Is a company's sale of software "credits," which let a customer generate additional reports from previously purchased hardware/software, a taxable sale of tangible personal property or a non-taxable intangible under Illinois sales tax law?

Plain-English summary

A company that resells a German firm's hardware-and-software wellness tool asked the Illinois Department of Revenue whether the additional "credits" its customers buy later — which unlock more nutritional-assessment reports from the software they already own — count as a taxable sale of tangible personal property or a non-taxable intangible.

The Department responded with general guidance rather than a ruling on the facts. Illinois taxes retail sales of tangible personal property under the Retailers' Occupation Tax Act (backed up by the Use Tax on the buyer's side), and by statute computer software is tangible personal property. "Canned" (prewritten, off-the-shelf) software is taxable no matter how it's delivered — disc, download, or otherwise — and so are charges for updates to canned software. Custom software, written to a customer's special order, is generally not taxable, and merely tweaking a canned package doesn't make it custom unless the changes are real and substantial.

There's an exception: a license of canned software escapes tax if it meets all five conditions in 86 Ill. Adm. Code 130.1935(a)(1) — most notably, a written agreement signed by both the licensor and the customer. Clicking "I agree" online does not satisfy that signature requirement, though a verifiable, authenticated electronic signature can. Purely cloud-based software that a customer only accesses remotely (never downloaded) is not taxed, but if the provider furnishes an API, applet, or agent that installs onto the customer's system, that is taxable software delivery unless it separately qualifies as a non-taxable license.

Applying this to the actual question, the Department said the taxpayer hadn't explained enough — whether the credits include software updates, whether the wellness provider keeps using the software without buying more credits, how credits are transferred — so it could not determine whether the credit purchases are taxable. It also clarified that what the taxpayer really wanted was a Private Letter Ruling (binding, fact-specific), but the letter as submitted only qualified for a General Information Letter (non-binding, general guidance).

What this means for you

Software vendors and resellers

If you sell prewritten/canned software in Illinois, expect to collect Retailers' Occupation Tax on the sale, including on update charges, unless the transaction is a license meeting every one of the five criteria in Section 130.1935(a)(1) — most importantly, an actual signed written agreement, not a clickwrap "I agree" button.

Businesses selling add-on credits, tokens, or upgrades

Selling "credits" that unlock more use of software you already sold is not automatically tax-exempt just because it feels like reselling an intangible. The Department looks at what the customer actually receives: continued access to canned software (taxable, absent a qualifying license) versus a truly custom program (generally not taxable) versus a subscription to cloud software never downloaded to the customer's machine (not taxed).

Accountants and tax professionals

Key distinctions to apply: canned vs. custom software (86 Ill. Adm. Code 130.1935(c)(3)); the five-part license exemption test in Section 130.1935(a)(1); and the cloud-delivery carve-out for software that is never downloaded. Also note the Department's prior holdings that electronic "click-to-accept" signatures fail the written-signature requirement (ST 06-0005-PLR) while verifiable electronic signatures can satisfy it (ST 18-0003-PLR, ST 18-0010-PLR).

Anyone deciding between requesting a GIL or a PLR

This letter is a useful reminder of the difference: a Private Letter Ruling is binding on the Department for the specific taxpayer and facts presented and requires following the procedure in 2 Ill. Adm. Code 1200.110; a General Information Letter merely points to relevant regulations and is not binding. If your facts are incomplete or hypothetical, expect a GIL rather than a binding answer.

Common questions

Q: Is computer software taxable in Illinois?
A: Canned (prewritten) computer software is taxable tangible personal property, regardless of the medium used to deliver it (disc, download, or other electronic means). Custom software written to a customer's special order is generally not taxable.

Q: Can a business avoid sales tax by "licensing" software instead of selling it?
A: Only if the license meets all five conditions in 86 Ill. Adm. Code 130.1935(a)(1): a written agreement signed by both licensor and customer; restrictions on the customer's duplication and use; a prohibition on the customer sublicensing or transferring the software to third parties without the licensor's continued control; a licensor policy of replacing lost/damaged copies (or allowing an archival copy); and a requirement that the customer destroy or return all copies at the end of the license (automatically satisfied for perpetual licenses).

Q: Does clicking "I agree" to an online license count as a signed written agreement?
A: No. The Department has held that click-to-accept acceptance does not satisfy the written, signed agreement requirement. A verifiable, authenticated electronic signature can satisfy it, but a simple click-through cannot.

Q: Is cloud-based or subscription software taxed?
A: Software delivered purely through the cloud and never downloaded to the customer's computer is not subject to tax, and Illinois generally does not tax subscriptions. But if the provider gives the subscriber something that installs locally (such as an API, applet, desktop agent, or remote access agent), that is treated as taxable software delivery unless it qualifies as a non-taxable license.

Q: Why didn't the Department just answer whether the "credits" in this case are taxable?
A: The taxpayer's letter didn't provide enough facts — such as whether purchasing more credits includes software updates or hardware/software maintenance, or whether the wellness provider retains use of the software without buying additional credits. Without those details, the Department said it could not issue a binding Private Letter Ruling and instead issued this general-information response.

Citations and references

Statutes:

• 35 ILCS 120/2 (Retailers' Occupation Tax imposed on sales of tangible personal property)
• 35 ILCS 105/3 (Use Tax imposed on the privilege of using tangible personal property in Illinois)
• 35 ILCS 120/2-25 (definition of "computer software"; canned software is tangible personal property)

Regulations:

• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax regulations)
• 86 Ill. Adm. Code 130.1935 (computer software: canned vs. custom, license exemption criteria)
• 86 Ill. Adm. Code 150.101 (Use Tax regulations)
• 86 Ill. Adm. Code 150.130 (retailer credit against Use Tax for Retailers' Occupation Tax paid)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedure)
• 2 Ill. Adm. Code 1200.120 (General Information Letters are not binding)

Prior Department letter rulings cited:

• ST 06-0005-PLR (Dec. 16, 2006) (electronic click-to-accept signature insufficient)
• ST 18-0003-PLR (Feb. 8, 2018) (verifiable electronic signature can suffice)
• 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/2023.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2023/ST-23-0007-GIL.pdf

Original ruling text

ST-23-0007-GIL 04/20/2023 COMPUTER SOFTWARE
This letter discusses computer software. See 86 Ill. Adm. Code 130.1935. (This
is a GIL.)
April 20, 2023

NAME
COMPANY1
Managing Member
ADDRESS1
Dear NAME:
This letter is in response to your letter dated March 27, 2023, 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 at COMPANY1 (COMPANY1) have a "manufacturers rep" type
relationship with a German company called COMPANY2. Through
COMPANY1, COMPANY2 sells wellness providers a combination of
hardware and software to initiate the relationship. This program allows the
wellness provider to offer a hair follicle test that provides their client a
nutritional assessment. We understand that this sale is sale of a tangible
product and we are required to collect sales taxes on this transaction.
However, if the purchasing wellness provider continues to utilize the tool
with their customers (of which they charge a fee), they will be required to
purchase additional report credits from COMPANY1 on behalf of
COMPANY2. These credits will populate the providers software program
and allow them to offer additional nutritional assessment reports to their
clients.

COMPANY1/ NAME1
Page 2
April 20, 2023
The question is will this sale of credits be considered an intangible or
tangible product for sales tax purposes. I spoke to NAME2 on the Illinois
Taxpayer Support line and he shared that the application he thought was
the closest to this was offering a gift certificate that is redeemed at a later
date by the user. He indicated that this did not seem to be a tangible
product and was, therefore, a non-taxable transaction. However, he was
clear that his interpretations were not binding by the state of Illinois. He
then instructed me to draft this communication to you and ask for a Private
Letter Ruling.
I appreciate you reviewing this situation and providing us guidance so we
can operate within the rules and regulations of the state. Naturally, we
would like to have an answer as quickly as possible so we can operate in
a complaint [sic] fashion. Please email me at ADDRESS2 or call me at

-###-#### if you have further questions.

DEPARTMENT’S RESPONSE:
The Illinois Retailers' Occupation Tax Act imposes a tax upon persons engaged
in this State in the business of selling tangible personal property to purchasers for use
or consumption. See 35 ILCS 120/2; 86 Ill. Adm. Code 130.101. In Illinois, Use Tax is
imposed on the privilege of using, in this State, any kind of tangible personal property
that is purchased anywhere at retail from a retailer. See 35 ILCS 105/3; 86 Ill. Adm.
Code 150.101. These taxes comprise what is commonly known as “sales” tax in Illinois.
If the purchases occur in Illinois, the purchasers must pay the Use Tax to the retailer at
the time of purchase. The retailers are then allowed to reduce the amount of Use Tax
they must remit by the amount of Retailers' Occupation Tax liability which they are
required to and do pay to the Department with respect to the same sales. See 86 Ill.
Adm. Code 150.130.
Computer software is considered tangible personal property in Illinois. 35 ILCS
120/2-25.
‘Computer software’ means a set of statements, data, or instructions to be
used directly or indirectly in a computer in order to bring about a certain
result in any form in which those statements, data, or instructions may be
embodied, transmitted, or fixed, by any method now known or hereafter
developed, regardless of whether the statements, data, or instructions are
capable of being perceived by or communicated to humans, and includes
prewritten or canned software.
35 ILCS 120/2-25. Generally, sales of “canned” computer software are taxable retail
sales in Illinois. Canned computer software is considered to be tangible personal
property regardless of the form in which it is transferred or transmitted, including tape,
disc, card, electronic means, or other media. 86 Ill. Adm. Code 130.1935. Charges for

COMPANY1/ NAME1
Page 3
April 20, 2023
updates of canned software are considered to be sales of software. 86 Ill. Adm. Code
130.1935(b). However, if the computer software consists of custom computer
programs, then the sales of such software may not be taxable retail sales. Custom
computer programs or software are prepared to the special order of the customer. The
selection of pre-written or canned programs assembled by vendors into software
packages does not constitute custom software unless real and substantial changes are
made to the programs or creation of program interfacing logic. See 86 Ill. Adm. Code
130.1935(c)(3). Computer software that is not custom software is considered to be
canned computer software.
If transactions for the licensing of computer software meet all of the criteria
provided in subsection (a)(1) of Section 130.1935, neither the transfer of the software
nor the subsequent software updates will be subject to Retailers' Occupation Tax. A
license of software is not a taxable retail sale if:
A)

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

B)

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

C)

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

D)

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

E)

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

If a license of canned computer software does not meet all the criteria the software is
taxable.
In order to comply with the requirements as set out in Section 130.1935(a)(1), there
must be a written “signed” agreement. A license agreement in which the customer
electronically accepts the terms by clicking “I agree” does not comply with the
requirement of a written agreement signed by the licensor and customer. The
Department previously held that an electronic signature did not comply with the
requirement of Section 130.1935(a)(1)(A) that the license be evidenced by a written

COMPANY1/ NAME1
Page 4
April 20, 2023
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.
Your letter does not discuss whether the wellness provider receives a license of
software that meets the criteria provided in Section 130.1935(a)(1). It is unclear from
your letter what, if any, benefits the customer receives from payment of the credits
beyond the ability to offer additional nutritional assessment reports. Does the wellness
provider continue to receive the use and benefits of the software without purchasing
additional credits? Does the purchase of additional credits include any updates to the
software? Does the purchase of additional credits include maintenance of the hardware
or software? How are the credits applied or transferred to the wellness providers?
Without a more thorough explanation of the credits the Department is unable to provide
a binding private letter ruling.
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:dmb