Does an out-of-state digital advertising company owe Illinois Use Tax or Service Occupation Tax on payments it receives from Illinois-based customers for serving mobile ads that lead to app installs?

Plain-English summary

A global digital-advertising company asked whether it should be charging Illinois Use Tax on the fees it earns from Illinois-based customers when its mobile-advertising network serves an ad that leads to an app install. Because the request actually raised general Retailers' Occupation Tax, Use Tax, and Service Occupation Tax questions rather than a specific fact pattern eligible for a binding Private Letter Ruling, the Department responded with a non-binding General Information Letter (GIL) instead.

The Department's response walks through Illinois's sales-tax framework: Retailers' Occupation Tax applies to sellers of tangible personal property, Use Tax applies to the privilege of using property purchased at retail, and the Service Occupation Tax Act taxes "servicemen" on tangible personal property (including some computer software) transferred incidental to a service. Servicemen can compute that tax under one of four methods, including a de minimis method for businesses whose property transfers are a small share of their service revenue.

Critically, the Department reiterated that merely viewing, downloading, or streaming data over the internet is not a transfer of tangible personal property in Illinois — so a service that never conveys tangible personal property or taxable software generally is not subject to any of these sales-based taxes. Canned (off-the-shelf) computer software is taxable tangible personal property, but a properly structured, signed software license that meets all the criteria in 86 Ill. Adm. Code 130.1935(a)(1) is not a taxable sale, and cloud-based software that is never downloaded to the customer's own equipment is not taxed either. The Department noted that click-to-accept "I agree" licenses do not satisfy the written-signature requirement, though a verifiable electronic signature can. Ultimately, the Department said it was unclear from the facts whether the company or its customers were transferring computer software, so it could not give a definitive yes-or-no answer and instead pointed the company to the controlling rules.

What this means for you

Digital advertising and ad-tech companies

If your business is paid based on outcomes like app installs or ad impressions, and you never transfer software or other tangible personal property to the customer, your service fees are generally outside Illinois's Retailers' Occupation Tax, Use Tax, Service Occupation Tax, and Service Use Tax. But if you deploy an API, applet, desktop agent, or remote-access agent onto the customer's systems, that can count as a taxable software transfer even if you don't separately bill for it — unless it qualifies as a non-taxable license or is delivered purely through the cloud without ever being downloaded.

Software vendors and SaaS companies

Canned (pre-written) computer software is taxable tangible personal property regardless of the delivery method (disc, download, or otherwise), while true custom software prepared to a customer's specifications is not automatically taxable. A software license escapes Retailers' Occupation Tax only if it meets all five conditions in 86 Ill. Adm. Code 130.1935(a)(1) — including a written agreement "signed" by both licensor and customer. A simple "click to accept" checkbox does not satisfy that signature requirement, though a verifiable electronic signature attached to the agreement can, per ST 18-0003-PLR and ST 18-0010-PLR.

Servicemen and businesses that bundle services with goods

If your business provides a service but also hands over tangible personal property as part of that service (a "serviceman" under the Service Occupation Tax Act), you must pick one of four ways to compute your tax base: separately stated selling price, 50% of the entire bill, cost price (if a registered de minimis serviceman), or Use Tax on cost price (if a non-registered de minimis serviceman). Which method applies can depend on whether your annual cost of transferred property is below 35% of your service revenue (75% for pharmacists and graphic-arts producers).

Accountants and tax professionals

This GIL is a useful reference for the "is it a service or a taxable transfer of tangible personal property" analysis, including the cloud-computing carve-out and the canned-vs-custom software distinction, but remember it is non-binding and was issued because the inquiry didn't qualify as a PLR-eligible specific fact pattern.

Common questions

Q: Does Illinois charge sales/use tax on digital advertising services like pay-per-install mobile ad campaigns?
A: Not generally, as long as no tangible personal property (including taxable computer software) is transferred to the customer. Viewing, downloading, or streaming data over the internet is not, by itself, a transfer of tangible personal property under the Department's view.

Q: Why did the taxpayer get a GIL instead of the Private Letter Ruling it requested?
A: The Department issues PLRs only for specific taxpayer fact situations following the procedures in 2 Ill. Adm. Code 1200.110; here, the nature of the inquiry and information provided led the Department to respond with a GIL instead, which is not binding on the Department and only directs the taxpayer to relevant regulations and guidance.

Q: Is "canned" computer software always taxable in Illinois?
A: Generally yes — canned/pre-written computer software is treated as taxable tangible personal property no matter how it's delivered (tape, disc, download, etc.), per 86 Ill. Adm. Code 130.1935. Custom software built to a customer's specifications is treated differently and is generally not a taxable retail sale.

Q: Can a software license avoid sales tax even if the software is canned?
A: Yes, if the license meets all five requirements of 86 Ill. Adm. Code 130.1935(a)(1): it's a written agreement signed by both licensor and customer, it restricts duplication/use, it bars sublicensing without the licensor's continued control, the licensor promises replacement copies or archival-copy rights, and the customer must destroy or return the software at the end of the license (automatically satisfied for perpetual licenses).

Q: Does a "click to accept" agreement count as a signed written license?
A: No. The Department has held that clicking "I agree" does not satisfy the written-signature requirement (ST 06-0005-PLR), though a verifiable, authenticable electronic signature attached to the agreement can satisfy it (ST 18-0003-PLR; see ST 18-0010-PLR for examples).

Citations and references

Statutes and regulations:

• 35 ILCS 120/2 (Retailers' Occupation Tax Act imposition of tax)
• 35 ILCS 105/3 (Use Tax Act imposition of tax)
• 35 ILCS 120/2-25 (definition of "computer software")
• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax regulations)
• 86 Ill. Adm. Code 130.1935 (taxation of computer software, including the license exemption criteria)
• 86 Ill. Adm. Code 140.101 and 140.101(f) (Service Occupation Tax Act tax-base methods; de minimis serviceman threshold)
• 86 Ill. Adm. Code 140.108 (de minimis servicemen not required to register)
• 86 Ill. Adm. Code 150.101 (Use Tax regulations)

Prior Department rulings discussed:

• ST 06-0005-PLR (Dec. 16, 2006) (click-to-accept license is not a signed written agreement)
• ST 18-0003-PLR (Feb. 8, 2018) (verifiable electronic signature can satisfy the signed-writing requirement)
• ST 18-0010-PLR (Sept. 26, 2018) (examples of acceptable written signatures)

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/st21-0049-gil.pdf

Original ruling text

ST 21-0049 11/30/2021 SERVICE OCCUPATION TAX
This letter discusses the Service Occupation Tax. 86 Ill. Adm. Code 140.101.
(This is a GIL.)
November 30, 2021
Dear NAME:
This letter is in response to your letter dated September 28, 2020, 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:
COMPANY formally requests a private letter ruling as it pertains to the
sale of providing digital traffic to mobile users promoting the installation of
the APPLICATION. This request pertains to Illinois Retailer’s Use Tax
A.

Statement of Facts

1. Taxpayer Information
   a.) This request for a Private Letter Ruling (PLR) is being made by VICE
   PRESIDENT, Finance, for COMPANY.
   b.) This PLR is not requested with regards to hypothetical or alternative
   proposed transactions
   c.) This PLR is requested to determine the Retailers’ Use Tax consequences
   of actual business practices of COMPANY
   d.) COMPANY is not currently under audit or under any other type of litigation
   with the IL Department of Revenue on this matter or any other ROT or
   Use Tax matter.
   e.) The IL Department of Revenue has not previously ruled regarding this
   matter for COMPANY In addition, COMPANY has not submitted any
   similar requests on this same issue previously with the IL Department of
   Revenue
   f.) COMPANY requests that their name, address, location of all facilities,
   employees’ names, vendors, and Original Equipment Manufacturers
   (OEM) names, description of facilities and any attached Exhibits be
   deleted from this PLR prior to making it public information

VICE PRESIDENT
COMPANY
Page 2
November 30, 2021
g.) COMPANY is not aware of any authority contrary to the authorities cited
below.
2.

Description of Taxpayers’ Business Operations
COMPANY is a global performance-focused advertising technology firm
that empowers brands and marketers with transparent, scalable, datadriven digital and mobile marketing and advertising solutions. We
empower every marketer to succeed with confidence in a mobile
consumer economy through our outcome-based performance solutions.
COMPANY has one office located in COUNTRY.
All invoices, accounts payable/receivables, accounting, banking, and sales
activity are completed in COUNTRY. COMPANY does not currently
charge IL use tax as our interpretation is that we provide a service for our
customer based out of Chicago IL

3.

Material Facts Relating to Transaction
Customers of COMPANY provide us with creative impressions that we
then share with our digital traffic partners. These partners serve the
impression as an advertisement on mobile devices in app and mobile web.
If the ad served leads to an install of the customers application, the
customer pays COMPANY an agreed upon sum for that install.

B.

Ruling Requested
COMPANY respectfully requests from the IL Department of Revenue if
they should be charging Use Tax on sales generated from customers
based out of Illinois?

DEPARTMENT’S RESPONSE:
The Illinois Retailers' Occupation Tax Act imposes a tax upon persons engaged
in this State in the business of selling tangible personal property to purchasers for use
or consumption. See 35 ILCS 120/2; 86 Ill. Adm. Code 130.101. In Illinois, Use Tax is
imposed on the privilege of using, in this State, any kind of tangible personal property
that is purchased anywhere at retail from a retailer. See 35 ILCS 105/3; 86 Ill. Adm.
Code 150.101. These taxes comprise what is commonly known as "sales" tax in Illinois.
If the purchases occur in Illinois, the purchasers must pay the Use Tax to the retailer at
the time of purchase. The retailers are then allowed to retain the amount of Use Tax
paid to reimburse themselves for their Retailers' Occupation Tax liability incurred on

VICE PRESIDENT
COMPANY
Page 3
November 30, 2021
those sales. If the purchases occur outside Illinois, purchasers must self-assess their
Use Tax liability and remit it directly to the Department.
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) 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.
Using the first method, servicemen may separately state the selling price of each
item transferred as a result of sales of service. The tax is based on the separately
stated selling price of the tangible personal property transferred. If servicemen do not
wish to separately state the selling price of the tangible personal property transferred,
those servicemen must use the second method where they will use 50% of the entire
bill to their service customers as the tax base. Both of the above methods provide that
in no event may the tax base be less than the cost price of the tangible personal
property transferred. Under these methods, servicemen may provide their suppliers
with Certificates of Resale when purchasing the tangible personal property to be
transferred as a part of sales of service. They are required to collect the corresponding
Service Use Tax from their customers.
The third way servicemen may account for their tax liability only applies to de
minimis servicemen who have either chosen to be registered or are required to be
registered because they incur Retailers’ Occupation Tax liability with respect to a
portion of their business. Servicemen may qualify as de minimis if they determine that
their annual aggregate cost price of tangible personal property transferred incident to
sales of service is less than 35% of their annual gross receipts from service transactions
(75% in the case of pharmacists and persons engaged in graphic arts production). See
86 Ill. Adm. Code 140.101(f). This class of registered de minimis servicemen is
authorized to pay Service Occupation Tax (which includes local taxes) based upon the
cost price of tangible personal property transferred incident to sales of service.
Servicemen that incur Service Occupation Tax collect the Service Use Tax from their
customers. They remit tax to the Department by filing returns and do not pay tax to their
suppliers. They provide suppliers with Certificates of Resale for the tangible personal
property transferred to service customers.

VICE PRESIDENT
COMPANY
Page 4
November 30, 2021
The final method of determining tax liability may be used by de minimis
servicemen that are not otherwise required to be registered under Section 2a of the
Retailers' Occupation Tax Act. Servicemen may qualify as de minimis if they determine
that the annual aggregate cost price of tangible personal property transferred as an
incident of sales of service is less than 35% of the servicemen's annual gross receipts
from service transactions (75% in the case of pharmacists and persons engaged in
graphic arts production). Such de minimis servicemen handle their tax liability by
paying Use Tax to their suppliers. If their suppliers are not registered to collect and
remit tax, the servicemen must register, self-assess, and remit Use Tax to the
Department. The servicemen are considered to be the end-users of the tangible
personal property transferred incident to service. Consequently, they are not authorized
to collect a "tax" from the service customers. See 86 Ill. Adm. Code 140.108.
The Department does not consider the viewing, downloading or electronically
transmitting of video, text and other data over the internet to be the transfer of tangible
personal property. However, if a company provides services that are accompanied with
the transfer of tangible personal property, including computer software, such service
transactions are generally subject to tax liability under one of the four methods set forth
above. If a transaction does not involve the transfer of any tangible personal property to
the customer, then it generally would not be subject to Retailers’ Occupation Tax, Use
Tax, Service Occupation Tax, or Service Use Tax.
“‘Computer software’ 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.

VICE PRESIDENT
COMPANY
Page 5
November 30, 2021
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)

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

E)

The customer must destroy or return all copies of the software to
the licensor at the end of the license period. This provision is
deemed to be met, in the case of a perpetual license, without being
set forth in the license agreement.

If a license of canned computer software does not meet all the criteria the
software is taxable. In order to comply with the requirements as set out in Section
130.1935(a)(1), there must be a written “signed” agreement. A license agreement in
which the customer electronically accepts the terms by clicking “I agree” does not
comply with the requirement of a written agreement signed by the licensor and
customer. The Department previously held that an electronic signature did not comply
with the requirement of Section 130.1935(a)(1)(A) that the license be evidenced by a
written agreement signed by the licensor and the customer. ST 06-0005-PLR
(December 16, 2006). In ST 18-0003-PLR (February 8, 2018), the Department decided
that an electronic license agreement in which the customer accepts the license by
means of a signature in electronic form that is attached to or is part of the license, is
verifiable, and can be authenticated will comply with the requirement of a written
agreement signed by the licensor and customer. See ST 18-0010-PLR (September 26,
2018) for examples of acceptable written signatures.
A license agreement in which the customer electronically accepts the terms by
clicking “I agree” remains unacceptable. Computer software is defined broadly in the
Retailers’ Occupation Tax Act. However, computer software provided through a cloudbased 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.

VICE PRESIDENT
COMPANY
Page 6
November 30, 2021

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.
It is unclear whether COMPANY or its customers transfers the computer software
for which COMPANY receives compensation. As noted above, if a transaction does not
involve the transfer of any tangible personal property to the customer, then it generally
would not be subject to Retailers’ Occupation Tax, Use Tax, Service Occupation Tax, or
Service Use Tax.
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,
Richard S. Wolters
Associate Counsel
RSW:tlc