My tax-prep software vendor charges sales tax on the annual license, which I accept, but also on a separate 'REP access' fee each time I use an add-on module for a client -- is that REP fee taxable?

Plain-English summary

A tax-preparation firm ("NAME") annually licenses professional income-tax-prep software ("PRODUCT") from a vendor ("BUSINESS"). The firm installs the software locally -- via CD or download -- on its own servers and workstations in Illinois, and generally downloads the Federal Individual, Federal Corporation, Federal Partnership, and Federal S-Corp modules, plus the Illinois and other-state individual modules its clients need. BUSINESS charges sales tax on the base license fee (the invoice shows a 6.25% rate, which the firm assumes is Illinois sales tax), and the firm agreed that tax was properly charged on that base license.

The same license also grants "REP" access to BUSINESS's other income-tax products -- business returns for corporations, partnerships, and S-corps, plus additional state modules. The firm can download any of those modules for free, but actually turning on Rep Access to view and use a module for a specific client triggers a separate per-use REP access fee, and BUSINESS charges sales tax on that fee too. The firm's real question was whether that REP access fee should be taxed, arguing its license (a click-to-accept end-user agreement) appeared to satisfy Illinois's 5-part test for a nontaxable software license, aside from possibly falling short on the signed-writing element.

The Department did not answer that question. Its response restates the general legal framework for taxing software in Illinois but explicitly states, in its final paragraph, that based on the information provided it is unable to determine whether the REP access obtained on a pay-per-use basis is computer software or is provided in a way that is not taxable -- and that it would need more information from BUSINESS describing how REP access is technically provided before it could say.

On the general law, the Department explained:

• Canned vs. custom software. "Computer software" is defined at 35 ILCS 120/2-25 as statements, data, or instructions used in a computer, including prewritten or canned software, regardless of the medium used to embody or transmit it. Sales of "canned" (non-custom) software are generally taxable retail sales, treated as tangible personal property no matter how delivered -- tape, disc, electronic means, or otherwise (86 Ill. Adm. Code 130.1935). "Custom" software -- prepared to a customer's special order -- may not be a taxable retail sale; merely assembling canned programs into a package does not make the result custom unless real, substantial changes are made to the programs or their interfacing logic (86 Ill. Adm. Code 130.1935(c)(3)).
• The 5-part license test. A license of canned software escapes tax only if it meets all five criteria in 86 Ill. Adm. Code 130.1935(a)(1): (A) a written agreement signed by both the licensor and the customer; (B) restrictions on the customer's duplication and use of the software; (C) a prohibition on the customer sublicensing or transferring the software to a third party without the licensor's permission and continued control; (D) a licensor policy of replacing lost or damaged copies at minimal or no cost (or letting the licensee keep an archival copy); and (E) a requirement that the customer destroy or return all copies at the end of the license period (automatically satisfied for a perpetual license). Missing any one element makes the license a taxable sale.
• Click-to-accept vs. electronic signature. A license agreement accepted only by clicking "I agree" does not satisfy the signed-writing requirement in element (A). But the Department has recognized that an electronic signature that is attached to or part of the license, is verifiable, and can be authenticated does satisfy that requirement, citing its own prior ruling ST-18-0010-PLR (Sept. 26, 2018) for examples of acceptable electronic signatures.
• SaaS and remote access components. Software provided through a cloud-based delivery system -- never downloaded to the client's computer, only accessed remotely -- is not subject to tax. But if the provider gives the subscriber an API, applet, desktop agent, or remote-access agent to enable access to the provider's network and services, the subscriber is receiving computer software. That transfer is taxable, even if there's no separate charge for it, unless the transfer itself qualifies as a nontaxable license under the 5-part test.

Because the Department could not determine, on this record, whether the REP access feature involves an actual transfer of computer software (versus, say, a purely remote-access arrangement) or whether any such transfer meets the 5-part test, it left the taxability of the REP access fee unresolved.

What this means for you

If you license professional tax-prep or similar per-module software

A base software license and a separate, pay-per-use "access" or "activation" fee for add-on modules may be analyzed differently for sales tax purposes. Whether the extra fee is taxable can turn on exactly how the vendor delivers that access -- for example, whether the module is downloaded to your system (potentially canned software) versus accessed only remotely through the vendor's own servers (potentially nontaxable SaaS), and whether any local component (API, applet, agent) is involved. If you want a binding answer on your own facts, this GIL shows you likely need a Private Letter Ruling request (under 2 Ill. Adm. Code 1200.110) that specifically describes the technical mechanics of how the add-on access is provided -- a GIL alone won't resolve it.

If you sell or license software with tiered or pay-per-use features

If part of your product is downloaded once but individual modules or features require a separate "unlock" or "access" fee to actually use, be prepared to explain precisely how that unlock works (is more code transferred? is it just flipping a permission flag against code already on the customer's machine? is it purely server-side?). That technical detail is exactly what the Department said it needed here and didn't have.

If you're relying on a click-to-accept license to avoid sales tax

A basic "I agree" checkbox will not satisfy the signed-writing element of the 5-part nontaxable-license test. If you want your license to qualify, use an electronic signature process that is verifiable and can be authenticated, and make sure the other four elements -- restrictions on duplication/use, a no-sublicense/continued-control provision, a lost/damaged-copy replacement policy (or archival-copy permission), and an end-of-license return/destroy requirement -- are all satisfied too.

Common questions

Q: Should I be charged sales tax on a per-use "access" or "activation" fee for an add-on software module I already have (or can download for free)?
A: This GIL does not answer that question for the requester's own facts, and it is a fact-specific inquiry. It depends on whether that access constitutes a transfer of computer software and, if so, whether the transfer qualifies as a nontaxable license under the 5-part test in 86 Ill. Adm. Code 130.1935(a)(1). Only more detail about how the vendor actually provides that access can resolve it.

Q: Is my base annual software license, which I pay sales tax on, being handled correctly?
A: The requester here believed his base license was properly taxed and the Department did not disturb that. Canned (non-custom) software is generally a taxable retail sale regardless of delivery method, unless the license independently satisfies all five criteria of the nontaxable-license test.

Q: Does clicking "I agree" on a software end-user license agreement satisfy Illinois's signed-writing requirement?
A: No. A simple click-to-accept "I agree" does not satisfy the written-and-signed requirement in 86 Ill. Adm. Code 130.1935(a)(1)(A). However, a verifiable, authenticatable electronic signature attached to or part of the license can satisfy that requirement.

Q: If a module is only accessed remotely and never downloaded to my computer, is it taxable?
A: Software-as-a-service or cloud-based delivery -- never downloaded to the client's computer, only accessed remotely -- is not subject to tax. But if the provider gives you an API, applet, desktop agent, or remote-access agent to enable that access, you are receiving computer software, which is taxable (even without a separate charge) unless the transfer qualifies as a nontaxable license.

Citations and references

Statutes and regulations cited:

• 35 ILCS 120/2-25 (definition of "computer software," including prewritten/canned software, regardless of transmission medium)
• 86 Ill. Adm. Code 130.1935 (canned software taxable as tangible personal property regardless of delivery method; subsection (a)(1) sets the 5-part nontaxable-license test; subsection (c)(3) defines custom software)
• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax imposed on sellers of tangible personal property)
• 86 Ill. Adm. Code 150.101 and 150.130 (Use Tax on tangible personal property purchased at retail; retailer's offsetting credit)
• 2 Ill. Adm. Code 1200.110 (procedures for requesting a Private Letter Ruling)
• 2 Ill. Adm. Code 1200.120 (GILs are non-binding and not a statement of Department policy)

Prior ruling referenced:

• ST-18-0010-PLR (Sept. 26, 2018) (cited by the Department for examples of acceptable electronic signatures satisfying the signed-writing requirement for a software license)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2019.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2019/st19-0006-gil.pdf

Original ruling text

ST 19-0006-GIL 03/06/2019 COMPUTER SOFTWARE
This letter discusses computer software. See 86 Ill. Adm. Code130.1935. (This is a GIL.)

March 6, 2019

Dear Xxxx
This letter is in response to your letter dated December 11, 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:
This month we discussed my company being charged sales tax by BUSINESS when we
purchase the professional tax preparation software PRODUCT from them. That
purchase being subject to Illinois sales tax made sense. Being charged sales tax by
BUSINESS when I turn on “Rep” access is what I question. You emailed me on
December 6th and stated that the issue I raise is highly dependent on the facts. I am
sending you this letter to explain the facts.
Annually my company purchases a License from BUSINESS to use their professional
income tax preparation software called PRODUCT. This License depending upon the
number of States I select costs $$$ up. I can have the software shipped to me via a CD
or download the software. I chose both methods and install the software on my local
server and workstations. The server and workstations are located in CITY, IL.
BUSINESS charges my company sales tax on this purchase. Which State they are
charging us sales tax for is not identified but the invoice uses a rate of 6.25% so I am
assuming it is IL Sales Tax. I think BUSINESS is handling this transaction correctly.
BUSINESS sells this software to thousands of tax firms.
When the PRODUCT software is ready I can download the code and install it on my
workstations. At that time I have the option to download all the Federal and State
modules that PRODUCT produces or a limited number. Generally I chose to download
the Federal Individual, Fed Corporation, Fed Partnership Fed S-Corp, and the
corresponding IL and STATE modules. I also download a number of individual modules
for other States where my clients live. I have in the past downloaded the code for all of
the States but have not done that in recent years.

ST 19-0006-GIL
Page 2

The license I purchase allows me to prepare and file unlimited Federal, IL and STATE
income tax returns for Individuals. It also provides me with “REP” access to
PRODUCTS other income tax products. These products are Federal and State
Business income tax returns. Like Corporations, Partnerships and S-Corporations. I can
also access every State module that I may need. When I access any module other than
the Federal 1040 individual, IL individual or STATE individual I am charged a REP
access fee by BUSINESS.
When I prepare an income tax return that includes a module other the Federal, IL or
STATE individual if that software module has already been downloaded I can enter the
clients [sic] information into that module. If the module is not on my system I can
download it online from BUSINESS. I am not charged a fee to download the software
or to enter information into that module. When I want to view the forms on my
computers display screen I apply to BUSINESS for Rep Access. When I am granted
Rep Access I am charged a fee for using that module for that client. BUSINESS at that
time also charges me Sales Tax on that REP access fee. Being charged a sales tax on
that fee is what I question.
NAME in preparing this letter I printed out the BUSINESS Software End User License
Agreement and IL Regulation Section 130.1935 on computer Software both of which I
have enclosed. After reading the Regulation and the PRODUCT Software license I
really am of the opinion that my PRODUCT License meets all the 5 items spelled out in
the Regulation to exempt the License from Sale Tax. I contacted BUSINESS and asked
about item A) a written agreement. I was told in this day and age that clicking on agree
in the software really takes the place of a wet signature. I am not sure that the State of
Illinois would agree but that is what I was told. So it is BUSINESS’S position that the
agreement was signed.
So while my initial concern was being charged IL Sales Tax On REP charges by
BUSINESS and it still is a concern of mine I think under the wording of this License
agreement I really am not purchasing anything but merely paying for a License to use
the PRODUCT software in which case based upon the regulations my payment for this
software license would not be taxable retail sale.
I respectfully request that you review this information and see if I need to bring this to
the attention of the State and Local tax folks at BUSINESS and seek a refund for Il
Sales tax paid to them in error.
DEPARTMENT’S RESPONSE:
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 86 Ill.
Adm. Code 130.101. 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 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

ST 19-0006-GIL
Page 3
retailers are then allowed to reduce the amount of Use Tax they must remit by the amount of
Retailers' Occupation Tax liability which they are required to and do pay to the Department with
respect to the same sales. See 86 Ill. Adm. Code 150.130.
“‘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.
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

ST 19-0006-GIL
Page 4
licensor and customer. The Department recently decided 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 (Sept. 26, 2108) for examples
of acceptable electronic signatures. A license agreement in which the customer electronically
accepts the terms by clicking “I agree” remains unacceptable.
Computer software is defined broadly in the Retailers’ Occupation Tax Act. However, software-as-aservice or 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. Please note, however, that if a provider of such 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, the serviceman transferring the
computer software is nonetheless subject to tax, unless the transfer qualifies as a non-taxable license
of computer software.
Based on the information you have provided, we are unable to determine whether the REP
access you obtain on a pay-per-use basis to prepare and print off returns is computer software or is
provided in a manner that is not taxable. We would need more information from BUSINESS
describing how the REP access is provided to you.
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
Chairman, Private Letter Ruling Committee

RSW: rkn