Does an IT company that resells Microsoft Office 365 and other SaaS (software-as-a-service) products to its customers have to charge Illinois sales tax on those sales?

Plain-English summary

An IT corporation that provides IT infrastructure and cloud reseller services, managed services, and managed security services wrote to the Illinois Department of Revenue asking about the taxability of software-as-a-service (SaaS) products it resells. As part of its services, the company (COMPANY) sells IT equipment and licenses appropriate to a customer's application, including remotely hosted software (SaaS) supplied by third-party vendors; COMPANY resells these SaaS products to its own clients. COMPANY specifically asked for a private letter ruling on whether it needed to charge tax on reselling Microsoft Office 365, saying it had been told by sales tax professionals that Illinois does not tax SaaS products and that its own sales-tax software already treats Office 365 sales as non-taxable. COMPANY's letter noted it may not have a copy of the actual license agreement between the software's licensor (e.g., Microsoft) and the end-user licensee, since in a deal like Office 365 the sale is directly between Microsoft and the customer.

Because the Department found the letter did not supply enough information for a binding ruling, it responded with a GIL instead of a PLR, and laid out the general framework rather than resolving COMPANY's specific facts. It explained that Illinois "sales tax" is really two taxes -- Retailers' Occupation Tax on sellers of tangible personal property (86 Ill. Adm. Code 130.101) and Use Tax on the buyer's privilege of using property purchased at retail (86 Ill. Adm. Code 150.101), with the retailer allowed to credit Retailers' Occupation Tax paid against the Use Tax it collects (86 Ill. Adm. Code 150.130). Sales of services are not subject to either tax (35 ILCS 120/2; 35 ILCS 105/3); instead, "servicemen" who transfer tangible personal property (including computer software) as an incident to a sale of service are taxed under the Service Occupation Tax Act (35 ILCS 115/3; 86 Ill. Adm. Code 140.101), which offers four different ways to calculate the tax base depending on how the serviceman is registered and bills its customers (86 Ill. Adm. Code 140.106, 140.108, 140.109). If a service transaction involves no transfer of tangible personal property at all, it generally is not subject to any of these taxes.

On computer software specifically, the Department quoted the statutory definition -- "a set of statements, data, or instructions to be used directly or indirectly in a computer ... [that] includes prewritten or canned software" (35 ILCS 120/2-25) -- and explained that canned (prewritten) computer software is treated as taxable tangible personal property no matter how it is delivered (tape, disc, card, electronic means, or other media) under 86 Ill. Adm. Code 130.1935. Custom computer programs prepared to a customer's special order, by contrast, may not be taxable retail sales; merely selecting and assembling prewritten programs into a package does not make it "custom" unless real and substantial changes are made to the programs or interfacing logic is created (86 Ill. Adm. Code 130.1935(c), (c)(1), (c)(2), (c)(3)). Separately, a license of computer software is not a taxable retail sale if it meets all five criteria in 86 Ill. Adm. Code 130.1935(a)(1): (A) a written agreement signed by both licensor and licensee (a click-through, checkbox, or shrinkwrap agreement does not qualify); (B) restrictions on the customer's duplication and use of the software; (C) a prohibition on sublicensing or transferring the software to unrelated parties without the licensor's permission; (D) a policy of providing an archival or replacement copy if the original is lost or damaged; and (E) a requirement that the licensee return or destroy the software at the end of the license (automatically satisfied for perpetual licenses). The Department noted its own precedent that an electronically "click I agree" signature does not satisfy criterion (A) (ST 06-0005-PLR, December 16, 2006), while a verifiable, authenticated electronic signature attached to or part of the license can satisfy it (ST 18-0003-PLR, February 8, 2018; examples in ST 18-0010-PLR, September 26, 2018) -- but a bare click-through acceptance remains unacceptable either way.

The Department then addressed SaaS and cloud delivery directly: a provider of software as a service acts as a serviceman subject to Service Occupation Tax rather than Retailers' Occupation Tax, but computer software delivered through a cloud-based system where it is never downloaded to the client's computer and is only accessed remotely is not subject to tax. However, if the provider gives the subscriber an API, applet, desktop agent, or remote access agent to enable access to the provider's network and services, the subscriber is still receiving "computer software" and that receipt is taxable (even absent a separate charge for it) unless the transfer qualifies for the 130.1935(a)(1) license exemption. The letter also noted that a free download from an out-of-state retailer's out-of-state server creates no Illinois Use Tax liability for the donee, and that Illinois generally does not tax subscriptions. Finally, the Department reviewed Certificate of Resale documentation requirements (86 Ill. Adm. Code 130.1405, Form CRT-61) and the Rock Island Tobacco case (87 Ill. App. 3d 476 (3rd Dist. 1980)), under which a retailer who obtains a proper, then-valid resale certificate is no longer liable even if the purchaser later uses the item itself.

Applying none of this to COMPANY's specific facts, the Department concluded the letter did not provide enough information for a binding PLR: it did not explain COMPANY's exact arrangement with its software supplier, whether the resold software was canned, custom, or SaaS, whether the license between the software's owner and the end user met the 130.1935(a)(1) criteria, how COMPANY's managed services/managed security services/IT equipment sales were structured (bundled or separate), or even whether Microsoft Office 365 itself qualifies as SaaS. The Department invited COMPANY to submit a new PLR request following 2 Ill. Adm. Code 1200.110's procedures if it wanted a binding answer.

What this means for you

IT companies and cloud/SaaS resellers

This GIL does not tell you whether reselling Microsoft Office 365 (or similar SaaS products) is taxable in Illinois -- and it specifically declines to confirm the taxpayer's belief that SaaS is categorically untaxed. The real answer turns on facts you need to nail down: (1) is the product canned software, custom software, or a service with no transfer of tangible personal property; (2) if it's cloud-delivered, is it ever downloaded onto the customer's computer, or only accessed remotely (only the latter escapes tax, and even then, giving the subscriber an API, applet, or access agent can still count as a taxable software transfer); and (3) does the underlying license meet all five criteria of 86 Ill. Adm. Code 130.1935(a)(1), including a signature from both the licensor and the customer (a check-box or click-through acceptance does not count). If you cannot answer these for your specific product and license, this GIL cannot substitute for your own analysis or a PLR.

Businesses reselling someone else's software license (like Office 365)

The Department flagged that in an arrangement like COMPANY's, the reseller may not hold a copy of the actual license agreement between the software owner (e.g., Microsoft) and the end customer -- but the taxability analysis depends on that license's terms. If you resell software you don't directly license, get documentation (or written confirmation) of whether the underlying license meets the five 130.1935(a)(1) criteria before assuming a sale is exempt.

Accountants and tax professionals

This GIL is a useful map of the framework (Retailers' Occupation/Use Tax vs. Service Occupation Tax; canned vs. custom software; the five-part license test; the cloud/SaaS carve-out; resale certificates) but resolves none of it for this taxpayer. Note the Department's specific list of missing facts it needed for a binding ruling -- that list is itself a good checklist for what to gather before advising a client on SaaS resale taxability, or before helping a client draft a PLR request under 2 Ill. Adm. Code 1200.110.

Common questions

Q: Does this GIL say whether Microsoft Office 365 resales are taxable in Illinois?
A: No. The Department stated the letter did not clearly establish whether Office 365 qualifies as SaaS, did not explain COMPANY's exact supplier arrangement, and did not confirm the underlying license met the five-criteria exemption test -- so it could not, and did not, resolve the taxability question for this taxpayer.

Q: Is SaaS (software as a service) automatically exempt from Illinois sales tax?
A: Not automatically. A SaaS provider acts as a "serviceman" subject to Service Occupation Tax rules rather than Retailers' Occupation Tax, and computer software delivered only through remote access (never downloaded to the client's computer) is not taxed. But if the provider gives the subscriber an API, applet, desktop agent, or remote access agent, the subscriber is still receiving "computer software" that is taxable unless the transfer meets the licensing exemption in 86 Ill. Adm. Code 130.1935(a)(1).

Q: What are the five criteria for a software license to be exempt from tax?
A: Per 86 Ill. Adm. Code 130.1935(a)(1): (A) a written agreement signed by both the licensor and the customer (not a click-through/checkbox/shrinkwrap agreement); (B) restrictions on the customer's duplication and use; (C) a prohibition on sublicensing or transferring to unrelated third parties without the licensor's permission; (D) a policy of providing a replacement or archival copy if the software is lost or damaged; and (E) a requirement that the customer return or destroy the software at the end of the license term (automatically met for perpetual licenses).

Q: Does a customer's electronic "I agree" click satisfy the signed-agreement requirement?
A: Generally no. The Department has held that a bare "click I agree" acceptance does not meet the signed-writing requirement of 130.1935(a)(1)(A) (ST 06-0005-PLR). A verifiable, authenticated electronic signature that is attached to or part of the license can satisfy it (ST 18-0003-PLR; ST 18-0010-PLR), but a simple click-through remains unacceptable.

Q: Why didn't the Department just answer the company's question?
A: The company asked for a binding Private Letter Ruling, but a PLR requires enough factual detail for the Department to apply the law to the taxpayer's specific situation. Here, the Department found the letter lacked key facts -- the vendor arrangement, whether the software was canned/custom/SaaS, and whether the license met the five-part test -- so it issued a GIL instead, which only explains the general legal framework and is not binding on the Department.

Q: Can this company rely on this GIL to avoid charging tax on its Office 365 resales?
A: No. A GIL is not a statement of Department policy and is not binding on the Department, even for the company that requested it. To get a binding answer specific to its facts, the company would need to submit a new request that satisfies the Private Letter Ruling procedures in 2 Ill. Adm. Code 1200.110.

Citations and references

Statutes:

• 35 ILCS 120/2-25 (definition of "computer software")
• 35 ILCS 120/2 (Retailers' Occupation Tax Act does not apply to sales of service)
• 35 ILCS 105/3 (Use Tax Act does not apply to sales of service)
• 35 ILCS 115/3 (Service Occupation Tax on tangible personal property transferred incident to a sale of service, including computer software)

Regulations:

• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax on sales of tangible personal property)
• 86 Ill. Adm. Code 150.101 (Use Tax on tangible personal property purchased at retail)
• 86 Ill. Adm. Code 150.130 (retailer's credit against Use Tax for Retailers' Occupation Tax paid)
• 86 Ill. Adm. Code 140.101 (Service Occupation Tax on tangible personal property transferred incident to service)
• 86 Ill. Adm. Code 140.106 (separately-stated-price / 50%-of-bill tax base methods)
• 86 Ill. Adm. Code 140.108 (de minimis serviceman not required to register)
• 86 Ill. Adm. Code 140.109 (registered de minimis serviceman)
• 86 Ill. Adm. Code 130.1935 (computer software: canned vs. custom, licensing exemption)
• 86 Ill. Adm. Code 130.1935(a)(1) (five criteria for a nontaxable software license)
• 86 Ill. Adm. Code 130.1935(c), (c)(1), (c)(2), (c)(3) (custom computer programs)
• 86 Ill. Adm. Code 130.1405 (Certificate of Resale requirements; Form CRT-61)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedure)
• 2 Ill. Adm. Code 1200.120 (General Information Letter procedure)

Referenced prior rulings and case law:

• ST 06-0005-PLR (December 16, 2006) -- a click-through electronic signature does not satisfy the signed-agreement requirement
• ST 18-0003-PLR (February 8, 2018) -- a verifiable, authenticated electronic signature can satisfy the signed-agreement requirement
• ST 18-0010-PLR (September 26, 2018) -- examples of acceptable written signatures
• Rock Island Tobacco and Specialty Co. v. Illinois Department of Revenue, 87 Ill. App. 3d 476, 409 N.E.2d 136 (3rd Dist. 1980) -- a retailer's liability ends upon accepting a proper, then-valid Certificate of Resale

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/st23-0033-gil.pdf

Original ruling text

ST-23-0033-GIL 11/02/2023 COMPUTER SOFTWARE
This letter discusses computer software. 86 Ill. Adm. Code 130.1935. (This is a
GIL.)
November 2, 2023
NAME
COMPANY
ADDRESS
Dear NAME:
This letter is in response to your letter dated October 25, 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:

COMPANY is an IT Corporation that provides IT infrastructure and cloud
reseller services, managed services, and managed security services.
Included with these services COMPANY will sell IT equipment and
licenses that are appropriate for the customer application. Part of these
sales can include remotely hosted software (SAAS) by third-party vendors.
COMPANY is reselling these SAAS products to its clients and is seeking a
private letter ruling on the taxability of these SAAS products.
Illinois taxes the sale of locally hosted software regardless of the method
of delivery. However, if the software is subject to a license agreement that
meets a five-part test, the transaction is not considered a sale, and Illinois
does not tax it. For this to be the case the license agreement:
1.
2.

Must be signed by both the licensor and licensee. A click
through, check the box, or shrinkwrap license agreement will
not meet this test.
Must restrict duplication and use (this a broad category, and
applies to all license agreements);

3.
4.
5.

Must restrict the licensee from transferring or sublicensing
the software to any unrelated party without the licensor’s
permission;
Must have a provision that either allows the licensee to make
an archival copy in the case of loss or damage, or requires
the licensor to provide another copy if necessary; and
Must have a provision indicating that at the end of the
agreement, the licensee will return or delete/destroy the
software. This prong is also met if the license is perpetual.

In the above test, the license is usually between a licensor and licensee,
so we (COMPANY.) may not have a copy of the license between licensor
and licensee. IE, Microsoft office 365 is a sale between Microsoft and the
user (our customer).
We/COMPANY have been informed by sales tax professionals that the
state of Illinois does not charge tax on SAAS products. We/COMPANY
would like to have confirmation that we do not have to charge taxes on the
sale of Microsoft office to our customers.
Examples of the SAAS products can be found here:
https://www.microsoft.com/en-us/microsoft-365/enterprise/microsoft365plans-and-pricing
Thank you in advance for your assistance.
MATERIAL FACTS
COMPANY. sells Microsoft Office 365 to its customers.
COMPANY sales tax software considers the sale of Microsoft Office 365
non-taxable.
The period for these transactions is Q4 2023.
Microsoft Office 365 is a cloud-powered productivity platform.
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 86 Ill. Adm. Code 130.101. Use Tax is imposed on the privilege
of using, in this State, any kind of tangible personal property that is purchased
anywhere at retail from a retailer. See 86 Ill. Adm. Code 150.101. These taxes
comprise what is commonly known as “sales” tax in Illinois. If the purchases occur in
Illinois, the purchasers must pay the Use Tax to the retailer at the time of purchase.

The retailers are then allowed to reduce the amount of Use Tax they must remit by the
amount of Retailers’ Occupation Tax liability which they are required to and do pay to
the Department with respect to the same sales. See 86 Ill. Adm. Code 150.130.
Service Occupation Tax
Retailers’ Occupation Tax and Use Tax do not apply to sales of service. See 35
ILCS 120/2; 35 ILCS 105/3. 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. See 86 Ill. Adm.
Code Sections 140.106; 140.108; and 140.109.
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. See 86 Ill. Adm. Code 140.106.
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). 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. See 86 Ill. Adm. Code 140.109.

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.
If an entity 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
“‘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
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.
A provider of software as a service is acting as a serviceman. As a serviceman,
the seller does not incur Retailers’ Occupation Tax. Service Occupation Tax is imposed
upon all persons engaged in the business of making sales of service on all tangible
personal property transferred incident to a sale of service, including computer software
(35 ILCS 115/3), and is calculated as explained above.
Computer software is defined broadly in the Retailers’ Occupation Tax and
Service Occupation Tax Acts. 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. If a
provider of a service provides to the subscriber an API, applet, desktop agent, or a
remote access agent to enable the subscriber to access the provider’s network and
services, the subscriber is receiving computer software. Although there may not be a
separate charge to the subscriber for the computer software, it is nonetheless subject to
tax, unless the transfer qualifies as a non-taxable license of computer software.

If an Illinois customer downloads computer software for free from an out-of-state
retailer’s web site or server that is also located out of state, the retailer, even though it is
donating tangible personal property to the customer, has exercised no power or control
over the property in Illinois. In this instance, the donor would not have made any
taxable use of the property in Illinois. The customer, the donee, would incur no Use Tax
liability for the retailer to collect and remit to Illinois. Illinois generally does not tax
subscriptions.
Moreover, sales of custom computer programs prepared to the special order of
the customer may not be a taxable sale. 86 Ill. Adm. Code 130.1935(c)(1). Custom
software means the software which results from real and substantial changes to the
operational coding of canned or pre-written software in order to meet the specific
individualized requirements of the purchaser for his limited or particular use. 86 Ill.
Adm. Code 130.1935(c)(2). Custom computer software is not subject to the Retailers’
Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax if the following
elements are present:
A)

preparation or selection of the program for the customer’s use requires an
analysis of the customer’s requirements by the vendor; and

B)

the program requires adaptation by the vendor to be used in a specific
work environment, e.g., a particular make and model of a computer using
a specified input or output device. 86 Ill. Adm. Code 130.1935(c)(1).

If modified software is held for general or repeated sale or lease, it is canned
software. 86 Ill. Adm. Code 130.1935(c)(2). 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. 86 Ill. Adm. Code 130.1935(c)(3). Computer software that is
not custom software is considered to be canned computer software. See 86 Ill. Adm.
Code 130.1935.
Sales for Resale
In order to document the fact that its sale to a purchaser is a sale for resale, a
seller must obtain a valid Certificate of Resale from the purchaser. See 86 Ill. Adm.
Code 130.1405. A Certificate of Resale is a statement signed by the purchaser that the
property purchased by him is purchased for purposes of resale. In addition to the
statement that the property is being purchased for resale, a Certificate of Resale must
contain:
1)

The seller’s name and address;

2)

The purchaser’s name and address;

3)

A description of the items being purchased for resale;

4)

Purchaser’s signature, or the signature of an authorized employee or
agent of the purchaser, and date of signing; and

5)

Registration Number, Resale Number, or a statement that the purchaser is
an out-of-State purchaser who will sell only to purchasers located outside
the State of Illinois.

The Department provides a standard form for documenting sales for resale
(Form CRT-61 Certificate of Resale). This form can be obtained from the Department’s
website.
The obligations of a seller with respect to accepting a Certificate of Resale were
addressed in Rock Island Tobacco and Specialty Company v. Illinois Department of
Revenue, 87 Ill.App.3d 476, 409 N.E.2d 136, 42 Ill. Dec. 641 (3rd Dist. 1980). The
Rock Island court held that when a retailer obtains a proper Certificate of Resale that
contains a registration or resale number that is valid on the date it is given, the retailer’s
liability is at an end. If the purchaser uses that item himself or herself (i.e., it was not
purchased for resale), the Department will proceed against the purchaser, not the
retailer, provided the above stated conditions are met. The purchaser’s registration or
reseller number can be verified at the Department’s website by clicking on the “Tax
registration inquiry” box.
Failure to present an active registration number or resale number and a
certification to the seller that a sale is for resale creates a presumption that a sale is not
for resale. This presumption may be rebutted by other evidence that all of the seller’s
sales are sales for resale or that a particular sale is a sale for resale. For example,
other evidence that might be used to document a sale for resale, when a registration
number or resale number and certification to the seller are not provided, could include
an invoice from the purchaser to his customer showing that the item was actually resold,
along with a statement from the purchaser explaining why it had not obtained a resale
number and certifying that the purchase was a purchase for resale in Illinois. The risk
run by a retailer in accepting such other documentation and the risk run by purchasers
in providing such other documentation is that an Illinois auditor is more likely to require
that more information be provided as evidence that the sale was, in fact, a sale for
resale.
Your letter does not provide sufficient information to enable the Department to
provide a binding private letter ruling. It is the Department’s understanding that
COMPANY resells computer software to end user clients. However, you do not explain
the exact arrangement COMPANY has with its supplier, the nature of the software (i.e.,
canned, custom, or SaaS) being resold, and you do not confirm the license agreement
between the owner of the software and the end user meets the license requirements of
Section 130.1935(a)(1). You indicate that COMPANY also sells managed services,
managed security services and IT equipment but do not fully explain the nature of the
services and whether the IT equipment is sold separately or as part of the service.
Finally, it is not entirely clear from your letter that Microsoft Office 365 qualifies as SaaS.
If you wish to submit another request for a private letter ruling, please review the
requirements to obtain a private letter ruling contained in 2 Ill. Adm. Code 1200.110.
I hope this information is helpful. If you have further questions, you may contact
me at (217) 782-2844. 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,

Richard S. Wolters
Associate Counsel
RSW