What does Illinois General Information Letter ST 19-0035-GIL conclude about Computer Software?

Plain-English summary

This General Information Letter answers a health-information management company's question about whether its varied revenue streams — medical records retrieval, coding, data abstraction, scanning, storage, and a software-as-a-service (SaaS) offering — are subject to Illinois' Retailers' Occupation (sales), Use, Service Occupation, or Service Use taxes. The company argued that nearly all of its offerings are services, not sales of tangible personal property, and that it qualifies as a "de minimis serviceman" that simply pays Use Tax on its own purchases of supplies (mostly labor, technology, and paper costs falling under a 35% cost-to-receipts threshold) rather than collecting tax from customers.

The Department's response confirms the general framework rather than blessing every line item. Illinois taxes sales of tangible personal property under the Retailers' Occupation Tax Act and Use Tax Act, but services themselves are not taxed that way — instead, "servicemen" (businesses that sell services) are taxed under the Service Occupation Tax Act only on tangible personal property that is transferred incident to the service. Servicemen can calculate that liability four ways: (1) tax on the separately stated selling price of the property transferred, (2) tax on 50% of the entire bill if they do not separately state a price, (3) Service Occupation Tax on the property's cost price if they are a registered de minimis serviceman, or (4) Use Tax on the property's cost price if they are de minimis and not otherwise required to register. "De minimis" means the annual cost price of tangible property transferred with services is less than 35% of gross receipts from services (75% for pharmacists and graphic arts producers).

On computer software specifically, the Department draws a sharp line. Viewing, downloading, or streaming video, text, or data over the internet is not, by itself, a transfer of tangible personal property, so pure cloud-based access — where software runs on the provider's servers and is never downloaded — is not taxed. But the Retailers' Occupation Tax Act defines "computer software" very broadly (35 ILCS 120/2-25), and if a SaaS provider gives the customer an API, applet, desktop agent, or remote access agent to connect to its systems, the Department treats that as a transfer of computer software to the subscriber — taxable, even if there's no separate line-item charge for it, unless the transfer meets all the criteria for a non-taxable software license under 86 Ill. Adm. Code 130.1935(a)(1) (written agreement signed by both parties, restrictions on duplication/use, a no-sublicense clause, a replacement-copy or archival-copy policy, and a duty to return or destroy the software at the end of the license). A click-to-accept "I agree" checkbox does not satisfy the "signed" requirement, though the Department notes (citing a separate 2018 ruling, ST-18-0010-PLR) that a verifiable, authenticated electronic signature can.

Applying this, the Department agrees the company's revenue streams that involve no transfer of tangible personal property — most of its electronic records retrieval, data processing, coding, and abstraction services — generally fall outside Retailers'/Use/Service Occupation/Service Use tax, consistent with the company's own analysis. Because the company is "making sales of service" and acting as a serviceman, it does not incur Retailers' Occupation Tax itself; instead Service Occupation Tax attaches to any tangible personal property (including taxable computer software) it transfers incident to its services, calculated under one of the four methods above.

What this means for you

Software-as-a-service and cloud-software providers

If your product is accessed entirely through a browser or cloud connection, with nothing installed on the customer's device, Illinois generally treats that as a nontaxable service. But the moment you distribute any executable component to connect the customer to your platform — an API, applet, desktop agent, or remote-access client — the Department views that as a transfer of taxable "computer software," even if you don't bill for it separately. To avoid tax, you'd need the arrangement to satisfy every element of the software-license exemption in 86 Ill. Adm. Code 130.1935(a)(1), including a genuinely signed (not merely clicked) license agreement.

Information-management, records-retrieval, and similar service businesses

Businesses that primarily sell labor and expertise (coding, data abstraction, records retrieval, scanning, storage, report writing) but occasionally hand over paper copies or other physical items should evaluate whether they qualify as "de minimis servicemen" — i.e., the cost of any tangible items they transfer is under 35% of their service receipts. If so, they may be able to simply pay Use Tax on their own purchases rather than collecting and remitting tax on their entire bill, but only if they use one of the four methods the Department describes and, where required, are properly registered.

Accountants and tax professionals advising multi-line-of-business clients

This letter is useful as a map of the four Service Occupation Tax calculation methods and the mechanics of the de minimis serviceman threshold, and it is a clear (if non-binding) restatement of the Department's cloud-software-versus-transferred-software distinction. Remember this is a GIL: it directs the taxpayer to the applicable rules but does not confirm how each specific revenue category in the company's business would be taxed line by line, and it is not binding on the Department for anyone.

Common questions

Q: If my company only lets customers view or download data through a web browser, do I owe sales tax on that?
A: Generally no. The Department states that viewing, downloading, or electronically transmitting video, text, and other data over the internet is not, by itself, a transfer of tangible personal property, so a pure service transaction with no such transfer is generally not subject to Retailers' Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax.

Q: We give SaaS customers a small desktop agent or API key to connect to our servers. Does that change anything?
A: Yes. The Department says that if a provider transfers to the subscriber an API, applet, desktop agent, or remote access agent to enable access to the provider's network and services, "it appears the subscriber is receiving computer software" — which is generally taxable, even without a separate charge, unless it qualifies as a non-taxable software license under 86 Ill. Adm. Code 130.1935(a)(1).

Q: What is a "de minimis serviceman," and why does it matter?
A: A de minimis serviceman is a business selling services whose annual cost price of tangible personal property transferred incident to those services is less than 35% of its annual gross receipts from service transactions (75% for pharmacists and graphic arts production, per 86 Ill. Adm. Code 140.101(f)). Depending on registration status, a de minimis serviceman may pay Service Occupation Tax or Use Tax on the cost price of the property it transfers, rather than tax on the full billed price.

Q: Can a click-through "I agree" button satisfy the signed-license requirement for a tax-exempt software license?
A: No. The Department states that accepting terms by clicking "I agree" does not satisfy the written, signed agreement requirement of 86 Ill. Adm. Code 130.1935(a)(1). However, the Department has separately accepted verifiable, authenticated electronic signatures (see ST-18-0010-PLR, Sept. 26, 2018) as satisfying that requirement.

Q: Does this letter tell me exactly how each of the company's specific revenue categories (e.g., "Coding Audit Report of Findings," "Data Storage — Physical," etc.) is taxed?
A: Not precisely — this is a GIL, and it addresses the company's software-as-a-service and general serviceman questions at the level of legal principle rather than confirming tax treatment for every listed revenue line. Readers with a similarly detailed, multi-revenue-stream business should review the full original text (including the company's own proposed revenue-category treatment table) and, if they want a binding answer for their own facts, request a Private Letter Ruling under 2 Ill. Adm. Code 1200.110.

Q: Is this letter binding on the Department?
A: No. It is a General Information Letter issued under 2 Ill. Adm. Code 1200.120, which directs taxpayers to relevant regulations and other information but is not a statement of Department policy and is not binding on the Department.

Citations and references

• 35 ILCS 120/2 (Retailers' Occupation Tax Act — imposition of tax on retail sales of tangible personal property)
• 35 ILCS 120/2-25 (Retailers' Occupation Tax Act — definition of "computer software")
• 35 ILCS 105/3 (Use Tax Act — imposition of tax on use of tangible personal property)
• 35 ILCS 115/3 (Service Occupation Tax Act — tax on tangible personal property transferred incident to sales of service)
• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax regulations)
• 86 Ill. Adm. Code 130.1935 (taxation of computer software, including the software-license exemption criteria)
• 86 Ill. Adm. Code 140.101 (Service Occupation Tax — servicemen and de minimis serviceman threshold)
• 86 Ill. Adm. Code 140.108 (Service Occupation Tax — de minimis serviceman method of paying Use Tax on cost price)
• 86 Ill. Adm. Code 150.101 (Use Tax regulations)
• 86 Ill. Adm. Code 150.130 (Use Tax — credit for Retailers' Occupation Tax paid)
• 2 Ill. Adm. Code 1200.110 (procedures for requesting a Private Letter Ruling)
• 2 Ill. Adm. Code 1200.120 (General Information Letters — not binding, not a statement of Department policy)
• ST-18-0010-PLR (Sept. 26, 2018) (Department guidance on acceptable electronic signatures for software license agreements)

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/st19-0035-gil.pdf

Original ruling text

ST 19-0035-GIL 12/10/2019 COMPUTER SOFTWARE
A provider of software as a service is acting as a serviceman. If the provider does not transfer
any tangible personal property to the customer, then the transaction generally would not be
subject to Retailers’ Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax. If
the provider transfers to the customer an API, applet, desktop agent, or a remote access agent
to enable the customer to access the provider’s network and services, it appears the
subscriber is receiving computer software that is subject to tax. See 86 Ill. Adm. Code Parts
130 and 140. (This is a GIL.)
December 10, 2019
RE:

Private Letter Ruling Request

Dear XXX:
This letter is in response to your letter dated August 23, 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:
Our client, COMPANY, seeks a formal written determination concerning the sales
taxability in Illinois of its revenues from its operations.
COMPANY is not under an audit and no litigation is pending with the Department.
COMPANY is aware that the department has issued a Private Letter Ruling in the past
to ENTITY (an entity that was acquired by COMPANY). Since that ruling was issued,
COMPANY’s product offerings has expanded and evolved, and in turn COMPANY is
requesting an updated ruling to ensure proper compliance in the state of Illinois. That
ruling dated July XX, 20XX, has been attached to this request.
Statement of Facts:
COMPANY is a national provider of information management services to healthcare
providers, patients, insurers, and other entities involved in the health care industry. For
over 40 years, COMPANY has been assisting clients with management of healthcare
data and evolving their service offerings to adapt to changing technology, regulations,
and industry needs. At this time, COMPANY operates three service lines which provide

ST 19-0035-GIL
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December 10, 2019
independent service offerings for the unique needs of their respective clients. The basic
operations of each of the lines of business are described below.
Information Services
COMPANY’s largest service line is INFORMATION SERVICES (ROI). Through
contracts established with medical service providers (e.g., hospitals, doctors’ offices),
the ROI group operates the medical records departments of these providers across the
nation. These service providers do not typically pay COMPANY for operating these
departments. Instead, COMPANY utilizes this position to provide the service of medical
records retrieval, for a fee, to others who request a copy of these records.
The requester could be a patient, other medical provider, insurance company, or thirdparty representative of a patient, such as legal counsel. The requester will pay a fee for
the service of retrieving the record, which may be delivered one of three ways: 1) an
electronic export from a records database 2) an electronic scan of the medical record;
or 3) as a paper copy. The requester is seeking the information contained in the
medical record, regardless of the medium via which this information is provided.
In most states, the fee COMPANY can charge for this service is regulated by law or by
a government agency, or the service may be mandated to be free of charge.
COMPANY’s contract with the medical provider often includes a certain number of nocharge records. Once this threshold is met, COMPANY may charge a fee to the facility
to provide this service on their behalf. Under some contracts, the facility may request
and be billed by COMPANY for records retrieval for internal use at the facility as well.
Data Services
COMPANY’s DATA SERVICES business represents the XXXX largest division by
revenue. This group provides records retrieval services primarily to health plans and
other requesters. These requestors electronically issue to COMPANY a list of
requested records, which COMPANY then attempts to retrieve, wherever they may be
located.
In some cases, these records are in a records department operated by COMPANY’s
ROI division. When COMPANY operates the records department of the care facility,
COMPANY representatives at that location will retrieve the record. In cases were
COMPANY does not operate the medical records department of the provider,
COMPANY will retrieve the record by remotely logging in the provider’s EMR, receiving
a fax or mailed record from the provider, the provider dropping a file on our online portal
or sending a representative to that provider’s medical records department to either scan
or copy those records. The provider’s office may require COMPANY to pay for the
records, in which case COMPANY passes this cost on to its customer, with no mark up.
Once the requested records are obtained, COMPANY may also perform additional
processing on the records such as specialized coding and data extraction before
delivering the records to the requesting client. The records are delivered to the
requesting client as electronic records.

ST 19-0035-GIL
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December 10, 2019

Information Management
The INFORMATION MANAGEMENT (HIM) group at COMPANY provides solutions for
health care providers, and researchers for the collection, management, storage and use
of healthcare data. HIM also facilitates the extraction of actionable information from that
data. The two primary service options in this area are medical records Coding Services,
Scanning and Storage Services and Data Abstraction Services.
Coding Services
Coding Services involve translating medical information (e.g., diagnoses,
procedures, treatments, etc.) into industry-standard codes for use in Electronic
Medical Records (“EMR”), risk adjustment services, insurance claim processing,
and other uses. HIM’s coding products & services include 1) providing coding
outsourcing services, 2) coding audits (e.g., review of coding work done by
others), and 3) a Software as a Service (“SaaS’) version of HealthSource Gym
that allows referential and industry guidance data to be accessed from any
device with an internet connection and web browser.
HIM also offers SaaS (software as a service) tool which assists customers
(health care providers and insurers) in managing their EMR audits which are
conducted by various oversight agencies.
Scanning and Storage Services
Another service provided by HIM is Data Processing, which involves converting
and updating an electronic medical record (EMR) to a new EMR. These services
may include combining several records and/or formatting records. HIM also
provides scanning services to convert paper records to electronic EMRs, and
both physical and electronic records storage.
Data Abstraction Services
The Abstraction Services provided by HIM include various data mining of clinical
data in order to extract and summarize relevant data from a population of
medical records. The service is performed by experienced professionals who
review voluminous records to identify and extract the relevant information. These
procedures assist COMPANY’s clients with tasks such as reporting for
government disease registries, extracting specific data from old medical records
during electronic conversion, and extracting other information such as drug
success rates, drug interactions, and health outcome data from medical records.
The output of these abstraction services is a database of clinical data or modern
electronic medical record, with summaries of specific data useful to the
requesting client. For many data abstraction projects, the COMPANY team
develops the database tool for data collection and performs redaction of personal
health information from the record.

ST 19-0035-GIL
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December 10, 2019

Following is a complete listing and description of each of the pertinent revenue
streams of the company.
Revenue Category
Abstraction Services

• Data Processing

Abstraction Services
Research
and
Oncology
Data
Services
Audit Services

Audit Management
Services
Data Processing
Data
Storage
Electronic

–

Data
Storage
Physical

–

Denial Management
Services
Postage
Shipping
Shipping & Handling
Pass Through
Information Services

Description
Fee for services of employees
reviewing and entering key clinical
data into a clinical database or
electronic
medical
records.
Electronic reports of abstraction
services and ODS/research services
Professional services associated with
reviewing and entering clinical data to
meet key markers for research
projects and cancer registries.
Professional services to review prior
coding determinations and correct or
reclassify to more appropriate
medical coding. Separate charge for
a written report of audit services.
Fees for accessing a data base to
manage Electronic Medical Records
for audit review by various agencies
Fee for converting and updating
electronic medical record (EMR) to
new EMR.
Fee for storage of electronic records
on COMPANY’s servers.
Fee for physical storage of records
(i.e. Paper, Media, CD, Roll Film,
Micro Fiche, VHS Tapes, X-Rays) on
behalf of a customer by Ciox.
Charges associated with appealing
denials of charges and associated
recoding of bills for resubmission.
United States Postal Service Postage
Shipping charges, may include
FedEx, courier, etc.
Shipping charges, may include
FedEx, courier, etc., includes charges
for handling
Reimbursement of direct costs in
obtaining medical records from other
medical records providers
Fee for importation of data from

ST 19-0035-GIL
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December 10, 2019

Labor
Projects

-Special

Labor-Department
Outsource
Photocopy Fees –
Electronic

Photocopy Fees
Record Retrieval

Scanning

Software
Service

as

a

Software Training

Fees
Medical

Records

provider to COMPANY’s system and
exportation
of
data
out
of
COMPANY’s system to provider. No
additional services rendered.
Charges for special labor incurred
conducting special projects where the
work is directed by the customer
typically on an hourly basis
Charges
associated
with
the
outsource and management of a
facility records management function
– work not directly by customer
Charges for reproducing health
records based on a per copy charge.
Copies are electronic utilizing the
method of fax or electronic delivery
via FTP.
Charges for reproducing health
records based on a per copy charge.
Copies are tangible.
Labor and other fees related to the
search, retrieval and delivery of
medical records including adding an
item to a currently stored item,
placing a retrieved item back into
place
and
obtaining
specific
information from a retrieved item.
Fee for paper charts and records
scanned into repository or other
storage/database solutions; set up
fees, per keystroke cost and fees for
indexing and burning records to cd or
DVD’s.
Charges for subscription access to
software and services not licensed to
customers which allow facilitation of
retrieval of records
Online support and training related to
software that resides on COMPANY
servers.
Implementation
and
integration services for customer
systems to access COMPANY
systems.
Notary,
Certification,
Affidavit,
Deposition separately state on
invoice
Labor to perform medical coding and

ST 19-0035-GIL
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December 10, 2019
Coding
Coding Audit Report
of Findings
Late Fees
Professional
Services

providing quality and productivity
reports monthly
A report that reviews the number of
records reviewed, types of records
and
coding
quality
and
documentation findings.
Fees for late payment
Configuration
of
electronically
delivered software

Requested Advisement
Are the services provided by COMPANY those subject to the Retailer’s [sic] Occupation
Tax, or does COMPANY meet the definition of a “de Minimis servicemen” and would not
be required to be registered under the Retailer’s [sic] Occupation Tax Act?
Taxpayer’s Determination
The ROI service line is responsible for providing information contained within a patient’s
medical records to the requesting parties. These parties may be medical practices,
individual physicians, hospitals, or individual patients. The service line typically receives
a request to retrieve and provide medical record information. This information is
typically provided in the form of an Electronic Medical Record (EMR) to healthcare
providers and other non-patient requesters and in tangible from to individual patients.
Additional services included in the above list of revenue categories, which sometimes
are provided and separately billed by the ROI division, are:
Data Storage,
Photocopying, Scanning, Record Retrieval, and Provision of Information.
The services provided by the DATA SERVICES service line are similar in nature to the
ROI service line. The primary difference is that the DATA SERVICES group deals with
high volume records retrieval services. These services are often requested by
Insurance Companies and/or Law Firms. DATA SERVICES also may perform and
separately bill for Data Storage, Photocopying, Scanning, record Retrieval, Provision of
Information, and Report Services. Most of the records and information developed by
this group are transmitted electronically, with no transfer of tangible personal property.
Services provided by the HIM service line are targeted to four distinct areas: 1) medical
information coding services, 2) medical coding review and correction, 3) abstraction
services and reports, and 4) audit management. All of the services listed above and
described in more detail previously are without question provided to customers seeking
specialized skills and knowledge to further produce information and/or provide a value
adding service. All of the customers within this business line are exclusively seeking
the knowledge, expertise, and results of the services provided.
The taxpayer does not believe any of COMPANY’s services as listed above are sales of
tangible property taxable under 35 Ill. Comp. Stat. Ann. § 120/2. While a few services

ST 19-0035-GIL
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December 10, 2019
may result in a paper record being transferred as incidence of the service, the Taxpayer
does not believe this tangible output to be the true object of the transaction. Instead,
the Taxpayer believes their services to be classified as those of servicemen under 35 Ill.
Comp. Stat. Ann. § 115/3.
Under 35 Ill. Comp. Stat. Ann. § 115/3 incidental transfers of tangible personal property
as part of the provision of services within the state of Illinois are subject to a tax. Ill.
Admin. Code, tit. 86 § 140 has established 4 methods of calculating the tax owed, and
the associated compliance procedures for each method.
The Taxpayer believes the appropriate method for addressing the taxation of their
services is established under Ill. Admin. Code, tit. 86 § 140.108. This method looks at
the ratio of the cost of tangible property transferred as part of their services to the total
of their service receipts received in a year. If it is less than 35%, taxpayers are subject
use tax on their purchases of tangible property, provided these taxpayers are not
otherwise required to be registered under the Retailer’s [sic] Occupational Tax.
The Taxpayer’s cost for each of their service lines are primarily labor related costs, such
as training, travel, and wages, and technology costs, such as EMR systems, scanning
and printing systems, and software development. The costs of paper for the services
that result in its output are will under the 35% threshold. Therefore, the Taxpayer
believes the appropriate treatment will be for COMPANY to pay use tax on their
purchases of tangible personal property used in performing their service in the state of
Illinois. This treatment holds consistent with the Department’s Private Letter Ruling
issued to ENTITY, issued on July XX, 20XX, and the Taxpayer believes this Ruling has
not been contradicted by changes of law or regulatory action since. The Taxpayer has
not found any valid authority contrary to this position.
We have listed the revenue categories below, with our treatment of tax indicated for
each:
Revenue Category
Abstraction Services
Abstraction
Research

Services

Audit Services
Audit
Services

Management

Data Processing

Treatment
Support
Use Tax Paid on 35 Ill. Comp. Stat. Ann. §
Purchases
115/3; Ill. Admin. Code
tit. 86 § 140.108
Use Tax Paid on 35 Ill. Comp. Stat. Ann. §
Purchases
115/3; Ill. Admin. Code
tit. 86 § 140.108
Use Tax Paid on 35 Ill. Comp. Stat. Ann. §
Purchases
115/3; Ill. Admin. Code
tit. 86 § 140.108
Use Tax Paid on 35 Ill. Comp. Stat. Ann. §
Purchases
115/3; Ill. Admin. Code
tit. 86 § 140.108
Use Tax Paid on 35 Ill. Comp. Stat. Ann. §
Purchases
115/3; Ill. Admin. Code
tit. 86 § 140.108

ST 19-0035-GIL
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December 10, 2019
Data Storage-Electronic
Data Storage - Physical
Denial
Services

Management

Postage
Shipping
Shipping & Handling
Pass through
Expense
Reimbursements
Information Services
Labor – Special Projects
Labor –
Outsource

Department

Photocopy
Electronic

Fees

Photocopy Fees
Provision of Information
Record Retrieval
Scanning

-

Use Tax Paid on 35 Ill. Comp. Stat. Ann. §
Purchases
115/3; Ill. Admin. Code
tit. 86 § 140.108
Use Tax Paid on 35 Ill. Comp. Stat. Ann. §
Purchases
115/3; Ill. Admin. Code
tit. 86 § 140.108
Use Tax Paid on 35 Ill. Comp. Stat. Ann. §
Purchases
115/3; Ill. Admin. Code
tit. 86 § 140.108
Use Tax Paid on 35 Ill. Comp. Stat. Ann. § 115/3;
Purchases
Ill. Admin. Code tit. 86 §
140.108
Use Tax Paid on 35 Ill. Comp. Stat. Ann. § 115/3;
Purchases
Ill. Admin. Code tit. 86 §
140.108
Use Tax Paid on 35 Ill. Comp. Stat. Ann. § 115/3;
Purchases
Ill. Admin. Code tit. 86 §
140.108
Use Tax Paid on 35 Ill. Comp. Stat. Ann. § 115/3;
Purchases
Ill. Admin. Code tit. 86 §
140.108
Use Tax Paid on 35 Ill. Comp. Stat. Ann. § 115/3;
Purchases
Ill. Admin. Code tit. 86 §
140.108
Use Tax Paid on 35 Ill. Comp. Stat. Ann. § 115/3;
Purchases
Ill. Admin. Code tit. 86 §
140.108
Use Tax Paid on 35 Ill. Comp. Stat. Ann. § 115/3;
Purchases
Ill. Admin. Code tit. 86 §
140.108
Use Tax Paid on 35 Ill. Comp. Stat. Ann. §
Purchases
115/3; Ill. Admin. Code
tit. 86 § 140.108
Use Tax Paid on 35 Ill. Comp. Stat. Ann. § 115/3;
Purchases
Ill. Admin. Code tit. 86 §
140.108
Use Tax Paid on 35 Ill. Comp. Stat. Ann. § 115/3;
Purchases
Ill. Admin. Code tit. 86 §
140.108
Use Tax Paid on 35 Ill. Comp. Stat. Ann. § 115/3;
Purchases
Ill. Admin. Code tit. 86 §
140.108
Use Tax Paid on 35 Ill. Comp. Stat. Ann. § 115/3;
Purchases
Ill. Admin. Code tit. 86 §
140.108
Use Tax Paid on 35 Ill. Comp. Stat. Ann. § 115/3;

ST 19-0035-GIL
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December 10, 2019
Purchases
Software as a Service

Use Tax Paid on
Purchases

Software Training

Use Tax Paid on
Purchases

Fees

Use Tax Paid on
Purchases

Medical Records Coding

Use Tax Paid on
Purchases

Coding Audit Report of
Findings

Use Tax Paid on
Purchases

Late Fees

Use Tax Paid on
Purchases

Professional Services

Use Tax Paid on
Purchases

Ill. Admin. Code tit. 86 §
140.108
35 Ill. Comp. Stat. Ann. § 115/3;
Ill. Admin. Code tit. 86 §
140.108
35 Ill. Comp. Stat. Ann. § 115/3;
Ill. Admin. Code tit. 86 §
140.108
35 Ill. Comp. Stat. Ann. § 115/3;
Ill. Admin. Code tit. 86 §
140.108
35 Ill. Comp. Stat. Ann. § 115/3;
Ill. Admin. Code tit. 86 §
140.108
35 Ill. Comp. Stat. Ann. § 115/3;
Ill. Admin. Code tit. 86 §
140.108
35 Ill. Comp. Stat. Ann. § 115/3;
Ill. Admin. Code tit. 86 §
140.108
35 Ill. Comp. Stat. Ann. § 115/3;
Ill. Admin. Code tit. 86 §
140.108

We appreciate your assistance in this matter and look forward to your correspondence. If you should
have any additional questions or need additional or clarifying information, do not hesitate to ask. I
can be reached at XXX-XXX-XXXX, or by email at EMAIL ADDRES.
DEPARTMENT’S RESPONSE:
Sales Tax
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 35 ILCS
120/2; 86 Ill. Adm. Code 130.101. In Illinois, 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
35 ILCS 105/3; 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.
Service Transactions
Retailers' Occupation Tax and Use Tax do not apply to sales of service. Under the Service
Occupation Tax Act, businesses providing services (i.e., servicemen) are taxed on tangible personal

ST 19-0035-GIL
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property transferred as an incident to sales of service. See 86 Ill. Adm. Code 140.101. 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.
Using the first method, servicemen may separately state the selling price of each item
transferred as a result of sales of service. The tax is based on the separately stated selling price of
the tangible personal property transferred. If servicemen do not wish to separately state the selling
price of the tangible personal property transferred, those servicemen must use the second method
where they will use 50% of the entire bill to their service customers as the tax base. Both of the
above methods provide that in no event may the tax base be less than the cost price of the tangible
personal property transferred. Under these methods, servicemen may provide their suppliers with
Certificates of Resale when purchasing the tangible personal property to be transferred as a part of
sales of service. They are required to collect the corresponding Service Use Tax from their
customers.
The third way servicemen may account for their tax liability only applies to de minimis
servicemen who have either chosen to be registered or are required to be registered because they
incur Retailers’ Occupation Tax liability with respect to a portion of their business. Servicemen may
qualify as de minimis if they determine that their annual aggregate cost price of tangible personal
property transferred incident to sales of service is less than 35% of their annual gross receipts from
service transactions (75% in the case of pharmacists and persons engaged in graphic arts
production). See 86 Ill. Adm. Code 140.101(f). This class of registered de minimis servicemen is
authorized to pay Service Occupation Tax (which includes local taxes) based upon the cost price of
tangible personal property transferred incident to sales of service. Servicemen that incur Service
Occupation Tax collect the Service Use Tax from their customers. They remit tax to the Department
by filing returns and do not pay tax to their suppliers. They provide suppliers with Certificates of
Resale for the tangible personal property transferred to service customers.
The final method of determining tax liability may be used by de minimis servicemen that are
not otherwise required to be registered under Section 2a of the Retailers' Occupation Tax Act.
Servicemen may qualify as de minimis if they determine that the annual aggregate cost price of
tangible personal property transferred as an incident of sales of service is less than 35% of the
servicemen's annual gross receipts from service transactions (75% in the case of pharmacists and
persons engaged in graphic arts production). Such de minimis servicemen handle their tax liability by
paying Use Tax to their suppliers. If their suppliers are not registered to collect and remit tax, the
servicemen must register, self-assess, and remit Use Tax to the Department. The servicemen are
considered to be the end-users of the tangible personal property transferred incident to service.
Consequently, they are not authorized to collect a "tax" from the service customers. See 86 Ill. Adm.
Code 140.108.

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The Department does not consider the viewing, downloading or electronically transmitting of
video, text and other data over the internet to be the transfer of tangible personal property. However,
if a company provides services that are accompanied with the transfer of tangible personal property,
including computer software, such service transactions are generally subject to tax liability under one
of the four methods set forth above.
If a transaction does not involve the transfer of any tangible personal property to the customer,
then it generally would not be subject to Retailers’ Occupation Tax, Use Tax, Service Occupation
Tax, or Service Use Tax.
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;

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

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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.
Computer software is defined broadly in the Retailers’ Occupation Tax Act. However,
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
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.
The Company is making sales of service and is a serviceman. As a serviceman, the Company
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), and is calculated as
explained above.
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
Associate Counsel
RSW:bkl