Does a SaaS company owe Illinois sales, use, or service occupation tax on a free connector applet and on subscription fees for its cloud-based service?

Plain-English summary

A software-as-a-service (SaaS) company that provides cloud-based remote work and web-conferencing tools asked the Illinois Department of Revenue to rule on two things: whether it had to keep collecting Service Occupation Tax (SOT) on 50% of its subscription fees, and whether it owed Use Tax on a small connector applet it gives customers for free.

The Department said no to both. The applet is downloaded for free from the company's own servers located outside Illinois, so the company never exercises "power or control" over that software inside Illinois — meaning no Use Tax is triggered for either the company or its customers, following the reasoning in an earlier Illinois ruling (ST 19-0007-GIL). And because Illinois doesn't tax cloud-based software that customers access remotely without ever downloading it (true SaaS), and doesn't tax subscriptions generally, the subscription fee itself isn't subject to Retailers' Occupation Tax, Use Tax, or SOT either.

The Department also found that even if the subscription fee were treated as bundling in some value for the applet, the company would still owe nothing, because it qualifies as a "de minimis" serviceman: the cost of the free applet is such a tiny fraction of its total service revenue that it falls well under the 35% cost-ratio threshold that would require charging tax on tangible personal property transferred to customers.

What this means for you

SaaS and cloud software companies

If your product is accessed entirely remotely (true SaaS) and any small client-side helper file (an applet, agent, or connector) is given away for free and downloaded from servers located outside Illinois, you may not owe Illinois Retailers' Occupation Tax, Use Tax, or Service Occupation Tax on your subscription revenue. The keys are: (1) no charge to the customer for the helper software itself, (2) your servers hosting the download are outside Illinois, and (3) the core product remains cloud-accessed rather than a locally installed program.

Business owners billing a single, undifferentiated charge

If you bundle a small amount of incidental tangible personal property (like a free applet) into one invoice line with your service fee, Illinois's "de minimis serviceman" rules may let you avoid collecting tax on 50% of that bill, as long as the cost of the tangible property stays under 35% of your total annual service revenue. Below that threshold, you may only owe (or may owe nothing) on your own cost price of that small item, rather than tax on half the customer's invoice.

Accountants and tax professionals

This ruling walks through the full four-option framework for servicemen under the Service Occupation Tax Act (separately-stated price, 50% of undifferentiated bill, de minimis SOT on cost price, or de minimis Use Tax on cost price) and applies it to a SaaS fact pattern. It's useful precedent for advising clients who bundle free or de minimis software distribution with subscription billing, though as a PLR it binds the Department only for this taxpayer's specific facts.

Common questions

Q: Does the company have to collect Service Occupation Tax on 50% of its subscription fees?
A: No. The Department ruled the company is not required to collect and remit SOT on 50 percent of the subscription fee, because the fee represents a charge solely for SaaS, which Illinois does not tax, and because Illinois generally does not tax subscriptions.

Q: Does the company owe Illinois Use Tax on the free applet it distributes?
A: No. Because Illinois customers download the applet for free from the company's servers located outside Illinois, the company exercises no power or control over the applet within Illinois, so no Use Tax liability is incurred by either the company or its customers — the same result reached in Illinois General Information Letter ST 19-0007-GIL.

Q: What if the subscription fee is treated as covering both the applet and the SaaS product together?
A: The company would still not owe SOT on 50 percent of the fee, because it would qualify as a "de minimis" serviceman: the cost of the applet, even given a nominal value, would never reach the 35 percent cost-ratio threshold (measured against the company's total annual gross receipts from sales of service) that triggers full-serviceman tax treatment.

Q: Why did the company previously charge Service Occupation Tax on 50% of its invoices?
A: Because it did not separately state the applet's value from the SaaS charge on customer invoices, it had been using the "50 percent of the entire single charge" method available to full servicemen under 86 Ill. Adm. Code 140.106(a). This ruling confirms that method wasn't actually required given the free, out-of-state nature of the applet and the true nature of the fee as a SaaS/subscription charge.

Q: Does this ruling also address the City of Chicago's Personal Property Lease Transaction Tax?
A: The facts note the company was audited by the City of Chicago and required to impose that local lease tax on Chicago-based customers, but the Department's ruling and analysis address only state Retailers' Occupation Tax, Use Tax, and Service Occupation Tax — it does not rule on the Chicago lease tax.

Q: Can another SaaS company rely on this ruling?
A: No. A Private Letter Ruling binds the Department only as to the specific taxpayer who requested it, and only to the extent the facts given were accurate and complete. Other companies can look to it for how the Department reasons about free applets and SaaS subscriptions, but cannot rely on it directly for their own tax positions.

Citations and references

Statutes and rules:

• 35 ILCS 105/3 (Use Tax Act; canned software as tangible personal property)
• 35 ILCS 115/3 (Service Occupation Tax Act; tax on tangible personal property transferred incident to service)
• 35 ILCS 120/2 (Retailers' Occupation Tax Act imposition)
• 35 ILCS 120/2-25 (definition of "computer software")
• 86 Ill. Adm. Code 130.1935 (canned vs. custom software; nontaxable license criteria)
• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax generally)
• 86 Ill. Adm. Code 140.101, 140.106, 140.108, 140.109 (Service Occupation Tax; full vs. de minimis serviceman)
• 86 Ill. Adm. Code 150.101 (Use Tax generally)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedure)

Related Department guidance cited in this ruling:

• Illinois General Information Letter ST 19-0007-GIL (Mar. 20, 2019) (free out-of-state software download creates no Use Tax liability)
• Illinois General Information Letter ST 17-0006-GIL (Mar. 2, 2017) (SaaS provider acts as a serviceman; applets/agents may be taxable software unless a nontaxable license)
• Illinois General Information Letter ST-20-0018-GIL (Sept. 28, 2020) (no ROT/SOT on cloud-based software accessed only remotely)
• ST 06-0005-PLR (Dec. 16, 2006) and ST 18-0003-PLR (Feb. 8, 2018) (electronic signature requirements for nontaxable software license agreements)

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/st21-0008-plr.pdf

Original ruling text

ST-21-0008 11/23/2021 COMPUTER SOFTWARE
This letter discusses computer software. See 86 Ill. Adm. Code 130.1935. (This
is a PLR.)
November 23, 2021
RE: COMPANY, Inc Private Letter Ruling
Dear NAME,
This letter is in response to your letter received September 29, 2021, 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:
On behalf of COMPANY (“COMPANY” or the “Company”), we request the
Illinois Department of Revenue (the “Department”) issue a Private Letter
Ruling ("PLR") with respect to the factual situation discussed below. This
request is pursuant to 2 Ill. Admin. Code 1200.110. We request a ruling
concerning the imposition and basis of the Illinois Service Occupation Tax
(“SOT”) to specific COMPANY transactions outlined below.
GENERAL INFORMATION

1. Enclosed is a copy of Power of Attorney Form IL-2848, executed
   by an authorized agent of the Company, authorizing CPA to act on
   the Company's behalf.
2. This PLR request is not based on alternative plans of proposed
   transactions or a hypothetical situation, it is instead on the

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Company's actual business as described below.

3. Neither the Company, nor any related taxpayer, is engaged in
   litigation with respect to this issue with the Department. The
   Company is not currently involved in any litigation in which the
   Department is a party.
4. The Company knows of no authority contrary to the authorities
   referred to and cited in this request.
5. To the best of the knowledge of both the Company and its
   representatives, the Department has not previously ruled on the
   same or similar issues for the Company; nor has the Company or
   any representative previously submitted the same or similar issues
   to the Department and withdrawn the request before a PLR was
   issued.
6. The Company requests that certain information be redacted from
   the PLR prior to dissemination to others. The Company requests
   that its name, address, the name of its representatives be redacted.
   STATEMENT OF MATERIAL FACTS
   The Company is a provider of software as a service (“SaaS”) and cloudbased remote work tools for collaboration, information technology
   management and customer engagement. The Company was founded in
   YEAR and is headquartered in CITY, STATE. The Company is registered
   with the Department to remit Illinois SOT on sales of its services as
   discussed below.
   The Company provides customers with remote access via a SaaS platform
   to computer hardware that allows access to web-conferencing capabilities.
   To facilitate this service it is necessary to link a user’s computer or mobile
   device to the Company’s servers through the use of an applet. This applet
   is downloaded from the Company’s servers, located outside of Illinois, to
   the user’s device. The Company provides this applet for free through
   online and mobile application storefronts, such as STOREFRONT1 and
   STOREFRONT2. The Company offers a basic version of its service for
   free to customers, but if users want to upgrade and access additional
   functionality, they must register and pay a subscription fee to the
   Company. Note this additional functionality is all remotely accessed
   cloud-based functionality, and there is no additional software or tangible
   personal property transferred from COMPANY to its customers.

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The Company does not separately state the applet from the SaaS offering
on the customer’s invoice. Instead, COMPANY has elected to present
these charges on the invoice as one single charge. As a result, the
Company has historically elected to charge customers SOT at 50 percent
of the total price of the invoice. Additionally, the City of Chicago audited
the Company and required COMPANY to impose Chicago’s Personal
Property Lease Transaction Tax (“Lease Tax”) on invoices to Chicagobased customers. Currently, the Company continues to charge SOT on 50
percent of its invoices to Illinois customers, as well as the Chicago Lease
Tax.
COMPANY does not sell any tangible personal property, sell any other
delivered software, and is not otherwise required to be registered for
Illinois Retailers’ Occupation Tax (“ROT”).
RULING REQUESTED
1) On behalf of the Company, we respectfully request the Department
to rule that the Company is not required to collect and remit SOT on
50 percent of the charge for the subscription fee the Company bills
to customers.
2) Additionally, we also respectfully request the Department to rule
that the Company does not incur a Use Tax liability on the provision
of applet offered to customers free of charge.
RELEVANT AUTHORITIES
Generally, the sale of “canned” computer software is considered a taxable
retail sale in Illinois. 35 ILCS 105/3. Canned software is considered
tangible personal property regardless of the form by which it is transferred
or transmitted, “…including tape, disc, card, electronic means, or other
media.” 86 Ill. Adm. Code 130.1935. However, pursuant to 86 Ill. Adm.
Code 130.1935(c)(3) a license of canned software is not a taxable retail
sale in Illinois if it meets the following criteria:
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

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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.
Illinois does not impose Illinois Retailers’ Occupation Tax (“ROT”) or SOT
on cloud-based software that is accessed only remotely and is never
downloaded to a customer’s computer (i.e., SaaS) in Illinois. See Illinois
General Information Letter ST-20-0018-GIL (Sept. 28, 2020). In Illinois, a
provider of SaaS is deemed to be acting as a serviceman. See Illinois
General Information Letter ST 17-0006-GIL (March 2, 2017). SOT is
imposed upon all persons engaged in the business of making sales of
service on tangible personal property that is transferred incident to the
sale of the service. 35 ILCS 115/3.
A “full” serviceman is required to remit SOT on the selling price of tangible
personal property transferred incident to sales of service if the cost ratio
between the tangible personal property and the serviceman's total annual
gross receipts from all sales of service is 35 percent or greater. See 86 Ill.
Adm. Code 140.106(a). The Serviceman has two options for invoicing, it
either can separately state the selling price of the tangible personal
property on the billing statement to a customer or; if the serviceman's bill
to a customer does not separately state the price of the tangible personal
property transferred, then SOT is based on 50 percent of the entire single
charge on the customer bill (but not less than the serviceman’s cost). Id.
A “de minimis” serviceman is a serviceman whose cost ratio between the
tangible personal property and the serviceman's total annual gross
receipts from all sales of service is less than 35 percent. 86 Ill. Adm.
Code 140.108 and 86 Ill. Adm. Code 140.109. A serviceman that is
deemed to be a “de minimis” serviceman has three options available to it
for determining its tax liability. A “de minimis” serviceman may either incur
SOT on the serviceman’s cost price of tangible personal property (if

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required to be registered for other reasons) or Use Tax (“UT”) on the
serviceman’s cost price of tangible personal property. Id. Finally, a de
minimis serviceman can elect to be treated as a full serviceman and
collect tax as outlined above. Id. (the two options noted above, separately
state or 50% of total single charge).
A “de minimis” serviceman is deemed to be the end user of the tangible
personal property transferred to its service customers, and the customer
incurs no tax liability. See 86 Ill. Adm. Code 140.108(a). The “de minimis”
serviceman should remit UT to suppliers at the time of purchase. Id. If
the supplier is not registered to collect UT, the “de minimis” serviceman
can register for the limited purpose of self-assessing and remitting its UT
liability to the Department. Id.
Recent Illinois General Information Letters (“GIL”) have addressed
situations in which a serviceman incidentally transfers software in the
provision of a service via an app store such as STOREFRONT2 or
STOREFRONT1.
In ST 19-0007-GIL, the Department found that when an Illinois customer
downloads free software from an out-of-state retailer’s server that is also
located out-of-state, the retailer is not liable for UT because the retailer
exercises no power or control over the property in Illinois. See Illinois
General Information Letter ST 19-0007-GIL (March 20, 2019). In this
situation, the customer would incur no UT liability either. Id. Alternatively,
the Department has determined that when a serviceman provides an API,
applet, desktop agent, or a remote access agent to enable a subscriber to
access the provider’s network and services, the subscriber may be
receiving computer software subject to tax unless the transfer qualifies as
a nontaxable license of computer software.
See Illinois General
Information Letter ST 17-0006-GIL (March 2, 2017). If the provider
qualifies as a de minimis serviceman, the provider may elect to pay UT on
its cost price of the computer software. Id.
ANALYSIS
The Company is not required to collect and remit SOT on 50 percent of the
subscription fee to its customers. The applet is offered for free to
customers whether they are charged a subscription fee for the enhanced
SaaS application or whether they are enrolled in the basic plan that is
made available free of charge. Given that the applet is made available for
free to all users, is provided by an out of state retailer from out of state
servers, the charge to customers for the subscription fee likely represents

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a charge solely for SaaS and should be afforded the same tax treatment as
the taxpayer in ST 19-0007-GIL (applet provided for free from out of state
servers does not result in use tax obligations to either the seller/donor or
buyer/donee). As mentioned previously, SaaS is not considered to be
tangible personal property and is not subject to tax. Therefore, the
subscription fee represents a charge solely for a service not subject to tax
under either Illinois ROT or SOT.
In the event that the subscription fee is deemed to represent a charge for
both the applet and the SaaS product, the Company would still not be
required to collect and remit SOT on 50 percent of the subscription fee
because the Company would qualify as a “de minimis” serviceman (unless
of course the company elected to be treated as a full serviceman and
collect utilizing the 50 percent method). The value, and by extension the
cost, of the applet to the Company is inconsequential as illustrated by the
Company making the applet available to all users free of charge. Even if a
nominal value were to be assigned to the applet this value would never
exceed a threshold of a 35 percent cost ratio between the applet and the
Company's total annual gross receipts from all sales of service. As a
result, the Company would qualify as a “de minimis” serviceman and would
be required to incur either SOT or UT on the cost price of the applet, unless
SOT or UT is otherwise not due.
CONCLUSION
Since the Company’s cost ratio is less than 35 percent, the Company is
not required to collect and remit SOT on 50 percent of the subscription fee
to their customers. The applet is offered for free to customers whether
they are charged a subscription fee for the enhanced SaaS application or
whether they are enrolled in the basic plan that is made available free of
charge.
Furthermore, similar to the taxpayer in ST 19-0007-GIL, the Company
should not be required to remit UT on the cost price of the applet as the
Company is an out-of-state retailer that does not operate servers in Illinois
and does not exercise power or control over the a pp let in Illinois when
downloaded by Illinois customers via online app stores. Accordingly, no
UT liability incurred by either COMPANY or its customers.
If the Department cannot reach a conclusion based on the information
provided, we respectfully request that the Department contact the
undersigned to determine what additional information is required.

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By email dated November 17, 2021, the Company’s representative at CPA
confirmed the “app is only provided for free and the app is not represented
in the invoice as a single charge since the app is provided for free. …
Arguably the second sentence could be stricken.”
DEPARTMENT’S RESPONSE:
Retailers’ Occupation Tax and Use Tax
The Illinois Retailers' Occupation Tax Act imposes a tax upon persons engaged
in this State in the business of selling tangible personal property to purchasers for use
or consumption. See 35 ILCS 120/2; 86 Ill. Adm. Code 130.101. In Illinois, Use Tax is
imposed on the privilege of using, in this State, any kind of tangible personal property
that is purchased anywhere at retail from a retailer. See 35 ILCS 105/3; 86 Ill. Adm.
Code 150.101. These taxes comprise what is commonly known as "sales" tax in Illinois.
If the purchases occur in Illinois, the purchasers must pay the Use Tax to the retailer at
the time of purchase. The retailers are then allowed to retain the amount of Use Tax
paid to reimburse themselves for their Retailers' Occupation Tax liability incurred on
those sales. If the purchases occur outside Illinois, purchasers must self-assess their
Use Tax liability and remit it directly to the Department.
Service Occupation Tax
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 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) separatelystated selling price of tangible personal property transferred incident to service; (2) 50%
of the serviceman's entire bill; (3) Service Occupation Tax on the serviceman's cost
price if the serviceman is a registered de minimis serviceman; or (4) Use Tax on the
serviceman's cost price if the serviceman is de minimis and is 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

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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.

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If a transaction does not involve the transfer of any tangible personal property to
the customer, then it generally would not be subject to Retailers’ Occupation Tax, Use
Tax, Service Occupation Tax, or Service Use Tax.
Computer Software
“‘Computer software’ means a set of statements, data, or instructions to be used
directly or indirectly in a computer in order to bring about a certain result in any form in
which those statements, data, or instructions may be embodied, transmitted, or fixed, by
any method now known or hereafter developed, regardless of whether the statements,
data, or instructions are capable of being perceived by or communicated to humans,
and includes prewritten or canned software.” 35 ILCS 120/2-25. Generally, sales of
“canned” computer software are taxable retail sales in Illinois. Canned computer
software is considered to be tangible personal property regardless of the form in which it
is transferred or transmitted, including tape, disc, card, electronic means, or other
media. 86 Ill. Adm. Code 130.1935. However, if the computer software consists of
custom computer programs, then the sales of such software may not be taxable retail
sales. Custom computer programs or software are prepared to the special order of the
customer. The selection of pre-written or canned programs assembled by vendors into
software packages does not constitute custom software unless real and substantial
changes are made to the programs or creation of program interfacing logic. See 86 Ill.
Adm. Code 130.1935(c)(3). Computer software that is not custom software is
considered to be canned computer software.
If transactions for the licensing of computer software meet all of the criteria
provided in subsection (a)(1) of Section 130.1935, neither the transfer of the software
nor the subsequent software updates will be subject to Retailers' Occupation Tax. A
license of software is not a taxable retail sale if:
A)

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

B)

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

C)

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

D)

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

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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. 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.
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.

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Analysis
It is the Department’s conclusion that the Company is acting as a serviceman
when it provides its software as a service and cloud-based remote work tools.
The Company confirmed that Illinois customers download the applet for free, and
there is neither a separate charge for the applet, nor is a charge for the applet included
in the charge for a subscription. Illinois customers also download the applet from a
server that is located out of state. It is the Department’s conclusion the Company incurs
no Use Tax liability for providing the applet to Illinois customers.
As noted above, Illinois does not impose occupation or use taxes on
subscriptions. The Company is not liable for occupation or use tax on the subscription
fees.
The factual representations upon which this ruling is based are subject to review
by the Department during the course of any audit, investigation, or hearing and this
ruling shall bind the Department only if the factual representations recited in this ruling
are correct and complete. This Private Letter Ruling is revoked and will cease to bind
the Department 10 years after the date of this letter under the provisions of 2 Ill. Adm.
Code 1200.110(e) or earlier if there is a pertinent change in statutory law, case law,
rules or in the factual representations recited in this ruling.
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,

RSW:rkn

Richard S. Wolters
Chairman, Private Letter Ruling Committee