If a perpetual software license meets all five requirements of 86 Ill. Adm. Code 130.1935(a)(1), is the transfer treated as a taxable lease/rental, or as a non-taxable license of an intangible?

Plain-English summary

A taxpayer asked the Illinois Department of Revenue to confirm, in a General Information Letter, how transfers of prewritten computer software under a perpetual license should be classified for Retailers' Occupation Tax and Use Tax purposes: as a taxable lease/rental of the software, or as a non-taxable sale of an intangible license.

The Department had already addressed this exact question in 1991, in PLR 91-0671, holding that such a transfer is not a rental but a non-taxable license of computer software. However, under the Department's own rules a PLR more than 10 years old can no longer be relied upon as reflecting current Department policy -- so the taxpayer requested a current GIL confirming the same conclusion still holds.

The Department's answer: yes, the 1991 conclusion still holds. Under 86 Ill. Adm. Code 130.1935(a)(1)(A)-(E), a license of computer software is not a taxable retail sale if it meets all five of the following conditions:

• (A) Written agreement. The license is evidenced by a written agreement signed by both the licensor and the customer.
• (B) Restricted duplication and use. The agreement restricts the customer's duplication and use of the software.
• (C) No unauthorized transfer. The agreement 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) Replacement or archival copy policy. The licensor has a policy of providing a replacement copy at minimal or no charge if the customer loses or damages the software, or of permitting the licensee to make and keep an archival copy -- and that 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.
• (E) Return or destruction at end of license. The customer must destroy or return all copies of the software to the licensor at the end of the license period. For a perpetual license, this condition is automatically deemed met without needing to be stated in the agreement, because a perpetual license has no end date.

If a transfer of prewritten software under a perpetual license satisfies all five elements, the transaction is not a rental or lease -- it is a non-taxable license of computer software (a sale of an intangible).

What this means for you

Software vendors and licensors

If you license prewritten software to Illinois customers under a perpetual license, structure the license agreement to clearly satisfy all five elements of 130.1935(a)(1): a signed written agreement, restrictions on duplication/use, a prohibition on unauthorized sublicensing or transfer, a documented replacement/archival-copy policy, and (implicitly, given the license's perpetual nature) no requirement to return or destroy copies at a fixed end date. Meeting all five means you should not need to collect Retailers' Occupation Tax or Use Tax on the transaction as a rental/lease.

Business owners and accountants

When evaluating whether a software purchase was properly taxed (or properly exempted), check the license agreement against the five-element test rather than assuming that "perpetual license" alone is enough -- the perpetual nature only automatically satisfies element (E); elements (A) through (D) must still be independently met.

Anyone relying on old letter rulings

This GIL is a useful reminder that Private Letter Rulings more than 10 years old cannot be relied upon as current Department policy. If you have been relying on an old PLR, consider requesting a current GIL or PLR to confirm the position still holds, as this taxpayer did.

Common questions

Q: Does a perpetual software license automatically avoid sales/use tax in Illinois?
A: No. It must meet all five elements of 86 Ill. Adm. Code 130.1935(a)(1)(A)-(E) -- a signed written agreement, restricted duplication/use, a prohibition on unauthorized transfer, a replacement/archival-copy policy, and destruction/return of copies at the end of the license (automatically satisfied for perpetual licenses since there is no end date).

Q: Why did the taxpayer need a new GIL if the Department already ruled on this in 1991?
A: Under the Department's procedures, a Private Letter Ruling more than 10 years old can no longer be relied upon as reflecting current Department policy. The 1991 ruling, PLR 91-0671, addressed the identical issue, but the taxpayer needed a current letter to confirm the conclusion still applies.

Q: Is this GIL binding on the Department?
A: No. A General Information Letter merely directs taxpayers to relevant regulations and other sources of information; it is not a statement of Department policy and is not binding on the Department. See 2 Ill. Adm. Code 1200.120.

Q: What's the difference between a taxable lease/rental of software and a non-taxable license?
A: A taxable lease or rental is treated like other transfers of tangible personal property for use, subject to Retailers' Occupation Tax and Use Tax rules on leases and rentals. A license meeting all five elements of 130.1935(a)(1) is instead treated as a sale of an intangible (the license itself), which is not a taxable retail sale.

Citations and references

Statutes and regulations cited:

• 86 Ill. Adm. Code 130.1935 (governs taxability of computer software transfers under the Retailers' Occupation Tax and Use Tax)
• 86 Ill. Adm. Code 130.1935(a)(1)(A)-(E) (five-element test under which a license of software is not a taxable retail sale)

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/st19-0031-gil.pdf

Original ruling text

ST 19-0031-GIL

12/06/2019 COMPUTER SOFTWARE

If the transfer of computer software is made pursuant to a perpetual license that contains the 5
elements of a non-taxable license of computer software set forth in Section 130.1935(a)(1), the
transaction is not a rental or lease. It is considered a non-taxable license of computer software.
(This is a GIL.)
December 6, 2019
Re:

General Information Letter on Application of Illinois Retailers’ Occupation Tax
And Use Tax on Computer Software

Dear XXX:
This letter is in response to your letter dated July 22, 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:
We request a general information letter on the application of the Illinois Retailers’
Occupation Tax and Use Tax on transfers of prewritten computer software under
Section 130.1935 of the Department of Revenue (“DOR”) Regulations, when the five
requirements of Section 130.1935(a)(1) are met. 86 Ill. Adm. Code 130.1935.
The issue raised is how to classify such transfers of prewritten software under a
perpetual license to use the software. Simply put, are these transfers considered
leases or rentals subject to the DOR regulations and rules on leases and rentals, or are
they considered sales of intangible licenses?
As a result, the question we seek clarification on is whether the DOR treats the transfer
of prewritten software that meets the five requirements of Section 130.1935(a)(1) as a
lease or rental of the prewritten software or the sale of a non-taxable license of software
(a sale of an intangible)? This issue was specifically addressed by the DOR in 1991. At
that time, the DOR held that such a transfer is not a rental, but a sale of “a non-taxable
license of computer software for Retailers’ Occupation Tax and Use Tax purposes.”
PLR 91-0671 (1991) (enclosed). Pursuant to the DOR’s rules, since this letter ruling is
over 10 years old, it can no longer be relied upon as reflection DOR policy.

ST 19-0031-GIL
December 6, 2019
Page 2
Consequently, it is requested that the DOR confirm in a general information letter that
under Section 130.1935, the transfer of prewritten software under a perpetual license
that meet the five requirements of Section 130.1935(a)(1) are considered non-taxable
sales of intangibles, and are not considered leases or rentals under the Illinois Retailers’
Occupation and Use Tax.
Thank you for your time and consideration of this matter.
DEPARTMENT’S RESPONSE:
As set forth in the Department’s regulation for computer software at 86 Ill. Adm. Code
130.1935(a)(1)(A) through (E), “[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 of 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 the transfer of computer software is made pursuant to a perpetual license that contains the 5
elements of a non-taxable license of computer software set forth in Section 130.1935(a)(1), the
transaction is not a rental or lease. It is considered a non-taxable license of 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,

Debra M. Boggess
Associate Counsel
DMB:bkl