What does Illinois General Information Letter ST 20-0030-GIL conclude about Computer Software?

Subject

Computer Software

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/st20-0030-gil.pdf

Plain-English summary

A consultant wrote to the Illinois Department of Revenue on behalf of a client that offers a mix of data-lookup and software services -- a file-based "death search" service, a leased desktop application that performs the same audit (BDAS), an online death-record lookup, a leased server appliance that performs file-based audits on-site (IDAS), a file-based address/locator check, an online address search, a locator-service API, and custom software development billed on a time-and-materials basis. The consultant asked whether any of these were subject to Illinois Retailers' Occupation Tax (sales tax) or Use Tax, and the Department treated the request as a General Information Letter (GIL) rather than a binding Private Letter Ruling.

The Department's answer turns on a basic distinction: sales, use, and service occupation tax in Illinois apply only when tangible personal property is transferred. Pure services -- like looking up a death record or an address online, or through an API, with nothing downloaded to the customer -- do not involve a transfer of tangible personal property and are not taxable. But when a service comes bundled with software or other tangible personal property (for example, leasing a desktop application or a server appliance), the transaction can become taxable under one of several methods used for "servicemen," including separately stating the price of the property transferred, using 50% of the bill as the tax base, or (for qualifying small-scale "de minimis" servicemen) paying tax on cost price.

The letter then walks through Illinois's rules for computer software specifically. Computer software is defined by statute as tangible personal property, and "canned" (pre-written) software is generally taxable no matter how it's delivered -- tape, disc, download, or otherwise. Custom software written to a customer's specifications is generally not a taxable retail sale. A license of canned software can also escape tax if it satisfies five specific conditions in 86 Ill. Adm. Code 130.1935(a)(1): a signed written agreement, restrictions on copying/use, restrictions on sublicensing or transfer, a policy for replacing lost or damaged copies (or allowing an archival copy), and a requirement that the software be destroyed or returned at the end of the license. The letter stresses that clicking "I agree" to accept license terms electronically does not satisfy the "written, signed agreement" requirement, though a verifiable electronic signature can, per later Department rulings. The letter closes with a discussion of how Illinois taxes leases of tangible personal property (conditional sales versus true leases), which is relevant to the leased desktop application and server appliance described in the request.

What this means for you

Software and data-service companies

If your product is a pure lookup or query service delivered through a website or API, with nothing installed on the customer's computer, this letter supports treating those transactions as non-taxable services in Illinois. But the moment your offering includes downloaded software, a leased application, or a leased device/appliance, you need to analyze whether that software is "canned" or "custom," and if canned, whether your license agreement meets all five conditions in 86 Ill. Adm. Code 130.1935(a)(1) to qualify as a non-taxable license.

SaaS and cloud-software providers

The letter confirms that software delivered purely through a cloud-based system -- never downloaded to the customer's computer, accessed only remotely -- is not subject to tax, and that Illinois generally does not tax subscriptions. However, if you provide the subscriber with an API, applet, desktop agent, or remote-access agent to enable access, that is treated as a transfer of computer software and can be taxable (subject to the same license exceptions) even if there's no separate charge for it.

Contract drafters and accountants

If you want a software license to be treated as a non-taxable license rather than a taxable sale, make sure the agreement is a genuine written agreement signed by both the licensor and the customer -- an electronic "I agree" click-through does not qualify, though a verifiable electronic signature attached to the agreement can. Also confirm the agreement restricts copying and transfer, includes a replacement/archival-copy policy, and requires return or destruction of the software at the end of the license term.

Common questions

Q: Does looking up records through a website or API count as a taxable sale in Illinois?
A: No. The Department states that viewing, downloading, or electronically transmitting data over the internet is not a transfer of tangible personal property, so a pure lookup service (with nothing downloaded) is not subject to Retailers' Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax.

Q: Is leasing software or a server appliance to a customer taxable?
A: It can be, because that involves transferring tangible personal property (the software or the device) as part of the service. The tax treatment depends on which of the four Service Occupation Tax methods applies, and, in the case of an appliance lease, on whether it is a "conditional sale" or a "true lease" under Illinois's leasing rules.

Q: What makes a computer software license non-taxable in Illinois?
A: A license of canned (pre-written) software escapes Retailers' Occupation Tax only if it meets all five conditions in 86 Ill. Adm. Code 130.1935(a)(1): a written agreement signed by both the licensor and customer; restrictions on the customer's duplication and use; restrictions on sublicensing or transferring the software to a third party; a policy for replacing lost/damaged copies or allowing an archival copy; and a requirement that all copies be destroyed or returned at the end of the license (deemed met automatically for perpetual licenses).

Q: Does clicking "I agree" to a license count as a signed written agreement?
A: No. The letter says a click-through "I agree" acceptance does not satisfy the written, signed agreement requirement. The Department has said in other rulings (ST 18-0003-PLR and ST 18-0010-PLR) that a verifiable, authenticated electronic signature attached to or part of the license can satisfy the requirement, but a simple click-to-accept does not.

Q: Is custom software taxed the same way as off-the-shelf software?
A: No. Custom computer programs prepared to a customer's special order are generally not taxable retail sales. Simply assembling pre-written or canned programs into a package doesn't make it "custom" unless real and substantial changes are made to the programs or interfacing logic is created.

Citations and references

Statutes and regulations:

• 35 ILCS 120/2 (Retailers' Occupation Tax Act imposition)
• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax on tangible personal property)
• 35 ILCS 105/3 (Use Tax Act imposition)
• 86 Ill. Adm. Code 150.101 (Use Tax on tangible personal property)
• 86 Ill. Adm. Code 150.130 (Use Tax credit for Retailers' Occupation Tax paid)
• 86 Ill. Adm. Code 140.101 (Service Occupation Tax Act, tax base methods for servicemen)
• 86 Ill. Adm. Code 140.101(f) (de minimis serviceman threshold)
• 86 Ill. Adm. Code 140.108 (de minimis servicemen not registered under Section 2a)
• 35 ILCS 120/2-25 (definition of computer software as tangible personal property)
• 86 Ill. Adm. Code 130.1935 (taxation of canned and custom computer software)
• 86 Ill. Adm. Code 130.1935(a)(1) (criteria for non-taxable software license)
• 86 Ill. Adm. Code 130.1935(c)(3) (custom vs. canned software distinction)
• ST 06-0005-PLR (December 16, 2006) (electronic signature did not satisfy written-agreement requirement)
• ST 18-0003-PLR (February 8, 2018) (verifiable electronic signature can satisfy written-agreement requirement)
• ST 18-0010-PLR (September 26, 2018) (examples of acceptable written signatures)
• 86 Ill. Adm. Code 130.1405 (certificates of resale)
• 86 Ill. Adm. Code 130.2010 (conditional sales contracts subject to Retailers' Occupation Tax)
• 86 Ill. Adm. Code 130.220 (true leases; lessors as end users)
• 86 Ill. Adm. Code 150.310(a)(3) (Use Tax credit for tax paid in another state)

Original ruling text

ST 20-0030-GIL 10/06/2020 COMPUTER SOFTWARE
This letter discusses computer software. See 86 Ill. Adm. Code 130.1935(a)(1). (This is a
GIL.)

October 6, 2020

Dear Xxxx:
This letter is in response to your letter dated December 24, 2019, in which you requested
information. The Department issues two types of letter rulings. Private Letter Rulings (“PLRs”) are
issued by the Department in response to specific taxpayer inquiries concerning the application of a tax
statute or rule to a particular fact situation. A PLR is binding on the Department, but only as to the
taxpayer who is the subject of the request for ruling and only to the extent the facts recited in the PLR
are correct and complete. Persons seeking PLRs must comply with the procedures for PLRs found in
the Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General Information
Letter (“GIL”) is to direct taxpayers to Department regulations or other sources of information regarding
the topic about which they have inquired. A GIL is not a statement of Department policy and is not
binding on the Department. See 2 Ill. Adm. Code 1200.120. You may access our website at
www.tax.illinois.gov to review regulations, letter rulings and other types of information relevant to your
inquiry.
The nature of your inquiry and the information you have provided require that we respond with
a GIL. In your letter you have stated and made inquiry as follows:
I’m requesting a private letter ruling regarding whether any of the services our client
provides to its Illinois customers are subject to the Illinois state and local sales and use tax.
The following is a description of the services our client provides:
•

File Based Death Search (Death Check)
We receive a file containing SSN, Name, DOB. We perform a death audit and return a file
with data of death and match type.

•

Application Based Death Search (BDAS)
Our customer leases software from us to perform a death audit. Lease term is yearly.

•

Online Death Search
Customer can use our website to look up death records of individuals individually.

•

Death Appliance (IDAS)
Customer leases a server from us where they can perform file based audits without
requiring the customer to send us a file.

ST 20-0030-GIL
Page 2

•

File Based Locator Service (Address Check)
Customer sends us a file containing SSN, Name, and DOB and we return a set of possible
addresses for the record.

•

Online Address Search
Customer can perform individual address searches using our website.

•

Locator Service API
Customer can call our web service from within their custom applications to validate
addresses.

•

Custom Software Development
We develop custom solutions for customers. Services are billed time and material.

I performed some research prior to sending this letter, including exchanging emails with the
Illinois (IL) Department of Revenue (DOR). I’m enclosing a copy of my email exchanges with
emails, it is my understanding that none of our clients transactions are subject to the
Illinois Retailers’ Occupation Tax (sales tax) or the Illinois Use Tax. However, in order to
get an “official” response, I’m sending this letter and enclosure to request a private letter
ruling regarding the taxability of our client’s services.
Thank you for your assistance in this matter. If you have any questions or need additional
information, please let me know.
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 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
property transferred as an incident to sales of service. See 86 Ill. Adm. Code 140.101. The transfer of

ST 20-0030-GIL
Page 3
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.
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.

ST 20-0030-GIL
Page 4
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 is considered tangible personal property in Illinois. 35 ILCS 120/2-25.
“‘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

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.

ST 20-0030-GIL
Page 5
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.
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. Illinois generally does not tax subscriptions.
Leases
The State of Illinois taxes leases differently for Retailers’ Occupation Tax and Use Tax
purposes than the majority of other states. For Illinois sales tax purposes, there are two types of
leasing situations: conditional sales and true leases. A conditional sale is usually characterized by a
nominal or one dollar purchase option at the close of the lease term. Stated otherwise, if a lessor is
guaranteed at the time of the lease that the leased property will be sold, that transaction is considered
to be a conditional sale at the outset of the transaction. Persons who purchase items for resale under
conditional sales contracts can avoid paying tax to suppliers by providing certificates of resale that
contain all the information set forth in 86 Ill. Adm. Code 130.1405. All receipts received by a
lessor/retailer under a conditional sales contract are subject to Retailers’ Occupation Tax. See 86 Ill.
Adm. Code 130.2010.
A true lease generally has no buy out provision at the close of the lease. If a buy-out provision
does exist, it must be a fair market value buy-out option in order to maintain the character of the true
lease. Lessors of tangible personal property under true leases in Illinois are deemed end users of the
property to be leased. See 86 Ill. Adm. Code 130.220. As end users of tangible personal property
located in Illinois, lessors of a true lease owe Use Tax on their cost price of such property. The State
of Illinois imposes no tax on rental receipts. Consequently, lessees incur no tax liability. In the case
of a true lease, the lessors of the property being used in Illinois would be the parties with Use Tax
obligations. The lessors would either pay their suppliers, if their suppliers were registered to collect
Use Tax, or would self-assess and remit the tax to the Department. If the lessors already paid taxes
in another state with respect to the acquisition of the tangible personal property, they would be
allowed a credit against Use Tax to the extent of the amount of the tax properly due and paid in the
other state. See 86 Ill. Adm. Code 150.310(a)(3).

ST 20-0030-GIL
Page 6
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:ter