloud
Collaboration Services would not be taxable if those charges are disaggregated and separately
identified from the taxable audio conferencing bridging services.
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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