Is a canned (prewritten) computer software license, and the technical support/updates that go with it, subject to Illinois Retailers' Occupation (sales) Tax?

Plain-English summary

A company that sells and supports prewritten (canned) computer software wrote to the Illinois Department of Revenue asking whether it needed to charge sales tax on technical support -- specifically, "optional" technical support that includes both software updates and support services, sold alongside electronically downloaded prewritten software. The company had been collecting sales tax on this support item, coded under its sales-tax software vendor's tax code for "Computer software technical services (prewritten software)-optional (electronically downloaded) downloaded updates, etc. & services." A client of the company argued the charges should be exempt, citing the licensing exemption described in a prior Illinois ruling (ST 18-0010-PLR) and codified at 86 Ill. Adm. Code 130.1935(a)(1): if a software license meets five specific criteria, neither the software transfer nor later software updates are subject to Retailers' Occupation Tax. The company asked its own software vendor whether its End User License Agreement (EULA) met those five criteria, and the vendor's informal response was that the EULA was "mostly consistent" with the five criteria but declined to make a formal legal determination. The company then asked the Department directly whether the technical support should be taxed in Illinois.

The Department responded with a GIL rather than resolving the specific EULA's status. It explained that the Retailers' Occupation Tax Act taxes sales of tangible personal property (86 Ill. Adm. Code 130.101), and the Use Tax Act taxes the privilege of using tangible personal property purchased at retail (86 Ill. Adm. Code 150.101); together these make up what's commonly called Illinois "sales tax." Canned (prewritten) computer software is treated as tangible personal property regardless of how it's delivered -- tape, disc, card, electronic download, or other media -- and is generally taxable. Charges for updates to canned software are treated as sales of software and are taxable along with it (86 Ill. Adm. Code 130.1935(b)), but charges for training, telephone assistance, installation, and consultation are not taxable if they are separately stated from the software's selling price. By contrast, custom computer programs prepared to a customer's special order may not be taxable retail sales at all (86 Ill. Adm. Code 130.1935(c)); merely selecting and assembling prewritten programs into a software 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)(3)).

The Department then laid out the licensing exemption itself: if a transaction for licensing computer software meets all five criteria in 86 Ill. Adm. Code 130.1935(a)(1) -- (A) a written agreement signed by both the licensor and the customer; (B) restrictions on the customer's duplication and use of the software; (C) a prohibition on the customer sublicensing or transferring the software to third parties without the licensor's permission and continued control; (D) a licensor policy of providing a replacement copy at minimal or no charge, or letting the licensee keep an archival copy, stated in the agreement, the licensor's books/records, or a notarized statement; and (E) a requirement that the customer destroy or return all copies at the end of the license period (deemed satisfied for perpetual licenses even without being spelled out) -- then neither the initial software transfer nor later software updates are taxable, and support, maintenance, or update charges provided under that qualifying license are also untaxed, whether billed under the license itself or a separate agreement. However, the Department was explicit on the one fact that mattered most in this letter: an end user license agreement that is not signed by both the licensor and the licensee does not meet criterion (A), so a license lacking that signature does not qualify for the exemption -- meaning the software (and any bundled updates) stays taxable.

What this means for you

Software vendors and companies licensing prewritten (canned) software in Illinois

Whether your software license is exempt from Illinois Retailers' Occupation Tax turns entirely on whether it satisfies all five criteria in 86 Ill. Adm. Code 130.1935(a)(1) -- not just some of them, and not just "in spirit." The Department flagged one criterion as a common failure point: the agreement must be signed by both the licensor and the customer. A standard click-through or unsigned End User License Agreement (EULA), even one that substantively restricts duplication, prohibits sublicensing, and addresses archival copies and end-of-term destruction, will not qualify if it lacks both signatures. If your EULA is unsigned, per this GIL your software license -- and any software updates bundled with it -- remains a taxable sale in Illinois.

Charges for support, training, installation, and consultation

Regardless of whether the software itself is taxable, charges for training, telephone assistance, installation, and consultation are not subject to tax if they are separately stated from the selling price of the canned software. But be careful with "updates": the Department treats charges for software updates as sales of software itself (taxable unless the license qualifies under (a)(1)), which is different from charges for support/consultation services that are genuinely separate from the software transaction.

Accountants and tax professionals advising clients on software taxability

This GIL reiterates the framework from 86 Ill. Adm. Code 130.1935 and the prior ST 18-0010-PLR (Sept. 26, 2018) that the taxpayer's letter referenced, but it does not itself decide whether this particular company's EULA qualifies -- the Department states only the general rule (signed-by-both-parties is required) and leaves the taxpayer to apply it. If a client's license agreement is unsigned, or you cannot confirm mutual signature, you should assume the license and its updates are taxable absent a favorable PLR on the client's specific facts.

Common questions

Q: Does this GIL say whether the specific company's technical-support charges are taxable?
A: Not by name, but the Department's answer strongly implies the software (and any bundled updates) is taxable if the underlying EULA is not signed by both the licensor and the customer, because that fails criterion (A) of 86 Ill. Adm. Code 130.1935(a)(1). The company's own inquiry described a standard EULA, and the vendor did not confirm mutual signature.

Q: What are the five criteria a software license must meet to avoid Illinois sales tax?
A: Per 86 Ill. Adm. Code 130.1935(a)(1): (A) a written agreement signed by the licensor and the customer; (B) restrictions on the customer's duplication and use of the software; (C) a prohibition on the customer licensing, sublicensing, or transferring the software to a third party (except a related party) without the licensor's permission and continued control; (D) a licensor policy of providing a replacement copy at minimal/no charge or allowing an archival copy, documented in the agreement, the licensor's records, or a notarized statement; and (E) a requirement that the customer destroy or return all copies at the end of the license period (deemed met for perpetual licenses even if not stated).

Q: Are software updates taxable even if the original software license is exempt?
A: If the license itself qualifies under 86 Ill. Adm. Code 130.1935(a)(1), then subsequent software updates provided under that license are also not subject to Retailers' Occupation Tax. But for canned software generally, charges for updates are treated as sales of software and are taxable under 130.1935(b) unless the qualifying license exemption applies.

Q: Is custom software taxed the same way as canned/prewritten software?
A: No. Custom computer programs prepared to a customer's special order may not be taxable retail sales at all, per 86 Ill. Adm. Code 130.1935(c). But simply selecting and assembling prewritten (canned) programs into a package does not make the result "custom" -- per 130.1935(c)(3), it only counts as custom if real and substantial changes are made to the programs or interfacing logic is created.

Q: Can this taxpayer rely on this GIL as a guarantee its support charges won't be taxed?
A: No. This is a GIL, not a Private Letter Ruling. It is not a statement of Department policy and is not binding on the Department, even for the taxpayer who requested it. A taxpayer wanting a binding determination on its own specific EULA would need to request a PLR under 2 Ill. Adm. Code 1200.110.

Citations and references

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 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(b) (software updates taxed as sales of software)
• 86 Ill. Adm. Code 130.1935(c) (custom computer programs)
• 86 Ill. Adm. Code 130.1935(c)(3) (assembling canned programs is not "custom" absent real/substantial changes)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedure)
• 2 Ill. Adm. Code 1200.120 (General Information Letter procedure)

Referenced prior ruling:

• ST 18-0010-PLR (September 26, 2018), cited by the taxpayer as the source of the five-criteria licensing test

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2024.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2024/ST24-0005-GIL.pdf

Original ruling text

ST-24-0005-GIL 01/29/2024 COMPUTER SOFTWARE
If a transaction for the licensing of computer software meets all of the criteria provided in 86 Ill.
Adm. Code 130.1935(a)(1), neither the transfer of the software nor the subsequent software
updates will be subject to retailers’ occupation tax. An end user license agreement which does
not contain the signature of both the licensor and licensee would not meet the requirements of
Section 130.1935(a)(1). See 86 Ill. Adm. Code 130.1935. (This is a GIL)
January 29, 2024
NAME
TAXPAYER REPRESENTATIVE
ADDRESS
Dear NAME:
This letter is in response to your letter dated November 16, 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:
I have a question about something being taxable in IL. I reached out on line to your
sales tax department and they recommended I send this in to the Legal Department.
We use COMPANY for our sales tax calculation, and we code our items with their tax
codes. We are collecting sales tax on tech support, our support items code with
COMPANY’s tax codes:
CODE Computer software technical services (prewritten software)-optional
(electronically downloaded) downloaded updates, etc. & services (Technical support
that is optional to the customer that includes both software updates and support
services, and associated with electronically downloaded prewritten computer software)
However, we have a client stating that they should be exempt from tax based on the
following:
“If transactions for the licensing of computer software meet all of the criteria provided in
Section 130.1935(a)(1), neither the transfer of the software nor the subsequent software

TAXPAYER REPRESENTATIVE/ NAME
Page 2
January 29, 2024
updates will be subject to Retailers’ Occupation Tax.”
09/26/2018 for reference)

(see ST 18-0010-PLR,

1. It is evidenced by a written agreement signed by the licensor and the customer;
2. It restricts the customer’s duplication and use of the software;
3. 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;
4. The licensor has a policy of providing another copy at minimal or no charge if the
   customer loses or damages the software, or of 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
5. 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.”
   I reached out to COMPANY, the software we sell and support to see if all 5 apply and
   this is their response:
   Just to clarify, I understand the situation to be that they do not want to pay sales tax on
   their COMPANY software licenses or Software Assurance. If I’m off on that let me
   know.
   We do have a End User License Agreement with the customer, and yes the 5 points
   they mention are mostly consistent with our EULA terms and conditions from my
   perspective.
6. It is evidenced by a written agreement signed by the licensor and the customer; - yes
   we have a EULA signed with them.
7. It restricts the customer’s duplication and use of the software; - the word “duplication”
   may or may not be stated in the EULA but it’s fairly implied by the EULA stating that
   they have a “limited non-transferable software license”. So yes.
8. 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; - our EULA clarifies that the customer has a “limited non-transferable software
   license”. So yes I would say this statement is true.
9. The licensor has a policy of providing another copy at minimal or no charge if the
   customer loses or damages the software, or of 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. - This may not be stated exactly in
   our EULA. but the way our software installed and licenses work, we do provide active
   customers their access to installers and licenses and minimal to no charge.
10. 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.” -- This may not be

TAXPAYER REPRESENTATIVE/ NAME
Page 3
January 29, 2024
stated exactly in our EULA, but I think the reference in our EULA to the customer having
a “limited non-transferable software license” covers this.
We are not in a legal position to advise if sales tax should be charged or not but yes
those 5 points are consistent with our EULA terms and conditions. And... no the
language they use isn’t exactly match the language we use in our EULA, but it's fairly
consistent. I think all those 5 points to be true. But that’s not COMPANY’s legal
determination and we aren't going to formally agree or disagree with those 5 points. It’s
simply that we just have a EULA signed with the customer and that is our legal/formal
agreement with them to be interpreted by them and their accountant as they wish.
I am unsure if support should be taxed in IL based on the above. I don’t see any special
tax codes for IL in COMPANY tax codes.
COMPANY will not help me with this, could you please help me as to whether tech
support should be taxed in Illinois or not?
Thank you,
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 86 Ill.
Adm. Code 130.101. In Illinois, the Use Tax Act imposes a tax 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.
Generally, sales of “canned” computer software are taxable retail sales in Illinois. Canned
computer software is considered tangible personal property regardless of the form in which it is
transferred or transmitted, “…including tape, disc, card, electronic means, or other media.” See 86 Ill.
Adm. Code 130.1935. Charges for updates of canned software are considered to be sales of
software. 86 Ill. Adm. Code 130.1935(b). However, charges for training, telephone assistance,
installation, and consultation are not subject to tax if they are separately stated from the selling price
of canned software. Id.
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. See 86 Ill. Adm. Code 130.1935(c). If computer software training or
other support services are provided in conjunction with a sale of exempt custom computer software or
a license of computer software, the charges for that training are not subject to tax. 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).
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

TAXPAYER REPRESENTATIVE/ NAME
Page 4
January 29, 2024
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.

Assuming a license of software meets the requirements of subsection (a)(1) of 86 Ill. Adm.
Code 130.1935, any charges for support, maintenance or updates of the licensed software provided
pursuant to the qualified license agreement would not be subject to Retailers’ Occupation Tax,
whether or not the charges for support, maintenance, or updates of the licensed software are billed
pursuant to the terms of the license agreement or the terms of a separate agreement.
If a license of canned computer software does not meet all the criteria of subsection (a)(1) of
86 Ill. Adm. Code 130.1935, the software is taxable. To comply with the requirements as set out in
Section 130.1935(a)(1), there must be a written agreement signed by the licensor and the customer.
An end user license agreement which does not contain the signature of both the licensor and licensee
would not meet the requirements of Section 130.1935(a)(1).
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,
Thomas Grudichak
Associate Counsel
TG:sc