Is computer software subject to Illinois sales and use tax, and how does that apply to software licenses, leases, and services like death-record and address searches?

Plain-English summary

A business that sells death-record searches, address-verification searches, leased search software, and custom software development asked the Illinois Department of Revenue whether any of these offerings are subject to Illinois sales and use tax. Because the request didn't fit the narrower requirements for a binding Private Letter Ruling, the Department responded with this General Information Letter (GIL), which explains the general rules for taxing computer software rather than resolving the taxpayer's specific transactions.

The core rule: "canned" (prewritten) computer software is tangible personal property and is generally taxable under the Illinois Retailers' Occupation Tax (sales tax) and Use Tax, no matter how it's delivered — tape, disc, card, or electronic transmission. Custom software written to a customer's special order is generally not taxable. Simply assembling and lightly configuring prewritten software packages doesn't make them "custom" — real and substantial changes to the program, or creation of interfacing logic, are required.

Software licenses get special treatment: a license of canned software escapes tax entirely if it meets all five conditions in 86 Ill. Adm. Code 130.1935(a)(1) — a signed written agreement, restrictions on duplication/use, restrictions on sublicensing, a policy for replacing lost/damaged copies, and a requirement to return or destroy the software at the end of the license term. Critically, the Department reiterates that an electronic "click to agree" acceptance does not satisfy the written-signature requirement, though a verifiable electronic signature attached to the license (as opposed to a simple click-through) can. Software delivered purely through the cloud — never downloaded to the customer's computer, only accessed remotely — is not subject to tax, even though APIs, applets, or remote-access agents that let a subscriber reach a provider's network are themselves treated as computer software.

The letter also walks through how businesses that provide services (not just goods) are taxed on any tangible personal property, including software, that gets transferred along with the service, and it explains the separate rules for leasing property (conditional sales vs. true leases) in Illinois. Because this is a GIL, none of this resolves whether the taxpayer's own death-search, address-search, or custom-development services are actually taxable — it only points to the regulations that would govern that analysis.

What this means for you

Software vendors and licensors

If you sell prewritten (canned) software, expect it to be taxable as tangible personal property unless your license agreement satisfies all five conditions of 86 Ill. Adm. Code 130.1935(a)(1) — including a genuinely signed written agreement. A simple "I agree" click-through will not exempt the transaction. If you deliver software solely through the cloud with nothing ever downloaded, that access is not taxed, but providing an API, applet, or remote-access agent to reach your systems is still treated as furnishing software (and is taxable unless a valid license exemption applies).

Custom software developers and service providers (including data/search services)

Custom-written software prepared to a customer's specific order is generally not a taxable sale, but merely tweaking or bundling canned/prewritten components doesn't count as "custom" — you need real, substantial modifications or new interfacing logic. If your business provides services (like the death-record or address-verification searches described in this letter) and any tangible personal property, including software, changes hands as part of that service, you may owe Service Occupation Tax or Use Tax under one of four statutory tax-base methods, depending on your registration status and gross receipts mix. Pure data lookups delivered electronically with no transfer of tangible personal property generally fall outside these taxes.

Lessors of computer hardware or software

Illinois treats "true leases" (no bargain buy-out) differently from "conditional sales" (essentially a sale with a nominal buy-out). True-lease lessors are treated as end users and owe Use Tax on their own cost of the property, but they don't collect tax from lessees on rental payments. Conditional-sale lessors, by contrast, owe Retailers' Occupation Tax on all receipts, similar to a retail sale.

Common questions

Q: Is all computer software taxable in Illinois?
A: No. "Canned" or prewritten software is generally taxable as tangible personal property. Custom software written to a customer's special order is generally not taxable, and merely configuring or assembling canned programs doesn't make them custom.

Q: Can a software license avoid sales tax?
A: Yes, but only if it meets all five conditions in 86 Ill. Adm. Code 130.1935(a)(1): a signed written agreement, restrictions on the customer's duplication/use, restrictions on sublicensing to third parties, a replacement policy for lost or damaged copies, and a requirement that the customer destroy or return the software at the end of the license term. Missing any one condition makes the license taxable.

Q: Does clicking "I agree" to an online license count as a signed written agreement?
A: No. The Department has repeatedly held that a simple click-through "I agree" does not satisfy the written, signed agreement requirement (citing ST 06-0005-PLR). However, a verifiable electronic signature that is actually attached to or part of the license can satisfy the requirement (citing ST 18-0003-PLR and ST 18-0010-PLR).

Q: If software is only accessed in the cloud and never downloaded, is it taxed?
A: No. Computer software delivered exclusively through a cloud-based system, where it's never downloaded to the customer's computer and only accessed remotely, is not subject to tax. Illinois also generally does not tax subscriptions.

Q: Does this letter decide whether the taxpayer's death-search and address-search services are taxable?
A: No. This is a General Information Letter, not a Private Letter Ruling. It only directs the taxpayer to the relevant statutes and regulations on computer software, services, and leasing — it does not analyze or resolve the taxability of the taxpayer's specific services, and it is not binding on the Department.

Citations and references

• 35 ILCS 120/2 (Retailers' Occupation Tax Act imposition of tax); 86 Ill. Adm. Code 130.101
• 35 ILCS 105/3 (Use Tax Act imposition of tax); 86 Ill. Adm. Code 150.101
• 86 Ill. Adm. Code 150.130 (credit for Retailers' Occupation Tax paid against Use Tax)
• 86 Ill. Adm. Code 140.101 (Service Occupation Tax Act tax-base methods); 140.101(f) (de minimis serviceman threshold); 140.108 (de minimis servicemen not required to register)
• 35 ILCS 120/2-25 (definition of computer software as tangible personal property)
• 86 Ill. Adm. Code 130.1935 (taxation of computer software); 130.1935(c)(3) (custom software definition); 130.1935(a)(1) (non-taxable license criteria)
• ST 06-0005-PLR (December 16, 2006); ST 18-0003-PLR (February 8, 2018); ST 18-0010-PLR (September 26, 2018)
• 86 Ill. Adm. Code 130.1405 (certificates of resale); 130.2010 (conditional sales contracts); 130.220 (true leases); 150.310(a)(3) (credit for tax paid to another state)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedures); 2 Ill. Adm. Code 1200.120 (General Information Letters)

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/st20-0035-gil.pdf

Original ruling text

ST 20-0035-GIL 10/01/2020 COMPUTER SOFTWARE

This letter discusses computer software. See 86 Ill. Adm. Code 130.1935. (This is a GIL.)

October 1, 2020

NAME
ADDRESS

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.govto 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:

e 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.

e Application Based Death Search (BDAS)

Our customer leases software from us to perform a death audit. Lease term is yearly.

e Online Death Search

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

e 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.

e 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.

e Online Address Search

Customer can perform individual address searches using our website.

e Locator Service API

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

e Custom Software Development

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

| performed some research prior to sending this letter, including exchanging emails with the
Illinois 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 (/.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
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.

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.

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. Ifa
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 lll.
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).

| 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