Our company sells an enhanced communications-platform product to Illinois customers, and separately some businesses offer software as a service or resell conferencing/telecom services -- when is computer software a taxable retail sale versus a non-taxable license, when does SaaS/cloud delivery escape sales tax, and when does audio-conferencing trigger the Telecommunications Excise Tax?

Plain-English summary

A privately-owned financial services firm (private banking, investment management, and investor services) had been collecting Illinois Retailers' Occupation Tax (ROT) on a revenue stream called "PRODUCT" -- an enhanced communications platform that connects the company's Illinois customers ("Users") to external service providers and internal systems. PRODUCT normalizes, translates, and transforms data according to each User's needs and transmits it over proprietary connections; it bundles in communications tools and consulting services; it's described as an "application only" offering that doesn't replace a User's own communications media; and the company doesn't co-mingle User data across customers.

After reviewing newer Department guidance, the company asked the Department for a formal, binding Private Letter Ruling (PLR) on whether PRODUCT should be subject to ROT or Service Occupation Tax (SOT) instead. The Department declined to issue the requested PLR, citing "the lack of information regarding the product contained in your request," and responded instead with this non-binding General Information Letter (GIL). Critically, the Department never actually classified PRODUCT -- it did not say whether PRODUCT is canned or custom software, a taxable license, a SaaS/cloud service, or something else. Instead, it laid out the general legal rules that would need to be applied to make that determination, leaving the taxpayer to do the matching itself.

Canned vs. custom computer software

Illinois defines "computer software" broadly: any set of statements, data, or instructions used in a computer to bring about a result, in any form and by any transmission method, including prewritten or "canned" software (35 ILCS 120/2-25). Generally, sales of canned software are taxable retail sales of tangible personal property in Illinois, no matter what medium is used to deliver it -- tape, disc, card, electronic means, or otherwise (86 Ill. Adm. Code 130.1935). Custom computer software -- prepared to the customer's special order -- may not be a taxable sale. But merely assembling pre-written/canned modules into a package does not make it "custom" unless real and substantial changes are made to the programs, or interfacing logic is created (86 Ill. Adm. Code 130.1935(c)(3)). Software that isn't custom is treated as canned software.

The 5-element test for a non-taxable software license

A software license escapes ROT only if it satisfies ALL FIVE criteria of 86 Ill. Adm. Code 130.1935(a)(1):

• (A) It's evidenced by a written agreement signed by both 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 (other than a related party) without the licensor's permission and continued control;
• (D) The licensor has a policy of providing a replacement copy at minimal or no charge, or letting the customer keep an archival copy, documented in the agreement, the licensor's books, or a notarized statement; and
• (E) The customer must destroy or return all copies at the end of the license period -- automatically satisfied for perpetual licenses without needing to be spelled out.

If a license of canned software fails even one of these, the software is taxable. On element (A) specifically, "signed" requires a genuine written signature: a customer clicking "I agree" to accept electronic terms does NOT satisfy the signed-writing requirement (the Department cited its earlier holding in ST 06-0005-PLR on this point). However, a verifiable and authenticatable electronic signature that is attached to or part of the license CAN satisfy element (A) (citing ST 18-0003-PLR and ST 18-0010-PLR for examples of acceptable electronic signatures). A bare "I agree" click-through remains unacceptable either way.

Software as a service (SaaS) and cloud delivery

A provider of software as a service acts as a "serviceman," not a retailer -- so it doesn't incur ROT. Instead, Service Occupation Tax (SOT) applies to tangible personal property (including computer software) that the serviceman transfers incident to a sale of service (35 ILCS 115/3). But computer software delivered through a true cloud-based system -- one where the software is never downloaded onto the client's computer and is only accessed remotely -- is not subject to tax at all.

A wrinkle: if a service provider gives a subscriber an API, applet, desktop agent, or remote access agent to enable access to the provider's network and services, the subscriber may be receiving taxable computer software -- even if there's no separate charge for it -- unless that transfer qualifies as a non-taxable license under the 5-element test above.

Servicemen have four options for calculating their SOT/Use Tax base on tangible personal property transferred incident to a service: (1) the separately stated selling price; (2) 50% of the entire bill; (3) SOT on cost price, if registered as a de minimis serviceman; or (4) Use Tax on cost price, if a de minimis serviceman not otherwise required to register.

Telecommunications Excise Tax and conferencing services

Separately from the PRODUCT/software discussion, the letter also summarizes Illinois telecom tax rules. The Illinois Telecommunications Excise Tax Act taxes originating or receiving intrastate or interstate telecommunications in Illinois at 7% of gross charges (35 ILCS 630/3 and 4); municipalities can layer on their own tax of up to 6% (population under 500,000) or 7% (population 500,000+) under the Simplified Municipal Telecommunications Tax Act. Audio-conferencing/bridging services that resell telephone service are subject to the Telecommunications Excise Tax, and such resellers can furnish resale certificates to their own telephone service providers. But a company that merely pays its own telecom provider for the service it uses -- without separately billing its customers for line or transmission charges -- is generally not itself treated as a telecommunications retailer for that activity (citing ST 13-0048-GIL). Some services may also qualify as exempt value-added services (citing ST 15-0001-PLR).

What this means for you

If you sell or license software to Illinois customers

Don't assume a "license" label alone avoids sales tax. Check your license agreement against all five elements of 130.1935(a)(1) -- especially the signature requirement. A simple electronic "click to accept" will not satisfy Illinois's signed-writing requirement; you need either a traditional signed writing or a verifiable, authenticatable electronic signature attached to or part of the agreement.

If you offer a SaaS, communications, or cloud-based platform

Determine whether your product is ever downloaded to the customer's device (even via an API, applet, or agent) or is purely accessed remotely without any local footprint. Software that's truly never downloaded and only accessed remotely escapes tax; anything transferred to the customer's own systems, even incidentally to a service, can trigger Service Occupation Tax unless it independently qualifies as a non-taxable license.

If you provide audio-conferencing, bridging, or similar telecom-adjacent services

Figure out whether you are reselling telephone service to your customers (which can trigger Telecommunications Excise Tax obligations and the need for resale certificates), or whether you're simply paying your own telecom provider without passing through separate line charges (which generally does not).

If you're requesting Department guidance

This letter is a reminder that the Department may decline to issue a binding PLR -- and answer with a non-binding GIL instead -- if your ruling request doesn't include enough product detail. A thorough, specific factual submission is a prerequisite to getting a binding answer.

Common questions

Q: Did the Department decide whether PRODUCT itself is taxable?
A: No. The Department declined to issue the binding PLR the taxpayer requested because of insufficient product information, and this GIL answers only with the general legal framework for canned vs. custom software, licensing, and SaaS/cloud taxability -- it never applies that framework to PRODUCT specifically.

Q: Is packaged/canned software always taxable in Illinois?
A: Generally yes -- canned or prewritten computer software is treated as taxable tangible personal property regardless of the medium used to transfer or transmit it, unless it's custom software prepared to the customer's special order (and merely assembling canned modules doesn't count as custom).

Q: Can a software license avoid sales tax?
A: Only if it meets all five criteria in 86 Ill. Adm. Code 130.1935(a)(1): a signed written agreement, restrictions on duplication/use, a ban on sublicensing/transfer without permission, a replacement/archival-copy policy, and a requirement to destroy or return copies at the end of the license (automatically met for perpetual licenses).

Q: Does clicking "I agree" on a license count as a signed agreement?
A: No. The Department has repeatedly held that a simple electronic "I agree" click does not satisfy the signed-writing requirement. A verifiable, authenticatable electronic signature attached to or part of the license can satisfy it, but a bare click-through cannot.

Q: Is software delivered through the cloud taxable?
A: If the software is delivered through a true cloud-based system and never downloaded to the client's computer -- only accessed remotely -- it is not subject to tax. But if the provider gives the subscriber an API, applet, or agent that functions as downloaded software, that can be taxable unless it qualifies as a non-taxable license.

Q: When is an audio-conferencing service subject to the Telecommunications Excise Tax?
A: When the conferencing provider is reselling telephone service to its customers. A provider that only pays its own telecom provider for the service it uses, without separately billing customers for line charges, is generally not treated as a telecommunications retailer for that activity.

Citations and references

Statutes cited:

• 35 ILCS 120/2-25 (broad definition of "computer software," including prewritten/canned software)
• 86 Ill. Adm. Code 130.1935 (canned software is taxable tangible personal property regardless of delivery medium)
• 86 Ill. Adm. Code 130.1935(a)(1)(A)-(E) (five-element non-taxable license test)
• 86 Ill. Adm. Code 130.1935(c)(3) (custom software requires real/substantial changes or interfacing logic)
• 35 ILCS 115/3 (Service Occupation Tax on tangible personal property transferred incident to a service, including software)
• 35 ILCS 630/3-4 (Telecommunications Excise Tax, 7% of gross charges)

Related Department letters cited:

• ST 06-0005-PLR (December 16, 2006) -- electronic "I agree" click does not satisfy the signed-writing requirement
• ST 18-0003-PLR (February 8, 2018) -- verifiable, authenticatable electronic signature can satisfy the signed-writing requirement
• ST 18-0010-PLR (September 26, 2018) -- examples of acceptable electronic signatures
• ST 13-0048-GIL -- company paying its own telecom provider, without separately billing customers for line charges, is not a telecommunications retailer for that activity
• ST 15-0001-PLR -- certain value-added services may be exempt from the Telecommunications Excise Tax

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/st19-0021-gil.pdf

Original ruling text

ST 19-0021-GIL 12/04/2019 COMPUTER SOFTWARE
This letter discusses computer software. See 86 Ill. Adm. Code130.1935. (This is a GIL.)
December 4, 2019

Dear XXX:
This letter is in response to your letter dated June 17, 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:
COMPANY (“Company”) is conducting a review of its tax obligations with respect to one
of its revenue streams. As taxability of software is evolving and product offerings are
becoming more complex, Company seeks guidance as to whether it has an obligation to
collect and remit Illinois Retailer’s Occupation Tax (“ROT”) or Service Occupation Tax
(“SOT”) on its revenue stream in question. Company wishes to seek formal guidance
from the state of Illinois with respect to the proper classification and tax treatment of its
offering.
On behalf of Company and pursuant to Ill. Admin. Code tit. 2, § 1200.110, we
respectfully submit this request for formal written and binding guidance from the Illinois
Department of Revenue (“DOR”) on the proper application of ROT and/or SOT
pertaining to Company’s offering.
FACTS
Company is a privately-owned financial services firm providing individuals and
institutions with private banking, investment management and investor services.
Company’s revenue stream in question is PRODUCT. PRODUCT offers an enhanced
communications platform (“PRODUCT”) to its customers located in Illinois (“Users”).
PRODUCT provides a single connectivity point between Users and their external
service providers and internal systems. Data originates from the users and/or external
service providers and is transmitted to Company via proprietary connections. In
accordance with users’ specific requirements, PRODUCT will normalize, translate, and

ST 19-0021-GIL
December 4, 2019
transform the information, which is then transmitted via proprietary connections.
Included in the PRODUCT product offering are communications tools and consulting
services. PRODUCT is an application only offering. Company does not co-mingle User
data, and User data is not incorporated into reports furnished to other Users.
Given the breadth of Illinois’ definition of what constitutes taxable computer software,
and as a result of external guidance, Company began collecting Illinois ROT from
PRODUCT customers in November 20XX. However, upon review of more recent
guidance issued by the state 1 in March of this year, Company seeks formal clarification
on the proper classification and taxability of its PRODUCT product.
Attached is a copy of the Communications Services Agreement (“Exhibit A”) which
provides a more exhaustive description of Company’s PRODUCT product.
Further, highlighted in the agreement are the following provisions that assist in
describing the purpose and functionality of PRODUCT to Users:
•

The PRODUCT services described herein are provided to User as an enhanced
communications platform and not as replacement of the User’s own
communications media. PRODUCT is not a primary source of information.
PRODUCT is a communications platform designed to communicate primary
source information between User and User Approved Destinations. 2

•

To this end PRODUCT supplies: communications facilities, information
management tools, and access to hosted website environment. 3

•

PRODUCT Materials – Shall mean certain materials supplied by Company to
User in the course of performance of this Agreement, which may include (without
limitation), business methodology, business plans, procedures, handbooks,
software (in object code or source code form) necessary to operate and maintain
the User Environment, data, documentation or information developed or provided
by Company or suppliers. 4

RULING REQUEST
Company requests the Department’s written and binding confirmation of the
classification of PRODUCT and the applicability of the Illinois ROT and/or SOT to this
offering.
Please do not hesitate to contact me at NUMBER or EMAIL with any questions or
concerns.
DEPARTMENT’S RESPONSE:
ST 19-0007-GIL 03/20/2019; ST 19-0006-GIL 03/06/2019.
Exhibit A, Page 1.
3
Exhibit A, Page 2.
4
Exhibit A, Page 3.
1
2

ST 19-0021-GIL
December 4, 2019

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 due to the lack of information regarding the product
contained in your request. We hope however, the following General Information Letter will be helpful
in addressing your questions.
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
“‘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;

ST 19-0021-GIL
December 4, 2019
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.
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.
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

ST 19-0021-GIL
December 4, 2019
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.
If an Illinois customer downloads computer software for free from an out-of-state retailer’s web
site or server that is also located out-of-state, the retailer, even though it is donating tangible personal
property to the customer, has exercised no power or control over the property in Illinois. In this
instance, the donor would not have made any taxable use of the property in Illinois. The customer,
the donee, would incur no Use Tax liability for the retailer to collect and remit to Illinois. Illinois does
not tax subscriptions.
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 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 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, for example, may pay its telecommunications provider the tax for
telecommunications services it uses to provide the services. See ST 13-0048-GIL. 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 services may also be classified as value-added services and not subject to tax.
See ST 15-0001-PLR.

ST 19-0021-GIL
December 4, 2019
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,

RSW:rkn

Richard S. Wolters
Associate Attorney