The company I pay for email marketing services says it must charge me Illinois sales tax, but they don't sell or license me any software -- is that right?

Plain-English summary

A customer of an email marketing/list-management service ("COMPANY") asked the Illinois Department of Revenue for a Private Letter Ruling (PLR) confirming that COMPANY -- a service-only business that stores customer email lists and sends mass emailings, with no software sold or licensed to him -- should not be charging him Illinois sales tax on its annual service fee. He had been paying that tax for years and wanted the Department to tell COMPANY to stop.

The Department did not resolve that specific dispute. Because the requester's disagreement was with a third party (COMPANY), not with a transaction the Department could rule on for him, the Department declined to issue a PLR and instead answered with this non-binding General Information Letter -- restating only the general law on how Illinois taxes computer software and software-adjacent services, without deciding whether COMPANY's particular fee is or isn't taxable.

On the general law, the Department explained several distinctions:

• 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 transmit or embody it. Sales of "canned" (non-custom) computer software are generally taxable retail sales, treated as tangible personal property no matter how it's delivered -- tape, disc, electronic means, or otherwise (86 Ill. Adm. Code 130.1935). "Custom" software -- specially prepared to a customer's special order -- may not be a taxable retail sale; merely assembling canned programs into a package doesn't make it custom unless real, substantial changes are made (86 Ill. Adm. Code 130.1935(c)(3)).
• The 5-part license test. A license of canned software is not a taxable sale if it meets all five criteria in 86 Ill. Adm. Code 130.1935(a)(1): (A) a written agreement signed by both licensor and customer; (B) restrictions on the customer's duplication and use; (C) a prohibition on sublicensing or transferring to third parties without the licensor's permission and continued control; (D) a licensor policy of replacing lost or damaged copies at minimal or no cost (or allowing an archival copy); and (E) a requirement that the customer destroy or return all copies at the end of the license (automatically satisfied for a perpetual license). A click-to-accept "I agree" checkbox does not satisfy the signed-writing requirement, but the Department has recognized that a verifiable, authenticatable electronic signature attached to or part of the license can satisfy it, citing its own prior ruling ST-18-0010-PLR (Sept. 26, 2018) for examples of acceptable e-signatures.
• SaaS and cloud delivery. A provider of software as a service acts as a "serviceman" under the Service Occupation Tax Act (35 ILCS 115/3), not subject to Retailers' Occupation Tax. Cloud-based software that is never downloaded to the client's computer -- only accessed remotely -- is not subject to tax at all. But if a provider gives the subscriber something like an API, applet, desktop agent, or remote-access agent to reach the provider's network or services, the subscriber may be receiving actual computer software, which is taxable (even with no separate charge for it) unless it independently qualifies as a nontaxable license under the 5-part test above.
• Tax base for servicemen. A serviceman who transfers tangible personal property (including software) incident to a service computes tax using one of four methods: (1) separately stated selling price, (2) 50% of the entire bill, (3) Service Occupation Tax on cost price if registered as a de minimis serviceman, or (4) Use Tax on cost price if de minimis and not otherwise required to register under Section 2a of the Retailers' Occupation Tax Act.

Because the GIL only restates this general framework, it does not tell readers -- or the requester -- whether COMPANY's particular email/list-management fee is taxable. That determination would depend on facts (such as whether COMPANY provides any API, applet, or remote-access agent, or any software transfer at all) that a GIL does not evaluate.

What this means for you

If you're a buyer of software-adjacent services

Paying for access to a web-based platform doesn't automatically mean you're being sold or licensed "software" for tax purposes -- but it doesn't automatically mean you aren't, either. The key question is whether the provider transfers any software to you (even something as small as an API, applet, or agent that lets you connect to their system) or whether the service is purely functionality you use on their own servers with nothing transferred to your device. If you believe you're being taxed incorrectly, a GIL addressed to you personally may only restate the general rule; it won't necessarily resolve a dispute with your specific vendor.

If you're a SaaS or cloud-service provider

If your customers only ever access your software remotely, with nothing downloaded to their computers, you generally act as a serviceman rather than a retailer, and your service is not taxable software as such. But if you give customers any local component -- an API, applet, desktop agent, or remote-access agent -- take a close look at whether that component is itself taxable computer software, and whether it can qualify as a nontaxable license under the 5-part test.

If you're drafting or reviewing a software license

To keep a canned-software license out of the taxable column, make sure the agreement is signed in writing by both the licensor and the customer (a verifiable electronic signature can work; a simple "I agree" click-through cannot), restricts duplication and use, bars sublicensing or transfer without the licensor's continued control, commits to replacing lost or damaged copies (or allows an archival copy), and requires return or destruction of copies at the end of the license term (automatically satisfied if the license is perpetual). Missing any one of the five elements makes the license a taxable sale.

Common questions

Q: Does a company that only provides email storage and mass-mailing services, with no software transferred, owe Illinois sales tax on its fee?
A: The Department did not decide that specific question in this GIL. As a general matter, a business that only provides services -- without selling or licensing any tangible personal property, including software -- would be acting as a serviceman rather than a retailer. But whether any particular provider's offering crosses into a software transfer (for example, through an API, applet, or remote-access agent) is a fact question the Department did not evaluate here.

Q: What's the difference between "canned" and "custom" software for Illinois tax purposes?
A: Canned (non-custom) software is generally taxable as tangible personal property no matter how it's delivered. Custom software -- specially prepared to a customer's particular order -- may not be a taxable retail sale, but simply bundling together pre-written canned programs doesn't count as custom unless real, substantial changes are made to the programs or their interfacing logic (86 Ill. Adm. Code 130.1935(c)(3)).

Q: Can I license software electronically without triggering tax, or does the agreement have to be signed on paper?
A: It doesn't have to be paper. While a simple click-to-accept "I agree" button does not satisfy the written-and-signed requirement in 86 Ill. Adm. Code 130.1935(a)(1)(A), the Department has recognized that a verifiable, authenticatable electronic signature attached to or part of the license agreement can satisfy that requirement, provided the other four license criteria are also met.

Q: If I use a cloud-based platform and nothing is ever downloaded to my computer, am I being sold taxable software?
A: Generally no -- cloud-based software that is never downloaded to the client's computer and is only accessed remotely is not subject to tax. However, if the provider gives you a local component like an API, applet, desktop agent, or remote-access agent to connect to their system, that component may itself be taxable computer software, even if there's no separate charge for it, unless it 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)
• 35 ILCS 115/3 (Service Occupation Tax Act -- servicemen, including SaaS providers, taxed on tangible personal property including software transferred incident to a service)
• 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/st19-0009-gil.pdf

Original ruling text

ST 19-0009-GIL 04/29/2019 COMPUTER SOFTWARE
This letter discusses computer software. See 86 Ill. Adm. Code130.1935. (This is a GIL.)
April 29, 2019
Dear Xxxx:
This letter is in response to your email dated April 24, 2019, 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 private letter ruling about the collection of Illinois sales tax by a
company called COMPANY, based in CITY, STATE.
Following is the information requested in Title 2 Part 1200 Section 1200.110 – Private
Letter Rulings, part b), items 1-8.
1) A complete statement of the facts and other information pertinent to the request.
COMPANY is a service-only business. The services that the company provides are the
storage of my list of customers’ email addresses and the distribution of my mass
emailings to those customers. I use interactive forms on their web site to add and delete
email addresses; to compose the messages for my mass emailings; and to schedule
the dates and times for those mailings. At the scheduled time, the message is sent by
the company to my customers.
COMPANY does not sell tangible products of any kind, and they do not sell or license
computer software of any kind. Because there is no transfer of any property of any kind
from COMPANY to me, they should not be charging Illinois sales tax on their annual fee
for their services.
2) All contracts, licenses, agreements, instruments or other documents relevant to the
request.

ST 19-0009-GIL
Page 2
I have attached a PDF file (“Website and Products Terms and Conditions of Use COMPANY”) containing their terms and conditions. When reading the company’s
Terms, it is important to note that their terminology can confuse and complicate the
issue. Specifically, they repeatedly refer to their services as “products,” which implies
that they sell something tangible. In context, it becomes apparent that their “products”
are nothing more than the interactive functions on their web site.
In Section 7.1 of their Terms and Conditions, COMPANY specifically states that they do
not sell or license software. I have attached a file (“COMPANY Terms-Conditions
Section 7.1”) which isolates that pertinent section of their terms.
3) An identification of the tax period at issue, and disclosure of whether an audit or
litigation is pending with the Department…
COMPANY has been charging sales tax to their Illinois customers since 20XX, and they
have continued that practice to date. From December 3, 20XX, through September 28,
20XX, I have paid a grand total of $$$ in sales tax on my annual fees. I have attached a
scan of my most recent invoice/receipt (“COMPANY-20XX-invoice”). Unfortunately, it
does not itemize the amounts, but it is mathematically provable to be their current base
rate of $$$ plus 6.25% sales tax ($$$).
I know of no audit or litigation pending with the Department.
4) A statement that to the best of the knowledge of both the taxpayer and the
taxpayer's representative the Department has not previously ruled on the same or a
similar issue for the taxpayer or a predecessor…
According to COMPANY, they did request Private Letter Rulings in 20XX and 20XX.
They sent me the responses, which I have attached as “Illinois Private Letter RulingGIL.pdf” and “Rulings__Illinois-GIL__02_29_20XX.doc”. In both cases, they received
General Information Letters referring to the statutes regarding the sale and licensing of
software, which COMPANY misinterpreted and misapplied.
In all discussions and conversations that I have had with the company, they refer to
“Regulation Section 130.1935 of Title 86 of the Illinois Department of Revenue
Regulations,” a regulation which only applies to the sale and licensing of software.
Again, that is not the nature of COMPANY’S business.
In addition to that, the company has cited the nexus rule, because they have an office in
CITY, Illinois. However, the nexus rule is also irrelevant to the issue, because the
company does not sell tangible products.
I requested a Private Letter Ruling myself in October 20XX, but I also received a GIL
stating that the laws concerning sales of software were clearly stated and there was no
need to issue a ruling on the matter. Unfortunately, that GIL didn’t help me to convince
COMPANY that they were misinterpreting the clearly stated laws.
5) A statement of authorities supporting the taxpayer's views, an explanation of the
grounds for that conclusion and the relevant authorities to support that conclusion.

ST 19-0009-GIL
Page 3
I have no authorities that I can name, but I have called and talked to people in the
Department of Revenue three or four times through the years. Everyone agrees that
services are not taxable, and a service-only business should not be collecting tax.
Nobody disputes that, but I have not been able to find anyone who will instruct
COMPANY to stop collecting taxes; and COMPANY won’t take my word for it, of
course.
6) A statement of authorities contrary to the taxpayer's views. Each taxpayer is under
an affirmative duty to identify any and all authorities contrary to the taxpayer's views. If
the taxpayer determines that there are no authorities contrary to his or her views, or
taxpayer is unable to locate such authority, the request must contain a statement to that
effect.
I know of no authorities who have views contrary to mine.
7) An identification of any specific trade secret information taxpayer requests be
deleted from the publicly disseminated version of the private letter ruling.
There are no trade secrets contained here.
8) The signature of the taxpayer or the taxpayer's representative…
I am submitting this request via email. I hope that my electronic signature is sufficient.
I hope that the Department of Revenue can issue a private letter ruling stating that, as a
service-only business, COMPANY has no obligation to collect sales tax from its Illinois
customers and that it should stop doing so.
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
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.

ST 19-0009-GIL
Page 4
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
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.
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). 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.

ST 19-0009-GIL
Page 5
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.
Under the Service Occupation Tax Act, a serviceman is taxed on tangible personal property
transferred incident to a sale of service. The transfer of tangible personal property to service
customers may result in either Service Occupation Tax liability or Use Tax liability for servicemen,
depending upon which tax base they choose to calculate their liability. Servicemen may calculate
their tax base in one of four ways: (1) separately stated selling price; (2) 50% of the entire bill; (3)
Service Occupation Tax on cost price if they are registered de minimis servicemen; or (4) Use Tax on
cost price if the servicemen are de minimis and are not otherwise required to be registered under
Section 2a of the Retailers’ Occupation Tax Act.
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,

RSW:rkn

Richard S Wolters
Associate Counsel