Does Illinois sales tax apply to a records-management company's document storage, shredding, scanning, software, and related service fees?

Plain-English summary

A national records and information-management company asked the Illinois Department of Revenue how sales tax applies to nineteen different revenue lines it bills to Illinois customers — things like document and vault storage, boxes and packaging materials, access/refiling fees, pick-up and delivery, certified shredding, scanning, hosting, workflow-automation software, cloud back-up, help-desk support, data entry, and maintenance agreements.

The Department's core answer is the same rule that governs all Illinois "sales tax" analysis: Retailers' Occupation Tax, Use Tax, Service Occupation Tax, and Service Use Tax only apply when tangible personal property is transferred to the customer. If a charge is purely for a service — with no transfer of a physical (or, in some cases, licensed software) good — none of those taxes apply.

Applying that rule line by line:

• Storage, access, vault, and account-maintenance fees are service charges with no property transfer, so they are not taxable.
• Boxes, cases, and packaging materials sold to customers ARE tangible personal property, so those sales are taxable retail sales.
• Pick-up, delivery, and fuel surcharge charges follow the "inseparable link" delivery-charge rule from Kean v. Wal-Mart Stores — but since the underlying transaction here is a service, not a taxable sale of goods, these charges are not subject to tax either.
• Shredding and destruction services are non-taxable services, except that selling the shredded material itself to a third party can trigger Retailers' Occupation Tax (unless that buyer is purchasing for resale).
• Canned (pre-written) computer software is taxable tangible personal property; custom software generally is not. A software license escapes tax only if it meets all five conditions in 86 Ill. Adm. Code 130.1935(a)(1), including a signed written agreement — a mere "click to accept" is not enough, though a verifiable electronic signature can qualify.
• Cloud-based/subscription services where software is never downloaded, and pure data viewing/transmission over the internet, are not treated as a transfer of tangible personal property and are not taxed as sales.
• Maintenance agreements are taxable only if bundled into the selling price of the property; if sold separately, the agreement itself isn't taxed, but the servicer may owe Use Tax on the cost of any parts transferred during a repair.
• Telecommunications charges are subject to a separate 7% Telecommunications Excise Tax (not sales tax) under 35 ILCS 630, but companies that don't separately bill customers for line/transmission charges generally aren't telecommunications retailers themselves.
• Cancellation fees don't involve a sale or transfer of property, so they are not taxable.

What this means for you

Records-management, storage, and shredding businesses

Your recurring storage, access, retrieval, account-maintenance, and shredding/destruction service fees are generally not subject to Illinois sales tax because no tangible personal property changes hands. But watch two things: (1) if you sell storage boxes, bins, or packaging materials to customers, those sales ARE taxable; and (2) if you sell shredded/destroyed material to a third party (e.g., a recycler), that sale can trigger Retailers' Occupation Tax unless the buyer gives you a resale certificate.

Software vendors and SaaS/cloud providers

Canned (off-the-shelf) software is taxable tangible personal property, but custom software generally is not. If you want a software license to be non-taxable, it must satisfy every element of 86 Ill. Adm. Code 130.1935(a)(1) — most importantly a genuinely signed written agreement, not just a website "I agree" click-through. Software delivered purely through the cloud, with nothing ever downloaded to the customer's device, is not treated as a taxable transfer of property, and Illinois generally does not tax subscriptions.

Accountants and tax professionals advising service businesses

The organizing principle here is the transfer-of-tangible-personal-property test that separates Retailers' Occupation/Use Tax (sales of goods) from the Service Occupation Tax Act (services with incidental property transfers). Apply the four Service Occupation Tax measurement methods (separately-stated selling price, 50% of the entire bill, de minimis serviceman cost price for SOT, or de minimis Use Tax on cost price) only when property actually is transferred incident to a service. Also flag the separate Telecommunications Excise Tax regime (35 ILCS 630) for clients with telecom-adjacent billing, since it runs on different rules than sales tax.

Common questions

Q: Is document and vault storage taxable in Illinois?
A: No. Physical document and vault storage are service charges with no transfer of tangible personal property to the customer, so no Retailers' Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax applies.

Q: What about the boxes, bins, and packaging materials sold to customers for storing their documents?
A: Those are taxable. Unlike the storage service itself, boxes, cases, and packaging materials are tangible personal property sold to the customer, so they are subject to Retailers' Occupation Tax.

Q: Are pick-up, delivery, and fuel-surcharge fees taxable?
A: Not in this fact pattern. Illinois generally taxes delivery charges that have an "inseparable link" to a taxable sale of goods (per Kean v. Wal-Mart Stores), but since the underlying storage and destruction transactions here are services rather than taxable sales, the associated delivery and fuel charges are not taxed either.

Q: Is shredding and certified destruction of documents taxable?
A: The shredding/destruction service itself is not taxable. However, if the shredded material is then sold to a third party, that sale can create Retailers' Occupation Tax liability unless the purchaser is buying it for resale.

Q: Is the company's workflow-automation software or hosting service taxable?
A: It depends on whether it's canned or custom software and how it's delivered. Canned (pre-written) software is taxable tangible personal property. Custom software generally is not. Software delivered only through the cloud — never downloaded to the customer's computer — is not treated as a taxable transfer of property, and per-user subscription and hosting fees for accessing such software are generally not taxed as sales in Illinois.

Q: How are maintenance agreements for equipment or software taxed?
A: If the maintenance charge is bundled into the selling price of the property (like a manufacturer's warranty included with a new purchase), it's part of the taxable sale, and no additional tax applies when service is later performed. If the maintenance agreement is sold separately, the agreement itself is not a taxable sale, but the servicer generally owes Use Tax on its cost of any parts transferred to the customer while performing the maintenance.

Q: Does a "click to accept" software license avoid sales tax the same way a signed license does?
A: No. To qualify as a non-taxable software license under 86 Ill. Adm. Code 130.1935(a)(1), the agreement must be a signed written agreement. Simply clicking "I agree" online does not satisfy that requirement, though the Department has recognized certain verifiable, authenticated electronic signatures as sufficient (citing ST-18-0010-PLR).

Q: Are telecommunications charges covered by this same sales-tax analysis?
A: No. Telecommunications are taxed under a separate Telecommunications Excise Tax (35 ILCS 630) at 7% of gross charges, not under Retailers' Occupation/Use/Service Occupation Tax. Companies that don't separately bill customers for line or transmission charges generally aren't treated as telecommunications retailers on those charges.

Q: Is a cancellation fee taxable?
A: No. A cancellation fee typically does not involve a retail sale or the transfer of tangible personal property incident to a sale of service, so it is not subject to tax.

Q: Can I rely on this letter for my own business?
A: No. This is a General Information Letter, not a Private Letter Ruling. It is not a statement of Department policy and is not binding on the Department for anyone, including the original requester. It only points to the relevant regulations; your own facts should be confirmed with the Department or a tax professional.

Citations and references

Statutes:

• 35 ILCS 120/2 (Retailers' Occupation Tax Act imposition)
• 35 ILCS 105/3 (Use Tax Act imposition)
• 35 ILCS 630/2, 630/3, 630/4 (Telecommunications Excise Tax Act)

Regulations:

• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax on sales of tangible personal property)
• 86 Ill. Adm. Code 130.415 (transportation and delivery charges)
• 86 Ill. Adm. Code 130.1405 (sales for resale)
• 86 Ill. Adm. Code 130.1935 (canned vs. custom computer software)
• 86 Ill. Adm. Code 130.2170 (warehousemen and storage services)
• 86 Ill. Adm. Code 140.101 (Service Occupation Tax on servicemen)
• 86 Ill. Adm. Code 140.301(b)(3) (taxation of maintenance agreements)
• 86 Ill. Adm. Code 150.101 (Use Tax on tangible personal property)
• 86 Ill. Adm. Code 410 (costs of doing business included in gross receipts)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedure)
• 2 Ill. Adm. Code 1200.120 (General Information Letter procedure)

Case law:

• Kean v. Wal-Mart Stores, Inc., 235 Ill. 2d 351, 919 N.E.2d 926 (2009) (delivery charges and the "inseparable link" test)

Related Department guidance cited in the letter:

• ST-18-0010-PLR (Sept. 26, 2018) (acceptable electronic signatures for software licenses)
• ST 13-0048-GIL (audio conference services and telecommunications tax)
• ST 15-0001-PLR (value-added telecommunications services)

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/st21-0013-gil-.pdf

Original ruling text

ST 21-0013 03/11/2021 SERVICE OCCUPATION TAX
If no tangible personal property is transferred to the customer, then no Illinois
Retailers’ Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax
would apply. See 86 Ill. Adm. Code Parts 130, 140, 150, and 160. (This is a GIL.)

March 11, 2021
Dear NAME:
This letter is in response to your letter dated December 23, 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:
We are submitting this petition seeking a Letter Ruling for our client
COMPANY, hereafter (“Petitioner”) with an office in CITY, Illinois. Petitioner
offers various services to clients domiciled in the state of Illinois. Please find
below the Company description and technical questions regarding the
appropriate application of Illinois sales tax law.
Petitioner requests an opinion as to the applicability of Illinois sales and
compensating use taxes to various services it offers to its clients whom have
physical locations in the State of Illinois.
Petitioner’s Representations:
To the best of the knowledge of both the Petitioner and the Petitioner’s
representative the Department has not previously ruled on the same or a
similar issue for the Petitioner or a predecessor, or that the Petitioner or any
representatives previously submitted the same or a similar issue to the
Department but withdrew it before a letter ruling was issued.
Company Description/Background/Facts:

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1. The Company is a leading national provider of lifecycle records and
   information management solutions. The Company provides document
   storage, data protection, digital/electronic document management and
   storage as well as certified destruction. The Company offers digital
   document management solutions with the integration of traditional or
   legacy hard copy storage, supplying its customers with an integrated
   platform of services and information management solutions. The
   Company does not engage in the self-storage business.
2. The Petitioner’s contracts with its clients clearly specify that storage will
   take place in Illinois.
   Below is a list of revenue categories with descriptions for which Petitioner
   is requesting a Letter Ruling as to the revenue category’s taxability. All
   revenue categories are separately stated on customer invoices.
   a) Boxes, Cases, & Packaging Materials: These are storage
   container boxes, plastic bins and cases as well as packaging
   materials sold to customers for the storage of their documents or
   other data storage items. These items are delivered to a
   customer’s location in Illinois. (Materials may include; folders
   containers, tapes, CD, encrypted hard drives, etc.
   b) Document Storage (Physical Storage): This is the monthly
   recurring charge for the physical storage in the State of Illinois of
   customer materials which include; Documents, Books,
   Manuscripts, and Electronic Data stored on CD, within a
   controlled environment with limited to no direct access by the
   customer.
   c) Vault Storage (Physical Storage): This is the monthly recurring
   charge for the physical storage in the State of Illinois of customer
   materials which include: Art, Antiques, Artifacts, Sports or
   Entertainment Memorabilia, Tapes, Tape Cases, all other
   Magnetic Media, within a climate-controlled facility with limited to
   no direct access by the customer.
   d) Document/Vault Storage Perm-Out: This is the one-time labor
   and administrative fee that is charged to its customers when a
   customer has decided to end its storage contract in the State of
   Illinois and desires to have their stored items removed and
   transferred to another facility. This fee includes the cost of
   inventorying and verifying the completeness of the items to be
   removed and reassigning the locations within the system.

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e) Account Maintenance Fees for Document & Vault Storage:
This is a monthly administrative fee which varies based upon the
specific customer’s account size. This fee is charged for the
monthly administration and inventory management of the client’s
documents and other items in the State of Illinois.
f) Access and Refiling Fees: This is the charge to retrieve or place
the customer’s materials or to access or refile the storage
containers which is separately stated on the invoice. There is no
charge for the initial placement of storage items. This charge
represents subsequent requests from the customer to access or
refile their items.
g) Pick-up and Delivery Services: This is the charge for the pickup and delivery of storage items to and from the customer’s
physical location in the State of Illinois and is stated separately
on the invoice.
h) Fuel Surcharges: This is the charge for occasions when the cost
of fuel has increased significantly and is required to be included
on invoices which contain pick-up and delivery charges from the
State of Illinois.
i) Access Viewing Room: This is the charge for a customer to
come to the Petitioner’s location and use an office to review their
stored documents.
j) Release of Information Services (Physical Delivery): This is a
charge for the retrieval, duplication, and delivery of certain
medical information to a third-party other than the client in the
State of Illinois. This is confidential medical information and is
handled and delivered in a secure manner. The Petitioner
delivers these records to the third party via Physical Delivery in
the State of Illinois or Secure Mail to a third-party with an Illinois
address.
k) Release of Information Services (Electronic Delivery
Method): This is a charge for the retrieval, duplication, and
delivery of certain medical information to a third-party other than
the client, who has a State of Illinois address. This is confidential
medical information and is handled and delivered in a secure
manner. The Petitioner delivers these records to the third party
via Electronic or Digital Delivery via the internet.

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March 11, 2021

l) Certified Shredding & Destruction: This is the charge for the
certified destruction of documents, tapes or other materials. The
Petitioner is requested to pick-up a sealed container, bin, or
console containing documents to be destroyed from the
customer’s location. The Petitioner picks up the sealed
containers then brings them back to the Illinois office location.
The materials are contained in Petitioner’s bins and consoles and
are locked and sealed for security purposes during this entire
process. The entire bin or console is transported to the
Petitioner’s Illinois location where they are transferred to a thirdparty who picks up the materials and brings them to their facility
in Illinois for destruction.
m) Scanning & Digital Imaging: This is the charge for the
conversion of a customer’s materials to digital images by means
of digital scanning for customers with a State of Illinois address.
n) Hosting Services: This is a monthly license fee calculated on a
per user basis to access digital images stored in the customer’s
online virtual warehouse for customers with a State of Illinois
Address.
o) Workflow Automation Software: This is a monthly license fee
charged on a per user basis to customers with an Illinois address
access workflow automation software which permits a customer
to scan a document and track its movement through various
departments within their company. For example, in the case of an
invoice in a customer’s accounts payable department: (1)
customer received a vendor invoice and the invoice is scanned
and uploaded to the cloud platform, (2) the invoice is then
electronically routed to the applicable department(s) for approval,
(3) once approved the invoice is electronically routed back to
accounts payable to be approved for payment. This software also
includes a separate charge for the component related to the
virtual warehouse for data storage in the cloud.
p) Online Research Tool: This is the monthly charge to customers
with an Illinois address for the ability to access the online
document retention guidelines by State and by discipline.
q) Electronic Digital Cloud Back-Up: This is a monthly charge to
customers with an Illinois address for the 24/7 electronic back-up
service. A customer’s data is backed up via the internet and is

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stored on a remote server for emergency data recovery needs.
Petitioner uses a third-party vendor to perform this service.
r) Help Desk Support: This is the monthly charge to customers
with an Illinois address for access to the telephone help desk to
address issues that the customer may have with the online
services.
s) Data Entry/Indexing: This is the charge to customers with an
Illinois address for services related to data entry and indexing of
such data previously scanned electronically to allow for future
search or query abilities.
We appreciate your assistance with these technical questions.
DEPARTMENT’S RESPONSE:
Tangible Personal Property vs. Services
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.
In computing Retailers' Occupation Tax liability, no deductions shall be made by a
taxpayer from gross receipts or selling prices on account of the cost of property sold, the
cost of materials used, labor or service costs, idle time charges, incoming freight or
transportation costs, overhead costs, processing charges, clerk hire or salesmen's
commissions, interest paid by the seller, or any other expenses whatsoever. Costs of
doing business are an element of the retailer's gross receipts subject to tax even if
separately stated on the bill to the customer. 86 Ill. Adm. Code 410. Fuel charges
represent costs of doing business and are included when determining Retailers’
Occupation Tax liability.
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

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86 Ill. Adm. Code 140.101. The purchase of tangible personal property that is transferred
to the service customer may result in either Service Occupation Tax liability or Use Tax
liability for the servicemen depending upon his activities. The serviceman’s liability may
be calculated in one of four ways:
1) separately-stated 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.
If the transactions you are inquiring about do not involve the transfer of any tangible
personal property to the customer, then they generally would not be subject to Retailers’
Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax.
Maintenance Agreements
The taxation of maintenance agreements is discussed in subsection (b)(3) of
Section 140.301 of the Department's administrative rules under the Service Occupation
Tax Act. See 86 Ill. Adm. Code Sec. 140.301(b)(3). The taxability of agreements for the
repair or maintenance of tangible personal property depends upon whether charges for
the agreements are included in the selling price of the tangible personal property. If the
charges for the agreements are included in the selling price of the tangible personal
property, those charges are part of the gross receipts of the retail transaction and are
subject to tax. In those instances, no tax is incurred on the maintenance services or parts
when the repair or servicing is performed. A manufacturer's warranty that is provided
without additional cost to a purchaser of a new item is an example of an agreement that
is included in the selling price of the tangible personal property.
If agreements for the repair or maintenance of tangible personal property are sold
separately from tangible personal property, sales of those agreements are not taxable
transactions. However, when maintenance or repair services or parts are provided under
those agreements, the service or repair companies will be acting as service providers
under provisions of the Service Occupation Tax Act that provide that when service
providers enter into agreements to provide maintenance services for particular pieces of
equipment for stated periods of time at predetermined fees, the service providers incur
Use Tax based on their cost price of tangible personal property transferred to customers
incident to the completion of the maintenance service. See 86 Ill. Adm. Code

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140.301(b)(3). The sale of an optional maintenance agreement or extended warranty is
an example of an agreement that is not generally a taxable transaction.
Delivery Charges
The Department’s regulation regarding transportation and delivery charges can be
found at 86 Ill. Adm. Code 130.415 and incorporates the decision rendered in Kean v.
Wal-Mart Stores, Inc., 235 Ill. 2d 351, 919 N.E.2d 926 (2009). At issue in Kean was
whether shipping charges for certain Internet purchases of tangible personal property
were subject to Illinois sales tax. The Court found in Kean that an “inseparable link”
existed between the sale and delivery of the merchandise plaintiffs purchased from WalMart’s Internet store. Thus, the court concluded that the outgoing transportation and
delivery charges were part of the gross receipts subject to the Retailers’ Occupation Tax.
86 Ill. Adm. Code 130.415(b)(1)(B)(i). An inseparable link exists when (a) the
transportation and delivery charges are not separately identified to the purchaser on the
contract or invoice or (b) the transportation and delivery charges are separately identified
to the purchaser on the contract or invoice, but the seller does not offer the purchaser the
option to receive the property in any manner except by the payment of transportation and
delivery charges added to the selling price of an item (e.g., the seller does not offer the
purchaser the option to pick up the tangible personal property or the seller does not offer,
or the purchaser does not qualify for, a free transportation and delivery option). 86 Ill.
Adm. Code 130.415(b)(1)(B)(ii). In contrast, if the customer can purchase the tangible
personal property without payment of transportation or delivery charges to the retailer,
then an inseparable link does not exist and the delivery charges should not be included
in the selling price of the tangible personal property.
86 Ill. Adm. Code
130.415(b)(1)(B)(ii)-(iii).
As noted above, if the transactions you are inquiring about do not involve the
transfer of any tangible personal property to the customer, then delivery charges would
not be subject to Retailers’ Occupation Tax, Use Tax, Service Occupation Tax, or Service
Use Tax.
Physical Storage, Shredding, and Destruction
The tax liabilities of warehousemen who hold themselves out to the public as being
engaged in the business of moving, storing, packing, and shipping tangible personal
property belonging to other persons are generally engaged in a service transaction. See
86 Ill. Adm. Code 130.2170. The business of providing security, shredding, and storage
services would generally fall under this category. Again, if no tangible personal property
is transferred to the service customer, then no Retailers' Occupation Tax, Use Tax,
Service Occupation Tax, or Service Use Tax, is incurred. Retailers' Occupation Tax
liability may be incurred on any shredded material that is sold to a third party. Such a
transaction may be exempt from tax if the purchaser is making a purchase of the shredded
material for resale. See 86 Ill. Adm. Code 130.1405. However, in cases in which

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warehousemen are engaged in the business of selling, to purchasers for use or
consumption, tangible personal property such as cartons, boxes, and packing tape, they
incur Retailers' Occupation Tax liability.
Computer Software
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. However, if the computer software consists of custom computer programs, then
the sales of such software may not be taxable retail sales. See 86 Ill. Adm. Code
130.1935. Computer software that is not custom software is canned computer software,
whether it is “stand-alone” or not. 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 Section 130.1935(c)(3).
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 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.

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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 recently
decided 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 (Sept. 26, 2018)
for examples of acceptable electronic signatures. A license agreement in which the
customer electronically accepts the terms by clicking “I agree” remains unacceptable.
In general, maintenance agreements that cover computer software are treated the
same as maintenance agreements for other types of tangible personal property. See 86
Ill. Adm. Code
130.1935(b). The taxation of maintenance agreements is discussed in the Service
Occupation Tax Act as well as above. See 86 Ill. Adm. Code Sec. 140.301(b)(3). If the
charges for the maintenance agreements are included in the selling price of canned
software, those charges are part of the gross receipts of the retail transaction and are
subject to tax. In those instances, no tax is incurred on the maintenance services or parts
when the repair or servicing is performed.
If the maintenance agreements are sold separately of the computer software, sales
of those agreements are not taxable transactions. However, when maintenance or repair
services or parts are provided under those agreements, the service or repair companies
will be acting as service providers under provisions of the Service Occupation Tax Act
that provide that when service providers enter into agreements to provide maintenance
services for particular pieces of equipment for stated periods of time at predetermined
fees, the service providers incur Use Tax based on their cost price of tangible personal
property transferred to customers incident to the completion of the maintenance service.
See 86 Ill. Adm. Code 140.301(b)(3). Charges for training, telephone assistance,
installation, and consultation are non-taxable services if separately stated from the selling
price of canned software. See 86 Ill. Admin. Code 130.1935(b); 86 Ill. Admin. Code
140.301(b)(3).
If, under the terms of a maintenance agreement involving computer software, a
software provider provides a piece of object code (“patch” or “bug fix”) to be inserted into
an executable program that is a current or prior release or version of its software product
to correct an error or defect in software or hardware that causes the program to
malfunction, the tangible personal property transferred incident to providing the patch or
bug fix is taxed in accordance with the provisions discussed above.
In contrast to a patch or bug fix, if the sale of a maintenance agreement by a
software provider includes charges for updates of canned software, which consist of new
releases or new versions of the computer software designed to replace an older version

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of the same product and which include product enhancements and improvements, the
general rules governing taxability of maintenance agreements do not apply. This is
because charges for updates of canned software are fully taxable as sales of software
under Section 130.1935(b). (Please note that if the updates qualify as custom software
under Section 130.1935(c) they may not be taxable). Therefore, if a maintenance
agreement provides for updates of canned software, and the charges for those updates
are not separately stated and taxed from the charges for training, telephone assistance,
installation, consultation, or other maintenance agreement charges, then the whole
agreement is taxable as a sale of canned software.
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.
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.
Telecommunications
The Telecommunications Excise Tax is imposed upon the act or privilege of
originating or receiving intrastate or interstate telecommunications in Illinois at the rate of
7% of the gross charges for such telecommunications purchased at retail from retailers.
35 ILCS 630/3 and 630/4.
“Gross charge" means the amount paid for the act or privilege of originating or
receiving telecommunications in this State and for all services and equipment provided in
connection therewith by a retailer, valued in money whether paid in money or otherwise,
including cash, credits, services and property of every kind or nature, and shall be
determined without any deduction on account of the cost of such telecommunications, the
cost of materials used, labor or service costs or any other expense whatsoever. In case
credit is extended, the amount thereof shall be included only as and when paid.
"Telecommunications," in addition to the meaning ordinarily and popularly ascribed
to it, includes, without limitation, messages or information transmitted through use of local,
toll and wide area telephone service; private line services; channel services; telegraph

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services;
teletypewriter;
computer
exchange
services;
cellular
mobile
telecommunications service; specialized mobile radio; stationary two-way radio; paging
service; or any other form of mobile and portable one-way or two-way communications;
or any other transmission of messages or information by electronic or similar means,
between or among points by wire, cable, fiber-optics, laser, microwave, radio, satellite or
similar facilities.
The Act defines gross charges as including the amount paid for the act or privilege
of originating or receiving telecommunications in this State and for all services and
equipment provided in connection therewith by a retailer. 35 ILCS 630/2(a). The Act does
exclude charges for customer equipment, including equipment that is leased or rented by
the customer from any source, when those charges are disaggregated and separately
identified from other charges. 35 ILCS 630/2(a)(4).
Generally, persons that provide services and who do not, as part of that service,
charge customers for the line or other transmission charges that are used to obtain these
services are not considered to be telecommunications retailers from these activities.
Consequently, a company that provides audio conference services, for example, may pay
its telecommunications provider the tax for telecommunications services it uses to provide
the services. See ST 13-0048-GIL. If, however, the company separately charges
customers for the line or other transmission charges, they should provide their
telecommunications providers with Certificates of Resale and should themselves collect
and remit tax. Some services may also be classified as value-added services and not
subject to tax. See ST 15-0001-PLR.
Cancellation Charges
A cancellation fee typically does not involve retail sales or the sale or transfer of
tangible personal property incident to a sale of service. Such charges are not subject to
tax.
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,
Alexis K. Overstreet
Associate Counsel
AKO:rkn