Is a web-based (SaaS) fleet management service, and a free companion app that goes with it, subject to Illinois sales or use tax?

Plain-English summary

A tax practitioner asked the Illinois Department of Revenue how to treat a client's web-based fleet management service. The client ("Company X") sells the service as Software as a Service (SaaS) — customers just log in over the internet and never download or control the underlying software. Company X also built a companion app that customers can optionally download for free to a phone or tablet to make data entry easier (for example, a truck driver logging fuel purchases and mileage); the app has no messaging features and doesn't change what customers pay.

The Department's answer, grounded in 86 Ill. Adm. Code 130.1935 and 35 ILCS 120/2-25: Illinois taxes "canned" (prewritten) computer software as tangible personal property, but a true cloud-based SaaS model — where software is never downloaded and is only accessed remotely — is not currently subject to tax in Illinois, and Illinois does not tax subscriptions generally. So the core fleet-management subscription revenue is not taxable.

The free optional app is a separate question because it is downloaded computer software, and "computer software" is defined broadly under Illinois law. Ordinarily a customer receiving computer software (even for no separate charge) would be receiving something subject to tax, unless it qualifies as a non-taxable software license under Section 130.1935(a)(1)'s five-part test. But here the Department applied a different rule: if the app is downloaded for free from a server located outside Illinois, the out-of-state retailer has "exercised no power or control over the property in Illinois," so there's no taxable use, and the customer (as donee) owes no Illinois Use Tax either. The Department noted it had already reached this same conclusion for this same service in a prior ruling, ST-20-0004-PLR. If the servers are instead located in Illinois, the software is taxable unless the license meets all the criteria in Section 130.1935(a)(1).

What this means for you

Software and SaaS companies

If you sell software purely as a hosted, remotely-accessed service (true SaaS, with no download to the customer's device), Illinois currently treats that as non-taxable — the Department describes cloud-based delivery, where software is "never downloaded onto a client's computer," as outside the sales/use tax base. But the ruling flags a real risk: if your SaaS product also hands the customer any code that runs locally — an API, an applet, a desktop agent, or a remote access agent — the Department says the customer "is receiving computer software," and that transfer can be taxable even if you don't charge separately for it, unless it qualifies as an exempt license.

Business owners offering free downloadable companion apps

Giving away a companion app doesn't automatically create Illinois tax exposure, but where your servers sit matters. Under this ruling, a free app downloaded from a server located outside Illinois isn't taxed because the out-of-state provider hasn't exercised control over property inside the state. If your servers (or the download source) are in Illinois, the same free giveaway can become a taxable transfer of canned software unless you structure it as a compliant license under 86 Ill. Adm. Code 130.1935(a)(1) — which requires a signed written agreement, use/duplication restrictions, anti-sublicense terms, a replacement-copy policy, and a return-or-destroy obligation at the end of the license. A simple "click-to-accept" agreement does not count as "signed" for this purpose.

Accountants and tax professionals

This GIL is a useful roadmap for the canned-vs-custom and license-vs-sale distinctions under 86 Ill. Adm. Code 130.1935, but remember it is non-binding — it just directs the taxpayer to the relevant regulations. For a client with genuinely unique, fact-specific exposure, a Private Letter Ruling request under 2 Ill. Adm. Code 1200.110 is the only route to a binding answer, and even then the PLR only binds the Department as to that one taxpayer's stated facts.

Common questions

Q: Does Illinois tax Software as a Service (SaaS) subscriptions?
A: Not currently. The Department states that computer software delivered through a cloud-based system, where it is never downloaded to the customer's computer and is only accessed remotely, is not subject to Illinois sales/use tax, and that Illinois does not tax subscriptions.

Q: We give customers a free app to go with our SaaS product — does that change the answer?
A: It can. A free download is still "computer software," which is defined broadly. In this ruling, the app was not taxable because it was downloaded from a server located outside Illinois, meaning the out-of-state retailer exercised no control over property within the state. If the server were in Illinois, the software would be taxable unless it qualified as an exempt license under 86 Ill. Adm. Code 130.1935(a)(1).

Q: What makes a software license non-taxable in Illinois?
A: Under Section 130.1935(a)(1), a license of canned software escapes tax only if it: (1) is evidenced by a written agreement signed by both licensor and customer; (2) restricts the customer's duplication and use; (3) bars the customer from sublicensing or transferring it to third parties without the licensor's continued control; (4) commits the licensor to replace lost/damaged copies at little or no cost (or lets the customer keep an archival copy); and (5) requires the customer to return or destroy all copies at the end of the license period. All five must be met, or the transaction is taxable.

Q: Does clicking "I agree" to online terms count as a signed license agreement?
A: No. The Department specifically states that a license agreement where the customer electronically accepts by clicking "I agree" does not satisfy the requirement of a written agreement signed by both the licensor and the customer.

Q: Is this letter binding on the Department?
A: No. It is a General Information Letter issued under 2 Ill. Adm. Code 1200.120, meaning it only points the taxpayer to relevant regulations and is not a statement of Department policy. Only a Private Letter Ruling, obtained under 2 Ill. Adm. Code 1200.110, binds the Department, and only as to the specific taxpayer and facts presented.

Citations and references

Statutes and rules:

• 86 Ill. Adm. Code 130.1935 (taxation of computer software; canned vs. custom; non-taxable license criteria)
• 35 ILCS 120/2-25 (statutory definition of "computer software")
• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax on sales of tangible personal property)
• 86 Ill. Adm. Code 150.101 (Use Tax on use of tangible personal property purchased at retail)
• 86 Ill. Adm. Code 150.130 (credit against Use Tax for Retailers' Occupation Tax paid)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedure)
• 2 Ill. Adm. Code 1200.120 (General Information Letter purpose and non-binding effect)
• ST-20-0004-PLR (prior Private Letter Ruling addressing the same SaaS fleet-management service)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2021.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2021/st21-0001-gil.pdf

Original ruling text

ST 21-0001 01/15/2021 COMPUTER SOFTWARE
This letter discusses computer software. See 86 Ill. Adm. Code 130.1935. (This is a GIL.)

January 15, 2021
Dear Xxxx:
This letter is in response to your E-Mail dated May 17, 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:
It was nice speaking with you yesterday. As I mentioned, we are assisting one of our
clients with determining whether the fleet management services they provide to
customers in Illinois may be subject to the Illinois retailer’s occupation tax, use tax, etc.
As discussed, the following is a summary of the facts related to the fleet management
service:
•

Our client, who I will refer to as Company X, provides a web-based fleet
management service for handling the administration, management, and recordkeeping of motor vehicle fleets.

•

Company X provides its services via a Software as a Service (“SaaS”) model
only. As you may know, “SaaS” allows a customer to remotely access a vendor’s
software applications on a cloud infrastructure; the customer does not manage or
control the underlying cloud infrastructure. Under this model, the customer
merely accesses the vendor’s servers via the internet.

•

In YEAR, Company X developed an application which it provides to its customers
for free. Customers have the option of downloading the application to a personal
device, such as a phone, tablet, etc., which the customer can use to more easily
upload vehicle information necessary for fleet management; or it can continue to
access the vendor’s platform via the internet to transfer such information to
Company X. Note the pricing of Company X’s services did not change with the
addition of the application.

ST-21-0001
Page 2
January 15, 2021
•

Company X does not provide the customer with the personal device, (i.e., tablet,
phone, etc.) for use with the application, or any other tangible personal property.

•

For example, a truck driver would use the application on his/her cell phone to
upload information regarding fuel purchases, such as fuel cost, fuel quantity, or
to keep track of mileage.

•

Prior to the introduction of the application, a truck driver would keep a manual
paper log of the same information and would turn the information into the office at
the end of a trip for entry into the fleet management system.

•

The user of the application on a personal device, can only enter information into
the application when they are connected to the Internet. If the user is not
connected to the Internet, they are not able to enter any information. In other
words, the application that is downloaded to a personal device can only be used
when the user has internet access on its device. However, it is anticipated that
this functionality may change in the future, which will allow the user to enter
information into the application which can be uploaded at a later time.

•

It is important to note that the users of the application are typically the motor
vehicle operators, who only have access to a portion of the platform for purposes
of entering information.

•

The individuals who use the fleet management software solution to manage the
fleet, typically view the data through a web portal on their computers, but also
have the ability to view the information on the app.

•

The application is not necessary to the service provided by Company X, but
practically speaking, most of Company X’s customers avail themselves of the
use of the application.

•

The application does not have the capability for sending or receiving messages,
such as communications with a dispatcher, etc. The application is solely used for
uploading data related to fleet management (i.e., fuel, mileage, etc.).

•

Company X is not registered for the Illinois retailer’s occupation tax, use tax, etc.

As we understand, Illinois does not tax SaaS models, but it does tax electronically
delivered software. Given our client’s current business involves SaaS, but also has a
free downloaded application available at the option of the customer, we recognize there
is some uncertainty as to how to the State might characterize this transaction.
Therefore, we would appreciate your guidance as to whether the fleet management
service provided by our client would be subject to retailer’s occupation tax, use tax, etc.
We understand that your response to this request would not be binding upon the State.

ST-21-0001
Page 3
January 15, 2021
Thank you again for your assistance with this matter. If you have any questions, please
do not hesitate to call me.
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. 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 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’ 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 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 canned computer software.
If transactions for the licensing of computer software meet all 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

ST-21-0001
Page 4
January 15, 2021
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.
Currently, 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 in Illinois. However, computer software is defined broadly in the
Retailers’ Occupation Tax Act. 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.
If an Illinois customer downloads computer software for free from an out-of-state retailer’s web
site or server that is also located out-of-state, the retailer, even though it is donating tangible personal
property to the customer, has exercised no power or control over the property in Illinois. In this
instance, the donor would not have made any taxable use of the property in Illinois. The customer,
the donee, would incur no Use Tax liability for the retailer to collect and remit to Illinois. Illinois does
not tax subscriptions.
The Department addressed this issue in a previous Private Letter Ruling, concluding the
revenues received from subscriptions of a SaaS model web-based fleet management service are not
subject to tax. The Department also concluded that an application downloaded for free by this
service’s subscribers from a server located in another state was not subject to tax for the reasons set
out above. See ST-20-0004-PLR.
We cannot provide a more specific answer without more information about the specific
products at issue. However, if the application is downloaded for free by the service’s subscribers from
a server located in another state, it would not be subject to tax. If the servers are not located in
another state, the license of the software must meet all the criteria set out in Section 130.1935(a)(1);
otherwise, it is taxable.
I hope this information is helpful. If you require additional information, please visit our website
at www.tax.illinois.gov or contact the Department’s Taxpayer Information Division at (217) 782-3336.
Very truly yours,

ST-21-0001
Page 5
January 15, 2021

Alexis K. Overstreet
Associate Counsel
AKO:rkn