If a software company can't satisfy Illinois' five-part test for an exempt software license, can it avoid charging sales tax by getting a resale certificate from the distributor instead?

Subject

Sale For Resale

Plain-English summary

A software company ("COMPANY") asked the Illinois Department of Revenue to confirm that its licensing setup avoided sales tax under the state's five-part test for exempt software licenses. COMPANY licenses "Programs" (its software) to end users, but it does not sell directly to them. Instead, COMPANY sells to a distributor ("ABC"), ABC sells to other remarketers, and those remarketers sell to the end user (the "Licensee"). Money flows the same way in reverse: the Licensee pays the remarketer, the remarketer pays ABC, and ABC pays COMPANY. Even though COMPANY never gets paid directly by the end user, COMPANY still enters into a separate license agreement directly with the Licensee, called the "AGREEMENT," which the Licensee accepts electronically by "clicking to accept" or "clicking to acknowledge" -- there is no wet-ink or verified electronic signature.

Illinois taxes sales of computer software as tangible personal property unless the transaction qualifies as an exempt license under 86 Ill. Adm. Code 130.1935(a)(1). To qualify, the license must meet all five conditions, and the very first one requires a written agreement signed by both the licensor and the customer. The Department has held before (in GIL ST 12-0011 and reaffirmed in PLR ST 18-0003) that simply clicking "I agree" to accept license terms online does not amount to a signed written agreement -- although a verifiable, authenticated electronic signature attached to the license can satisfy the requirement.

Here, the Department found that the AGREEMENT between COMPANY and the Licensee was accepted only by click-to-accept, not by any qualifying signature. COMPANY argued the separate, wet-ink-signed Business Partner Agreement with ABC should somehow be read together with the AGREEMENT (an "incorporation by reference" theory used successfully in PLR ST 18-0003), but the Department rejected that argument here because ABC was not a party to the AGREEMENT at all -- ABC's signed contract with COMPANY and the Licensee's clicked acceptance of the AGREEMENT are two separate, unrelated documents involving different parties. Since the first prong of the five-part test failed, the whole license flunks the exemption test, and the transaction is a taxable retail sale.

Because the sale is taxable, someone in the distribution chain owes Illinois Retailers' Occupation Tax (or Use Tax). The Department's answer: COMPANY must collect Illinois Retailers' Occupation Tax from ABC, based on the price COMPANY charges ABC for the Program -- unless ABC gives COMPANY a valid Certificate of Resale (Form CRT-61) under 86 Ill. Adm. Code 130.1405. If ABC is reselling the software down the chain (which it is, to remarketers who then sell to Licensees), a proper resale certificate lets COMPANY sell to ABC tax-free, shifting the tax-collection obligation further down the chain to whichever seller ultimately sells to someone who doesn't resell it.

What this means for you

Software companies with multi-tier distribution or reseller networks

If your end-user license agreement is accepted only by clicking "I agree," "I accept," or similar -- with no wet-ink signature or verifiable electronic signature process -- your license likely does not meet the first prong of Illinois' five-part test (86 Ill. Adm. Code 130.1935(a)(1)(A)), no matter how the rest of your distribution chain is structured. You cannot patch that gap by pointing to a different, properly signed contract with a different party (like a distributor) unless that other party is actually part of the license transaction with the end user. If your license fails the test, the sale is a taxable transfer of canned computer software, and tax liability attaches somewhere in your sales chain.

Distributors, remarketers, and resale certificates

If you buy software from a vendor to resell it (rather than to use it yourself), give your vendor a completed Certificate of Resale (Form CRT-61) that meets the requirements of 86 Ill. Adm. Code 130.1405 -- seller and purchaser names/addresses, a description of the property, your signature and date, and your registration or resale number (or an out-of-state purchaser statement). Under Rock Island Tobacco, once your vendor has a valid certificate with a registration/resale number that was valid when given, the vendor's liability ends, and the Department will pursue the purchaser instead if the item was not actually resold. Without a certificate or registration number, Illinois presumes the sale was not for resale, though that presumption can be rebutted with other proof (such as an invoice showing the item was actually resold).

Accountants and tax professionals advising on software licensing

This ruling is a useful reminder that the five-part test in 86 Ill. Adm. Code 130.1935(a)(1) is conjunctive -- all five conditions must be met, and failing prong (A) alone is enough to make the whole transaction taxable. It also confirms that the "incorporation by reference" theory that worked in PLR ST 18-0003-PLR (where the same customer signed one document and clicked to accept a second, related document) does not extend to situations involving three or more unrelated parties in a distribution chain. Watch the tax base carefully: when a licensing arrangement is taxable because of an intermediary structure, the Department measured the taxable "selling price" as the price the licensor charges its direct purchaser (COMPANY's price to ABC), not the price ultimately paid by the end user.

Common questions

Q: Does clicking "I agree" to a software license ever satisfy Illinois' signature requirement?
A: Not by itself. The Department has repeatedly held that a simple click-to-accept does not constitute a written agreement "signed" by both the licensor and the customer. However, a verifiable and authenticated electronic signature that is attached to or part of the license (not just a click-through) can satisfy the requirement, as recognized in PLR ST 18-0003-PLR.

Q: Can a signed contract with my distributor cover the license I never separately sign with the end user?
A: Not automatically. The Department rejected that "incorporation by reference" argument here because the distributor (ABC) was not a party to the license agreement between COMPANY and the end user (the Licensee) -- they were separate, unrelated transactions. Incorporation by reference worked in an earlier ruling only because the same customer signed one document and accepted the related document electronically.

Q: If my software sale is taxable, who has to collect the tax when I sell through a multi-tier distribution chain?
A: According to this ruling, the seller (COMPANY) must collect Illinois Retailers' Occupation Tax from its direct purchaser (ABC), based on the price it charges that purchaser -- unless the purchaser furnishes a valid Certificate of Resale, in which case the sale to that purchaser is tax-free and the obligation shifts further down the chain.

Q: What has to be on a valid Certificate of Resale?
A: Under 86 Ill. Adm. Code 130.1405, it needs the seller's name and address, the purchaser's name and address, a description of the property being purchased for resale, the purchaser's (or an authorized agent's) signature and the date, and the purchaser's registration number, resale number, or a statement that the purchaser is an out-of-state buyer who will only sell outside Illinois. The Department's standard form is Form CRT-61.

Q: What happens if a purchaser doesn't provide a registration/resale number or certificate?
A: Illinois presumes the sale was not for resale, meaning tax applies. That presumption can be rebutted with other evidence, such as an invoice showing the item was actually resold along with a statement explaining why no resale number was obtained -- but the ruling notes auditors are more likely to demand additional proof in that situation.

Q: Is "canned" computer software always taxable in Illinois?
A: Sales of canned (prewritten) computer software are generally taxable retail sales regardless of how they're delivered (tape, disc, card, electronic transmission, etc.), unless the transaction qualifies as an exempt license meeting all five conditions of 86 Ill. Adm. Code 130.1935(a)(1), or the software is genuinely custom software prepared to the customer's special order rather than a pre-written package.

Citations and references

• 35 ILCS 120/2 (Retailers' Occupation Tax Act imposes tax on tangible personal property, including computer software)
• 35 ILCS 120/2-25 (statutory definition of "computer software")
• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax imposed on persons selling tangible personal property)
• 86 Ill. Adm. Code 130.1405 (Certificates of Resale)
• 86 Ill. Adm. Code 130.1935 (taxation of computer software; five-part license test; canned vs. custom software)
• 86 Ill. Adm. Code 130.1935(a)(1)(A) (signed-writing prong of the five-part test)
• 86 Ill. Adm. Code 130.1935(c)(3) (custom vs. canned computer programs)
• 86 Ill. Adm. Code 150.101 (Use Tax on tangible personal property purchased at retail)
• 86 Ill. Adm. Code 150.130 (retailer's credit against Use Tax for Retailers' Occupation Tax paid)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedures)
• 2 Ill. Adm. Code 1200.120 (General Information Letters)
• Illinois Gen. Info. Letter No. ST 12-0011-GIL (2/29/12)
• Ill. Private Letter ST 18-0003-PLR (2/8/18 and 2/28/18 as cited in the text)
• ST 18-0010-PLR (9/26/2018)
• ST 06-0005-PLR (12/16/2006)
• Rock Island Tobacco and Specialty Company v. Illinois Department of Revenue, 87 Ill.App.3d 476, 409 N.E.2d 136, 42 Ill. Dec. 641 (3rd Dist. 1980)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2020.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2020/st20-0002-plr.pdf

Original ruling text

ST 20-0002-PLR 03/03/2020 SALE FOR RESALE
This letter discusses certificates of resale. See 86 Ill. Adm. Code 130.1405. (This is a PLR.)

March 3, 2020

Dear Xxxx:
This letter is in response to your letter dated September 20, 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.
Review of your request disclosed that all the information described in paragraphs 1 through 8
of Section 1200.110 appears to be contained in your request. This Private Letter Ruling will bind the
Department only with respect to COMPANY, for the issue or issues presented in this ruling, and is
subject to the provisions of subsection (e) of Section 1200.110 governing expiration of Private Letter
Rulings. Issuance of this ruling is conditioned upon the understanding that neither COMPANY, nor a
related taxpayer is currently under audit or involved in litigation concerning the issues that are the
subject of this ruling request. In your letter you have stated and made inquiry as follows:
As counsel for, and on behalf of COMPANY, pursuant to 2 Ill. Admin. Code §1200.110,
we hereby formally request a Private Letter Ruling (“PLR”) from the Illinois Department
of Revenue (“Department”), confirming that, based upon the representations below.
COMPANY is not currently under audit by the Department regarding this issue.
COMPANY is not aware of any authority contrary to the views expressed in this PLR
request. Furthermore, we ask that COMPANY’s name, address, and any contracts
which are attached or subsequently provided to the Department be kept confidential and
deleted from the publicly disseminated version of a PLR issued in response to this
request. A power of attorney authorizing my and NAME’s representation of COMPANY
before the Department in connection with this PLR is attached as Exhibit A.
I. Facts
Pursuant to Ill. Admin. Code §1200.110(b), COMPANY makes the following
representations:
•

COMPANY is a STATE corporation.

ST 20-0002-PLR
Page 2
•

COMPANY focuses on the integration of business insight and technical
invention. COMPANY creates business value for clients and solves business
problems through integrated solutions that leverage information technology with
knowledge of business processes.

•

COMPANY also has an ecosystem of Business Partners with the capabilities and
capacity to deliver high value solutions to end customers. COMPANY utilizes its
channel of Business Partners to resell COMPANY products and services and in
the case of COMPANY programs, Business Partners may acquire the right to
remarket COMPANY licensed programs to end user customers. Business
Partners establish their own prices to the end user customer.

•

COMPANY enters into agreements with various distributors and unrelated third
parties (“Business Partners”) who are thereby enabled to remarket COMPANY
Products and Services.
o An COMPANY Service is defined as a performance of a task, provision of
advice and counsel, assistance, support or access to a resource (such as
an information database) that COMPANY may approve its remarketers to
market.
o An COMPANY Product is defined as a machine or program. A “Program”
is defined as: “the following including the original and all whole or partial
copies: a. machine-readable instructions and data; b. components; c.
audio-visual content; and d. related licensed materials.
The term
“Program’ includes any COMPANY Program, or non- COMPANY Program
that COMPANY may approve its remarketer to market.
o This letter ruling request only addresses the tax treatment of “Programs”
(i.e. COMPANY software).

•

In general, the Business Partner Agreement grants authority to the Business
Partner – Distributor to remarket Programs to remarketers. The Business
Partner Agreement identifies the specific Programs that a Business Partner –
Distributor can remarket.

•

The Program is obtained by the end user primarily by electronic delivery.

•

The Programs marketed by the Business Partners require COMPANY license
agreements to be agreed to by the end user. In those instances, the possessor
of the Program, e.g. the end user, will be granted a license. (hereinafter referred
to as “Licensee”).

•

The COMPANY license agreements are direct terms between COMPANY and
the License.

•

Specific Facts:

ST 20-0002-PLR
Page 3
o COMPANY has Business Partners who are authorized to remarket the
Programs to other remarketers who in turn remarket the Programs to
Licensees who are located in Illinois.
o For purposes of this PLR, the Business Partner – Distributor is referred to
as ABC.
o ABC is headquartered outside of Illinois.
o COMPANY enters into a Business Partner Agreement (“BPA”) with ABC
which grants ABC the right to actively remarket Programs as a COMPANY
Business Partner – Distributor.
o ABC is not approved to remarket to the end user. Instead, ABC is
permitted to remarket Programs to other remarketers who in turn remarket
to end users.
o ABC sets the price of the Program to be remarketed to their remarketers.
o The remarketer then remarkets the Program to the end user. COMPANY
licenses the Program to the end user directly using a license agreement
between COMPANY and the end user. The Program is subject to the
AGREEMENT (“AGREEMENT”) and its applicable DOCUMETNS. A
Program may be subject to additional program license acquisition terms.
o The AGREEMENT is the license agreement which governs the Licensee’s
permitted use of the Program.
o ABC never enters into a license agreement with COMPANY, nor does
COMPANY give ABC authorization to enter into sublicense agreement
with COMPANY, nor does COMPANY give ABC authorization to enter into
sublicense agreements with remarketers or end users under the Business
Partner Agreement.
o ABC remarkets Programs to other remarketers who remarket the
Programs to Licensees located in Illinois, including CITY.
o COMPANY does not receive payment directly from the Licensee (end
user). Instead, COMPANY invoices ABC, ABC then invoices the
remarketer, and the remarketer invoices the end user.
o COMPANY receives payment from ABC.
•

Pertinent provisions of the Business Partner Agreements, related Attachments,
and applicable license agreements are the following:
o ABC remarkets COMPANY Programs to remarketers on an equitable
basis.

ST 20-0002-PLR
Page 4
o ABC is free to set its own prices regarding COMPANY Programs that it
remarkets.
o ABC does not license the Programs from COMPANY.
o ABC “fulfills” valid Program orders from remarketers. Practically, this
means that ABC provides the end user’s data to COMPANY so that
COMPANY can provide the COMPANY license for the relevant Program
to Licensee (end user).
o In the event of an eligible refund, ABC and remarketer are responsible to
process the refund to the Licensee under certain terms.
o COMPANY’s and ABC’s Business Partner current agreement is evidenced
by a wet ink signature. However, as previously stated above, the
Business Partner Agreement does not contain a license for ABC’s use of
Programs.
o The Licensee enters into the AGREEMENT license agreement and any
applicable LI documents with COMPANY and is subject to the terms and
conditions.
o The AGREEMENT and any applicable LI documents that are entered into
between COMPANY and the Licensee are not evidenced by a wet ink
signature of the Licensee. Rather, the Licensee agrees to the license
terms and conditions by “clicking to accept” or “clicking to acknowledge.”
II. Question Presented
Does COMPANY’s licensing agreement with the end user satisfy the first prong of the
Illinois five-part test as prescribed by 86 Ill. Admin. Code 130.1935(a)(1)(A)? If not, is
the transaction a taxable sale subject to the Illinois retailer’s occupation tax?
III. Illinois Law
Computer software is statutorily defined as tangible personal property and its sale or
use is taxable in Illinois. 35 ILCS 120/2. “Computer software” is defined as:
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 that is
held for repeated sale or lease, and all associated documentation and materials,
if any, whether contained on magnetic tapes, discs, cards, or other devices or
media…

ST 20-0002-PLR
Page 5
35 ILCS 120/2-25. “Computer software” includes all types of software including
operational, applicational, utilities, compliers, templates, shells and all other forms. 86
Ill. Admin. Code § 130.1935(a).
A license of computer 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.
86 Ill. Admin. Code § 130.1935(a)(1). If a transfer of software meets the five-part test,
the transfer is not a sale subject to the Retailers’ Occupation Tax.
While it is very common for software to be licensed over the internet and for the
customer to check a box that states that he or she accepts the license terms, it is the
Illinois Department of Revenue’s position that such an acceptance does not constitute
an acceptance for purposes of 86 Ill. Admin. Code § 130.1935(a)(1)(A). Illinois Gen.
Info. Letter No. ST 12-0011-GIL, 2/29/12. To meet the signature requirement for an
exempt software license, the agreement must contain the written signature of the
licensor and customer. The signature must be an ink signature or an electronic
signature. If a transfer of software does not meet the signature requirement, the
transfer is a sale subject to the Retailers’ Occupation Tax. Id.
IV. Authorities
We have reviewed all relevant Illinois tax status, regulations and administrative opinions
issued by the Department but were unable to locate authority directly on point.
However, the cited authority supports the position advocated by COMPANY and we did
not locate any authority contrary to the position advocated by COMPANY.
V. Discussion/Analysis
The Department has stated on numerous occasions that software licenses over the
internet requiring the customer to check a box that states he or she accepts the license

ST 20-0002-PLR
Page 6
terms does not constitute a written agreement signed by the licensor and the customer
for purposes of 86 Ill. Admin. Code 130.1935(a)(1)(A). The Department has previously
indicated that to meet the signature requirement for an exempt software license, the
agreement must contain the written signature of the licensor and customer. Ill. Gen
Info. Letter No. ST 12-0011-GIL (2/29/12). However, the Department has more recently
determined 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. Ill. Gen. Info. Letter No. ST 180003 (2/28/18). A license agreement in which the customer electronically accepts the
terms by clicking “I agree” does not satisfy the first prong of the five-part test.
Here, the AGREEMENT and related LI documents contain the license terms and
conditions which governs the Licensee’s permitted use of the COMPANY Program.
While ABC provides the end user’s data to COMPANY which enables COMPANY to
provide the relevant Program license to the Licensee, ABC never enters into, or signs a
license agreement with COMPANY. Conversely, the Licensee accepts the terms and
conditions of the AGREEMENT and any applicable LI documents with COMPANY by
“clicking to accept” or clicking to acknowledge” the terms and conditions of the
applicable license agreement. Notably, the AGREEMENT and any applicable LI
documents which are entered into between COMPANY and Licensee are not evidenced
by a wet signature of the Licensee.
The Department recently examined the issue of whether multiple documents could be
considered together to meet the signature requirement. See Ill. Private Letter ST 180003 (2/28/18). In that ruling, the company provided its customers with two documents,
an order form and a licensing agreement. Read together the document contained the
full licensing contract, however only the order form had a wet signature. The company
argued that the two documents should satisfy 86 Ill. Admin. Code § 130.1935(a)(1)(A)
because of the operation of the doctrine of incorporation by reference and because the
signed order form creates the contract. Applying the legal doctrine “incorporation by
reference”, the Department ruled that “[w]henever an order form incorporates terms and
conditions from another document, the Department will review the order form and the
document that is incorporated by the order form to determine if all the requirements of
Section 130.1935(a)(1) have been met.”
In this instance, however, the AGREEMENT and LI documents containing the
applicable licensing terms and conditions is exclusively entered into between
COMPANY and the end user Licensee. ABC and the end user are unrelated third
parties and COMPANY does not enter into any licensing agreement with ABC. Any
agreement between COMPANY and ABC, even though evidenced by a wet signature,
cannot be incorporated by reference into the AGREEMENT and any applicable LI
documents entered into between COMPANY and the Licensee to satisfy the
requirements of Section 130.1935(a)(1). Accordingly, the relations between COMPANY
and ABC and the Licensee is distinguishable from the parties’ relationship in PLR ST180003 because there, the party who accepted the purchase order with a wet signature
was the same party who entered into the license agreement with a “click to accept.”
Conversely here, there are at least three parties involved in the relevant transaction,
and ABC, the Business Partner, does not enter into the AGREEMENTS or any LI

ST 20-0002-PLR
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document with COMPANY. Instead, the Business Partner Agreement permits ABC the
right to actively market Programs to third parties. Because the licensing agreement
between COMPANY and the end user is electronically accepted or acknowledged by
clicking a box, the agreement does not constitute a written agreement signed by the
licensor and customer as required under Section 130.1935(a)(1)(A).
Additionally, while COMPANY enters into the AGREEMENT and DOCUMENTS
documents with the Licensee, it never receives payment directly from the Licensee for
its use of the COMPANY Program. Instead, COMPANY invoices ABC, ABC invoices
any applicable remarketers, and the remarketers invoice the Licensee. In accordance
with this payment structure, ABC and the applicable remarketers are free to set their
own prices of the Programs which are marketed. This is relevant because COMPANY
is unaware of the remarketer’s selling price of the COMPANY Programs to the
Licensee. Accordingly, COMPANY only receives compensation for the sale of its
Programs from ABC. Thus, because part one of the five-part test is not met, the sale of
COMPANY Programs is subject to Illinois retailers’ occupation tax, and the measurable
tax base is COMPANY’s selling price of the COMPANY Program to ABC.
VI. Conclusion
In conclusion, COMPANY’s license agreement with the Licensee does not constitute a
written agreement signed by the licensor (COMPANY) and the customer (ABC) under
86 Ill. Admin. Code 130.1935(a)(1)(A) and the transaction is therefore a taxable sale
subject to the Illinois retailers’ occupation tax. COMPANY should collect Illinois
retailer’s occupation tax from ABC based on the selling price of the COMPANY Program
to ABC, or if applicable, collect a properly completed ABC Illinois resale certificate.
Copies of the relevant referenced agreements are available upon the Department’s
request. Finally, should the Department not be able to issue the PLR as requested, we
request a meeting to discuss the matter.
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
“‘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

ST 20-0002-PLR
Page 8
by or communicated to humans, and includes prewritten or canned software.” 35 ILCS 120/2-25.
Generally, sales of “canned” computer software are taxable retail sales in Illinois. Canned computer
software is considered to be tangible personal property regardless of the form in which it is
transferred or transmitted, including tape, disc, card, electronic means, or other media. 86 Ill. Adm.
Code 130.1935. However, if the computer software consists of custom computer programs, then the
sales of such software may not be taxable retail sales. Custom computer programs or software are
prepared to the special order of the customer. The selection of pre-written or canned programs
assembled by vendors into software packages does not constitute custom software unless real and
substantial changes are made to the programs or creation of program interfacing logic. See 86 Ill.
Adm. Code 130.1935(c)(3). Computer software that is not custom software is considered to be
canned computer software.
If transactions for the licensing of computer software meet all of the criteria provided in
subsection (a)(1) of Section 130.1935, neither the transfer of the software nor the subsequent
software updates will be subject to Retailers' Occupation Tax. A license of software is not a taxable
retail sale if:
A)

It is evidenced by a written agreement signed by the licensor and the customer;

B)

It restricts the customer’s duplication and use of the software;

C)

It prohibits the customer from licensing, sublicensing or transferring the software to a
third party (except to a related party) without the permission and continued control of the
licensor;

D)

The licensor has a policy of providing another copy at minimal or no charge if the
customer loses or damages the software, or permitting the licensee to make and keep
an archival copy, and such policy is either stated in the license agreement, supported by
the licensor’s books and records, or supported by a notarized statement made under
penalties of perjury by the licensor; and

E)

The customer must destroy or return all copies of the software to the licensor at the end
of the license period. This provision is deemed to be met, in the case of a perpetual
license, without being set forth in the license agreement.

If a license of canned computer software does not meet all the criteria the software is taxable.
In order to comply with the requirements as set out in Section 130.1935(a)(1), there must be a
written “signed” agreement. A license agreement in which the customer electronically accepts the
terms by clicking “I agree” does not comply with the requirement of a written agreement signed by the
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.

ST 20-0002-PLR
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Sales for Resale
In order to document the fact that its sale to Purchaser is a sale for resale, Company is
obligated by Illinois to obtain a valid Certificate of Resale from Purchaser. See 86 Ill. Adm. Code
130.1405. A Certificate of Resale is a statement signed by the purchaser that the property purchased
by him is purchased for purposes of resale. In addition to the statement that the property is being
purchased for resale, a Certificate of Resale must contain:
1)

The seller's name and address;

2)

The purchaser's name and address;

3)

A description of the items being purchased for resale;

4)

Purchaser's signature, or the signature of an authorized employee or agent of the
purchaser, and date of signing; and

5)

Registration Number, Resale Number, or a statement that the purchaser is an out-ofState purchaser who will sell only to purchasers located outside the State of Illinois.

The Department provides a standard form for documenting sales for resale (Form CRT-61
Certificate of Resale). This form can be obtained from the Department’s website.
The obligations of a seller with respect to accepting a Certificate of Resale were addressed in
Rock Island Tobacco and Specialty Company v. Illinois Department of Revenue, 87 Ill.App.3d 476,
409 N.E.2d 136, 42 Ill. Dec. 641 (3rd Dist. 1980). The Rock Island court held that when a retailer
obtains a proper Certificate of Resale that contains a registration or resale number that is valid on the
date it is given, the retailer’s liability is at an end. If the purchaser uses that item himself or herself
(i.e., it was not purchased for resale), the Department will proceed against the purchaser, not the
retailer, provided the above stated conditions are met. The purchaser’s registration or reseller
number can be verified at the Department’s website by clicking on the “Tax registration inquiry” box.
Failure to present an active registration number or resale number and a certification to the
seller that a sale is for resale creates a presumption that a sale is not for resale. This presumption
may be rebutted by other evidence that all of the seller’s sales are sales for resale or that a particular
sale is a sale for resale. For example, other evidence that might be used to document a sale for
resale, when a registration number or resale number and certification to the seller are not provided,
could include an invoice from the purchaser to his customer showing that the item was actually
resold, along with a statement from the purchaser explaining why it had not obtained a resale number
and certifying that the purchase was a purchase for resale in Illinois. The risk run by a retailer in
accepting such other documentation and the risk run by purchasers in providing such other
documentation is that an Illinois auditor is more likely to require that more information be provided as
evidence that the particular sale was, in fact, a sale for resale.
It is the Department’s understanding that COMPANY sells canned computer software to ABC,
and the agreement between COMPANY and ABC does not meet the license requirements of Section
130.1935(a)(1). COMPANY must pay Retailers’ Occupation Tax and collect Use Tax on its sales of
computer software to ABC unless COMPANY receives a resale certificate from ABC.

ST 20-0002-PLR
Page 10
I hope this information is helpful. If you have further questions concerning this Private Letter
Ruling, you may contact me at (217) 782-2844. If you have further questions related to the Illinois
sales tax laws, please visit our website at www.tax.illinois.gov or contact the Department’s Taxpayer
Information Division at (217) 782-3336.
Very truly yours,

Richard S. Wolters
Chairman, Private Letter Ruling Committee
RSW:ter