Does Illinois sales tax, service occupation tax, or telecommunications excise tax apply to cloud-based practice-management software sold to healthcare providers?

Plain-English summary

A company that sells cloud-based practice-management software to healthcare providers (billing/claims processing, electronic health records, and patient messaging/portal services) asked the Illinois Department of Revenue to confirm that none of its offerings are subject to Illinois Retailers' Occupation Tax (ROT), Service Occupation Tax (SOT), or the Illinois Telecommunications Excise Tax (TET). Because this was a General Information Letter (GIL) rather than a Private Letter Ruling (PLR), the Department did not issue a binding yes/no answer to this specific taxpayer's facts. Instead, it laid out the general rules that determine how software and cloud services are taxed in Illinois and left the taxpayer to apply them.

On computer software generally, the Department explained that "canned" (prewritten/off-the-shelf) computer software is treated as taxable tangible personal property no matter how it's delivered — download, disc, or otherwise — while "custom" software prepared to a customer's special order is not taxable. A software license escapes ROT entirely if it meets five specific conditions in 86 Ill. Adm. Code 130.1935(a): a signed written agreement, restrictions on duplication/use, a ban on sublicensing without the licensor's continued control, a policy of replacing lost/damaged copies (or letting the customer keep an archival copy), and a requirement that the customer destroy or return the software at the end of the license (waived for perpetual licenses). Clicking "I accept" on a browser-based license does not satisfy the signed-agreement requirement unless it uses a verifiable, authenticated electronic signature.

On cloud computing and SaaS specifically, the Department reiterated its longstanding informal position (citing several of its own prior GILs and PLRs) that Illinois has no specific SaaS regulation, and that cloud services where software is never downloaded to the customer's computer and is accessed only remotely are generally not subject to Illinois sales tax — the state treats these as transfers of intangible data rather than tangible personal property. Illinois also does not tax subscriptions as such. However, if a provider transfers an API, applet, desktop agent, or remote-access agent to the customer's own device, that transfer can itself be taxable computer software unless it qualifies as an exempt license under the criteria above, regardless of whether it's separately charged.

On bundled and service transactions, the Department explained that if taxable tangible personal property (including software) is bundled with nontaxable services for one undifferentiated price, the whole bundle becomes taxable unless the taxable portion is separately stated (in which case tax applies only to that portion, or to 50% of the bill if nothing is separately stated). On telecommunications, the Department walked through the TET's definition of "telecommunications" and noted that a company that merely purchases telecommunications services from a vendor to support its own service offering (rather than reselling telecommunications to the end customer) is not itself liable for TET on those services — citing its own prior GILs (ST 12-0041-GIL, ST 16-0032-GIL) that this determination is fact-specific and made case by case.

What this means for you

Software vendors and SaaS companies

If your product is delivered purely as a web-based/cloud service — accessed through a browser or app, hosted on your own servers, with no software installed on the customer's device — Illinois generally will not treat your sales as taxable retail sales of tangible personal property, and it does not tax the subscription fee itself. But watch for anything that pushes code onto the customer's hardware: an API, a downloadable applet, a desktop agent, or a remote-access agent can be treated as a transfer of taxable canned software, even if you don't bill for it separately, unless your license terms satisfy all five conditions in 86 Ill. Adm. Code 130.1935(a) (signed agreement, duplication/use restrictions, no unauthorized sublicensing, replacement/archival-copy policy, and end-of-license return/destruction obligation).

Healthcare practice-management and similar service bundlers

If you combine multiple offerings (e.g., billing/claims processing, records management, and messaging) into one bundled monthly charge, be aware that Illinois taxes the entire bundle if any part of it involves taxable tangible personal property and the taxable piece isn't separately stated on the invoice. Servicemen who do transfer some tangible personal property incident to their services should separately state that portion or expect tax to apply to 50% of the full bill.

Accountants and tax professionals advising on multistate SaaS

This GIL is a useful roadmap of Illinois's informal cloud-computing position (no downloaded software = generally not taxable; APIs/agents/applets pushed to a customer device = potentially taxable software) and of how the Department analyzes telecommunications excise tax exposure for companies that consume, rather than resell, third-party telecom services. But remember it is not binding — if a client needs certainty on its specific facts, it must request a Private Letter Ruling under 2 Ill. Adm. Code 1200.110, which requires an identified taxpayer and is binding only as to that taxpayer.

Common questions

Q: Did the Department rule that this company's software and services are tax-exempt?
A: No. This is a GIL, not a PLR, so the Department expressly declined to make a binding determination on the taxpayer's specific facts. It only explained the general legal framework (canned vs. custom software, cloud computing, bundling, and telecommunications rules) for the taxpayer to apply itself.

Q: Is SaaS taxable in Illinois?
A: Illinois has no specific SaaS regulation. The Department's general position is that cloud computing services where software is never downloaded onto the customer's computer, and is only accessed remotely, are not subject to Illinois sales/use tax because no tangible personal property is transferred. Illinois also does not tax subscriptions.

Q: What turns a "nontaxable service" into a taxable software transfer?
A: If the provider gives the customer an API, applet, desktop agent, or remote-access agent that gets installed or downloaded onto the customer's own device or server, that transfer can be taxable canned computer software — even without a separate charge — unless it meets all five criteria for an exempt software license under 86 Ill. Adm. Code 130.1935(a).

Q: Does clicking "I Agree" to an online license satisfy the written-signature requirement for an exempt license?
A: Not by itself. Simply checking a box to accept online license terms does not meet the signed-written-agreement requirement. It can qualify only if the customer's acceptance uses an electronic signature that is verifiable, can be authenticated, and is attached to or made part of the license.

Q: When is a company liable for the Illinois Telecommunications Excise Tax on its own telecom purchases?
A: If a company purchases telecommunications services from a vendor merely as a component used to deliver its own separate service (rather than reselling telecommunications to the end customer), the company generally is not itself liable for TET on those purchased services — but the Department stresses this determination is fact-specific and made case by case.

Citations and references

• 86 Ill. Adm. Code 130.1935 (canned vs. custom computer software; nontaxable software license criteria)
• 35 ILCS 120/2, 120/2-25 (Retailers' Occupation Tax Act; definition of "computer software")
• 35 ILCS 105/3 (Use Tax Act)
• 35 ILCS 115/3 (Service Occupation Tax Act)
• 86 Ill. Adm. Code 130.101; 150.101; 150.130 (ROT and Use Tax imposition; ROT credit against Use Tax)
• 86 Ill. Adm. Code 140.101; 140.106 (Service Occupation Tax; separately stated selling price)
• 35 ILCS 630/1 et seq., 630/2, 630/3, 630/4 (Illinois Telecommunications Excise Tax Act)
• 35 ILCS 636/5-10, 636/5-15 (Simplified Municipal Telecommunications Tax Act)
• 86 Ill. Adm. Code 495.100(c) (telecommunications excise tax gross charges)
• 47 U.S.C. § 151 note; § 1101(B) (federal Internet Tax Freedom Act moratorium)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedure); 2 Ill. Adm. Code 1200.120 (General Information Letter procedure)
• Prior Department guidance cited in this GIL: ST 17-0006-GIL (Mar. 2, 2017); ST 10-0062-GIL (Aug. 4, 2010); ST 20-0009-GIL (June 9, 2020); ST 21-0001-GIL (Jan. 15, 2021); ST 20-0004-PLR (June 10, 2020); ST 10-0003-PLR (June 10, 2020); ST-09-0023-GIL (Jan. 16, 2009); ST 12-0059-GIL (Nov. 29, 2012); ST 12-0041-GIL; ST 16-0032-GIL (July 29, 2016)

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/ST24-0029-GIL.pdf

Original ruling text

ST 24-0029-GIL 09/11/2024 COMPUTER SOFTWARE
This letter discusses computer software. See 86 Ill. Adm. Code 130.1935. (This
is a GIL.)
September 11, 2024
COMPANY
Attn: NAME, TITLE
ADDRESS
Dear NAME:
This letter is in response to your letter dated June 24, 2024, 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 https://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:
This letter is a request for a General Information Letter request (“GIL”)
pursuant 2 Ill. Admin. Code §1200.120 on behalf of our client, Company
(hereinafter referred to as “Company” or “Taxpayer”). Taxpayer has
engaged COMPANY (“COMPANY”) to represent it for purposes of this
request.
To the best of Company’s knowledge, the issues addressed in this GIL
request are not the subject of an Illinois Department of Revenue
(“Department”) audit of Company, nor are the issues presented pending in
litigation involving Company. The Department has not provided written
guidance on this issue to Company.
I.

Facts

Company offers practice management services to healthcare providers and
physician’s offices. Company provides its customers with a suite of network
healthcare solutions which permit healthcare providers to deliver better and
more patient care. Company’s service offerings assist healthcare providers

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in the entire patient treatment lifecycle – from patient intake, insurance
billing and management, medical record documentation, patient
engagement, invoicing patients and insurance carriers, and claims followup.
The interface between Company and its customers is exclusively internet
based, and, at the customer’s selection, includes access via mobile app.
Company’s cloud-based platform is housed exclusively on Company’s
servers which are located outside of Illinois. Physician practice data is
securely maintained on Company’s servers, and Company does not charge
customers separately for data storage, retrieval, or transmission.
Company’s customers are able to access data through built-in reporting
functions or through custom reports.
Company never transfers any software or software license to its customers,
nor does Company ever install its proprietary software on a customer server
or hardware.
Java software, known as “applets”, are sometimes
downloaded onto a user’s personal server or hardware during the course of
a web-based browser session, but these applets have no independent value
or use apart from facilitating the web browser session. Company never sells
or transfers any tangible personal property while providing its services to its
customers as part of the services discussed herein.
Company’s primary service offerings are Billing and Claims, Manager and
Transmitter. In some instances, Company bundles these three service
offerings together as its Bundled Base package. When a customer signs
up for one or more service offerings from Company, the contract requires
the customer to pay initial implementation fees in addition to a monthly
service charge. The implementation fees cover the set-up of the practice
on Company’s systems as well as any assistance from Company’s
personnel to facilitate the set-up process and perform the initial user training
with the customer’s staff, sometimes for an additional fee. Thereafter,
Company’s monthly service charges are based on the service offerings
selected by the healthcare provider and typically determined based on a
percentage of the medical provider’s revenue. Alternatively, in some
instances, the monthly service charges are imposed at a flat rate based on
the number of practitioners in a medical practice or the number of claims
processed. Where the customer purchases Bundled Package Base, the
customer receives the suite of services for one monthly charge. Company
does not provide any internet, telephone, or facsimile connections to its
customers. Customers are responsible for obtaining the requisite access
to the respective communication services necessary to communicate with
Company in the context of all of the service offerings.

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Company’s internet-based service offerings are described as follows:
Billing and Claims Services
Company’s Billing and Claims is a practice management and revenue cycle
service offering that manages administrative and billing-related functions for
physician practices. Company’s customers conduct business in an industry
where third-party insurers are a significant source of payments for medical
services rendered to patients. Company’s service offerings enable its
customers to achieve faster reimbursement from payers, reduce billing error
rates, increase collections, lower operating costs, improve operational
workflow controls, improve patient satisfaction and compliance, and more
efficiently manage clinical and billing processes.
The primary Billing and Claims services provided by Company include
sending insurance claims, receiving, processing and posting payments from
insurance companies and patients, and working the customer’s accounts
receivable, which consists of tracking insurance claims, investigating claims
that have been denied by the insurance company, providing tools that allow
customers to determine whether insurance payments comport with those
customers’ contracted rates, and managing the patient billing cycle by
sending patient statements and posting any patient payments Company
receives. While the service offering automates certain functions for the
healthcare providers, there is significant human involvement required from
Company employees when providing this service to its customers. During
customer onboarding, Company assigns a dedicated resource to
collaborate with the customer to ensure that enrollment paperwork is
submitted to the insurance companies. This enrollment work allows the
customers to update its pay-to address, sign up for electronic claim
submission and adjudication, and receive payment from insurance
companies electronically. Company employees and agents, in providing its
Billing and Claims service, conduct outreach to payers to determine the
status of outstanding medical claims, prepare custom appeal forms when
directed by customers, and engage with insurance companies to ascertain
any necessary steps to secure payment for claims. Company maintains an
electronic eligibility interface with insurance carriers which allows Company
to provide insurance eligibility verification prior to a patient’s office visit.
Company also tracks its customer’s practice activity to ensure that charges
are captured and properly entered, and claims are generated for each
patient visit.
A key component of Billing and Claims is a database of payer-specific
reimbursement requirements, researched and regularly updated by
Company, that facilitates the full and accurate payment by health insurers

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of patient bills. Company employees work directly with its customers to
submit insurance claims and collect patient balances, communicating with
each other via claim notes within the user interface. Each customer grants
Company the authority to submit claims on its behalf. Relying on its
database of reimbursement requirements, Company employees can
analyze, process, and submit claims on behalf of its customer in accordance
with the insurance carrier’s requirements. As part of its submission,
Company must ensure that all required information is gathered and
presented appropriately for adjudication. Company tracks the status of
claims, including calling payers, reviewing faxes, checking payer portals,
and sending demand letters for claim statuses. For denied claims,
Company employees review the claim denial explanation, and analyze
whether the claim denial was appropriate. This includes reviewing medical
service eligibility and when necessary, taking necessary steps including
contesting the insurance carrier’s claim denial. As part of this process,
when appropriate, Company employees resubmit denied claims after its
customer has made appropriate corrections.
In resolving claims, Company may use a proprietary tool to access thirdparty web portals such as a payer’s website and APIs on its customer’s
behalf to submit documentation required by payers. Company also
generates patient billing statements for its customer’s patients. Finally,
Company facilitates the transfer of outstanding patient balances to a
customer’s designated collection agency based on policies and procedures
as determined by its customer.
Manager Services
Company’s Manager service offering provides managed and automated
medical record- and patient workflow-related services for healthcare
providers, including an electronic health record management service.
Manager captures and stores pertinent patient data, including an electronic
chart which summarizes each patient’s relevant medical and demographic
information, encounter documentation, orders, results, patient interactions
and questionnaires, clinical reminder tracking, and workflow task
management. Manager also enables Company’s customers to manage
outbound prescriptions, place outbound orders, and obtain results that
Company connects to the antecedent order where possible. Company’s
customers determine and configure which information is to be shared
directly with their patients.
Through its Manager service offerings, Company presents its customers
with a library of global content, including clinical templates for documenting
patient care (such as history of present illness, review of systems, medical

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procedures, and physical exam), clinical guidelines reflecting medical
standards and best practices, curated lists of permissible orders, and
guidance related to drug-drug and drug-allergy interactions. Customers can
modify the defaults within the user interface to customize, for example,
screening questionnaires, patient information forms, and clinical templates.
Customers authorize Company to exchange data with other sources
including state health reporting organizations and other third-party providers
that facilitate more efficient patient care collaboration. Customers can input
patient data and details from patient visits through using a variety of
methods including – typing into or making selections from within templates
provided from Manager document libraries, voice-to-text entries, and
labeling hand-written documents with barcodes that are sent to Company
for incorporation into electronic records.
Company also takes on responsibility for classifying and processing
documents that are sent to its customers by third parties (including other
physicians, pharmacies, and labs). Company’s dedicated team processes
incoming documents, organizes the documentation by patient, and presents
them to the physician’s practice. Documents that Company has access to
are classified by type (e.g., lab result, consult letter, etc.), matched to the
correct patient chart, tied to outstanding orders (if applicable), verified for
classification, and entered into the Company database utilized by the
customer. Company may also distribute prescription renewals, referrals,
consultation letters and authorizations, relieving the physician’s staff of
these tasks. Manager utilizes fax services provided by third-party vendors
and telecom providers to render its services. In addition, Manager also has
a secure messaging function where customers can send messages to
known trusted recipients using a standard internet connection.
Through Company’s co-sourcing model, data entry tasks are completed
through a combination of Company’s services and the efforts of its
customer’s medical practice staff. The Manager services incorporate
approximately 16 million documents into the database each month,
including facsimiles received from lab service providers and others.
Facsimiles are reviewed, coded, and integrated into the database by a staff
of approximately 1,100 Company employees and contractors, using a multilevel, multi-reviewer scanning, categorization and data entry process or
through automated processes established by Company.
Many of
Company’s Manager customers participate in quality management
programs managed by government or private payers. Company personnel
support customers’ participation in these programs, including program data
submission and audit support with respect to certain programs. Finally,
Company offers Manager customers the Bundled Package app which

COMPANY
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serves as an extension of Manager for desktop and iOS devices allowing
customers to use Manager to accomplish a subset of clinical tasks on the
go.
Transmitter Service
Company’s Transmitter service offering provides its customers with a set of
tools and services that allows on-demand, automated and live interaction
between patients and provider practices both pre- and post-visit, including
unlimited use of the patient portal. Company’s Transmitter service consists
of three primary tools: (1) messaging, (2) access to live operators; and (3)
patient portal. The service involves significant human effort from Company
subcontractors as well as automated processes. Transmitter is not sold as
a standalone service, but is instead only provided in conjunction with either
Manager, Billing and Claims, or both.
Transmitter includes an automated appointment reminder system that
allows patients to either confirm the appointment or request rescheduling
through a live operator. It is also used to remind patients to make
appointments for various wellness visits including cancer screenings,
annual physicals, and vaccinations. Lastly, phone calls and text messages
are sent to alert patients to the availability of results.
Transmitter service offers live operators who take redirected calls from its
customers. Where authorized by its customer, live operators can schedule
patient appointments following the customers’ scheduling protocols, collect
patient payments, and patient messages which are relayed to its customers
following the customers’ defined processes, namely through the user
interface customers use for Billing and Claims and Manager. Live operators
are available from 10:00 AM to 8:00 PM ET Monday through Friday,
excluding major holidays.
Through the patient portal, patients can send secure messages to their
healthcare provider and complete online check-in through the patient portal
as well as schedule appointments. The patient portal allows healthcare
providers to securely initiate, receive, and respond to patient messages.
Patients are directed to log in to their patient portal account to view patient
health information or account statements. Customers with Bundled Base
package service can use the patient portal for online self-check in prior to
the appointment. Post-appointment, customers can send lab results to
patients, send patient questionnaires, send notices for unpaid balances,
and collect payments from patients. The customer portal used in the
Transmitter services is web based and hosted by Company so that
physician practices do not need software, servers, or phone lines to use it.

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II.

III.

Issues
1.

Whether Illinois customers’ purchases of Manager, Billings
and Claims, or Transmitter are subject to the Illinois Retailers’
Occupation Tax or Illinois Service Occupation Tax?

2.

Whether Illinois customers’ purchases of Manager, Billings
and Claims, or Transmitter are subject to the Illinois
Telecommunications Excise Tax?

Relevant Statutes, Regulations, and Rulings

The Illinois Retailers' Occupation Tax Act (hereinafter “ROT”) 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.
A.

Illinois Retailers’ Occupation Tax
i. Taxation of Software

Canned computer software in Illinois is defined as tangible personal
property and subject to tax. 35 ILCS Chapter § 120/2; 35 ILCS Chapter §
115/3; 35 ILCS §105/3-25; 86 Ill. Admin. Code §130.1935(a). Canned
computer software is considered tangible personal property regardless of
the form in which it is transferred. Custom computer software, however,
which are prepared to the special order of the customer is not subject to
ROT. Id.
Furthermore, a transaction for the license or transfer of computer software
which meets all of the criteria provided in 86 Ill. Admin. Code Section
130.1935(a) will not be subject to ROT, even where a transfer of a software
or subsequent software updates occur. Per 86 Ill. Admin. Code Section
130.1935(a), 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;

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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.

Illinois has not adopted any specific regulations addressing SaaS.
Generally, cloud computing services are not subject to tax within Illinois at
the state level, rather, the state views these transactions as transfers of
intangible information or data. Ill. Dept. of Rev. GIL ST 17-0006 GIL (March
02, 2017); Ill. Dept. of Rev. GIL No. ST 10-0062-GIL (August 04, 2010); Ill.
Dept. of Rev. GIL ST 20-0009-GIL (June 09,2020); Ill. Dept. of Rev. GIL No.
ST 21-0001 (January 15, 2021); Ill. PLR, No. ST 20-0004-PLR (June 10,
2020); Ill. PLR, ST 10-0003-PLR (June 10, 2020). If no tangible personal
property is transferred, the transaction is generally not subject to retailers'
occupation tax nor use tax. Ill. Dept. of Rev. GIL ST 17-0006-GIL (March
02, 2017).
If the provider transfers to the customer an API, app, desktop agent or a
remote access agent to enable the customer to access the provider’s
network and services, the subscriber may be receiving taxable 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 nontaxable license of computer software. Id. Illinois
does not tax subscriptions. Ill. Dept. of Rev. GIL ST 21-0001-GIL,
01/15/2021.
ii. Taxation of Services

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The ROT does not apply to sales of service. Under the Service Occupation
Tax (“SOT”), 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 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.
iii. Bundled Transactions
Sales that include tangible personal property and non-taxable services in
one single charge to the consumer are subject to sales tax on the full sales
price. When the taxable and non-taxable items are bundled into a single
package and sold for at a set price, the entire package is taxable because
the non-taxable services items are not separately stated as required under
Illinois' ROT regulations to maintain their non-taxable nature. Ill. Dept. of
Rev., GIL ST-09-0023-GIL (01/16/2009). Servicemen may separately state
the selling price of each item transferred as a result of the sale of service.
See 86 Ill. Adm. Code §140.106; Ill. Dept. of Rev. GIL ST 12-0059 GIL
(11/29/2012). The tax is then calculated on the separately stated selling
price of the tangible personal property transferred. Id. If the servicemen do
not separately state the selling price of the tangible personal property
transferred, they must use 50% of the entire bill to the service customer as
the tax base. Id.
B.

Illinois Telecommunications Excise Tax

Telecommunications services are not subject to the Illinois sales and use
tax but are instead taxed under the Illinois Telecommunications Excise Tax
(“TET”). 35 ILCS Chapter §630/1 et seq. The Illinois TET is imposed upon
the act or privilege of originating in this State or receiving in this State
interstate telecommunications by a person in this State purchased at retail
from a retailer by such person. 35 ILCS 630/4.

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The definition of “telecommunications” includes, without limitation,
messages or information transmitted through use of local, toll and wide area
telephone service; private line services; channel services; telegraph
services; teletypewriter; computer exchange services; cellular mobile
telecommunications service; specialized mobile radio; stationary two way
radio; paging service; or any other form of mobile and portable one-way or
two-way communications; or any other transmission of messages or
information by electronic or similar means, between or among points by
wire, cable, fiberoptics, laser, microwave, radio, satellite or similar facilities.
The definition of “telecommunications” does not include value added
services in which computer processing applications are used to act on the
form, content, code and protocol of the information for purposes other than
transmission.
Additionally, “telecommunications” does not include
purchases of telecommunications by a telecommunications service provider
for use as a component part of the service provided by him to the ultimate
retail consumer who originates or terminates the taxable end-to-end
communications. ILCS Chapter 35 § 630/2(c).
In both IL ST 12-0041-GIL and ST 16-0032 the Department notes that if a
company provides a service and the communications provided were merely
a component of that service, the service provider would be liable for TET on
telecommunications services purchased from vendors and used by it to
provide its services.
IV.

Ruling Request and Application

Company requests the Department’s guidance that the ROT, SOT and TET
does not apply to any of Company’s offerings. In support of this request,
Company provides as follows:
A.

None of Company’s service offerings are subject to Illinois
ROT or SOT

Illinois ROT does not apply to any of Company’s service offerings – Billing
and Claims, Manager, and Transmitter services. Company’s service
offerings are not subject to Illinois ROT because the ROT does not apply to
the sales of pure services, such as personal services, professional services,
or repair/maintenance or installation services. Further, as Company does
not sell any tangible personal property to its customers pursuant to its
service offerings and therefore, would also not be subject to the Illinois SOT.
Company provides back-office practice management services to healthcare
providers (hospitals and physician offices). Company uses a cloud, web-

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based based platform to perform its services, and in some instances,
enables its customers to utilize the web-based portal to interact and display
information for its customers. With some service offerings, Company’s
customer and the customer’s patients can also elect to use of a mobile app.
However, in the provision of these services there is no execution of a
software license by our client’s customer, or the patient.
Specifically, in regard to the Billing and Claims service, this practice
management and revenue cycle service offering manages administrative
and billing related functions of physician practices. The service offering
includes our client sending insurance claims, receiving, processing and
posting payments from insurance companies and patients, working
customer’s A/R. Company employees pursue claims, accounts receivables
and reconcile patient accounts on behalf of its customer.
In regard to the Manager services, Company offers managed and
automated medical record and patient treatment services for healthcare
providers, including electronic health record management. Company
captures, organizes and displays pertinent patient data in the customer
portal. This service also enables its customers and patients to manage
outbound prescriptions and other medical service orders. Additionally,
Manager provides its customers with a library of medical related content
including clinical templates for documenting patient care and medical as
well as information related to the underlying health conditions that the
patient is seeking treatment for. This service offering relies on more than
1,000 individuals to review, scan, categorize and data process the
documentation and tag to appropriate patient.
Lastly, in regard to its Transmitter services, Company’s customers receive
a service that enables them to engage in on demand, automated and live
interaction with their patients. Company’s Transmitter service offering
enables it customers to send appointment reminders, reminders to pick up
prescriptions, and schedule appointments. This service is never provided
on a standalone basis; but instead, is provided in conjunction with one or
both of the services above.
Even if in the provision of any of Company’s service offerings above,
Company transferred tangible personal property in the view of the
Department, the “true object” of the sales of such services is best
categorized as professional services provided by Company, which are not
subject to tax in Illinois. However, since no tangible personal property is
transferred from Company to its customers, no true object test analysis is
required.

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B.

Company’s service offerings are not subject to the Illinois
Telecommunications Tax.

The Illinois TET does not apply to Company’s Manager, Billing and Claims,
or Transmitter services because these service offerings do not meet the
definition of “telecommunications” as defined by Illinois law.
The TET is imposed upon the act or privilege of originating or receiving
intrastate or interstate telecommunications in Illinois. 35 ILCS §630/1. This
tax is imposed on all person originating or receiving telecommunications in
Illinois. The definition of “telecommunications” in addition to the meaning
ordinarily and popularly ascribed to it, includes, without limitation, messages
or information transmitted through use of local, toll and wide area telephone
service; private line services; channel services; telegraph services;
teletypewriter;
computer
exchange
services;
cellular
mobile
telecommunications service; specialized mobile radio; stationary two way
radio; paging service; or any other form of mobile and portable one-way or
two-way communications; or any other transmission of messages or
information by electronic or similar means, between or among points by
wire, cable, fiberoptics, laser, microwave, radio, satellite or similar facilities.
35 ILCS §630/2. Further, Illinois does not tax internet access charges as
the Internet Tax Freedom Act (“IFTA”) and subsequent federal laws prohibit
such taxation. Here, none of Company’s service offerings fall within the
definition of “telecommunications” that would subject them to tax in Illinois.
i.

Billing and Claims Services

The Billing and Claims service is a combination information services, billing
and collection services. Company submits insurance claims, receives,
processes and posts patient payments, and reconciles its customer
accounts receivable, which consists of tracking insurance claims,
investigating denied claims by the insurance company, providing
information that allow customers to determine whether insurance payments
comport with those customers’ contracted rates, and managing the patient
billing cycle reconciling patient statements with patient payments. To the
extent information is transmitted as part of this service, it is done so either
through exempt internet-based means, or through the use of
telecommunications services purchased from third parties. Accordingly, the
Billing and Claims service is not subject to communications tax.
Further, although the Billing and Claims service involves Company’s
consumption of telecommunications services purchased from third parties,
Company does not provide the communications infrastructure for the
requisite electronic transmission, conveyance, or routing of voice, data,

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audio, video data necessary to impose the TET. To the extent Company
purchases taxable telecommunications services from a telecommunication
services provider, Company pays taxes on its purchases. Company never
provides any internet, telephone, or facsimile connection services to its
customers. Instead, Company’s customers are responsible for securing the
necessary access to the communication services that are necessary to
communicate with and obtain services from Company.
ii.

Manager services

Manager services are an information service that is not subject to TET. The
Manager services allow customers to generate, store, and process patient
health information for the purpose of efficient medical practice management
and does not fall within the definition of “telecommunications” that would
subject it to tax pursuant to the TET. Company’s manager services are a
pure service offering involving data processing and other services that allow
data to be generated, acquired, stored, processed, or retrieved and
delivered by an electronic transmission to the medical provider, or its
patient, whose only purpose for the underlying transaction is the processed
data or information. Id. Company’s core offering captures and stores
pertinent patient data, treatment orders, results, patient interactions and
questionnaires, clinical reminder tracking, and workflow task management.
Manager services also assists Company’s customers’ management of
outbound prescriptions, place outbound orders, and obtain patient results.
Accordingly, Company’s manager service offerings do not fall within the
purview of the Illinois TET.
To ensure patient privacy and provide its services, Company contracts with
third-party vendors that provide inbound and outbound faxing services to
Company’s customers. Notably, Company interacts with the third-party
vendors through online application portals which transmit information for
outbound faxes and receive information from inbound faxes as TIFF images
(i.e., e-faxes). Further, Company is the purchaser, rather than the provider,
of telecommunication services. Moreover, Company does not collect a
separate charge for any e-faxes received or transmitted to its customer.
iii.

Transmitter Services

The Transmitter service is exempt from Illinois TET because it is a pure
service offering and Company does not provide any tangible personal
property as part of the service.
While Transmitter does facilitate
communication between patients and medical providers through
messaging, live operators and a patient portal, Company consumes the
telecommunication services in its retrieval and presentment of patient data

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September 11, 2024
to medical providers and their patients, it does not provide such
telecommunications services. Further, “telecommunications” does not
include purchases of telecommunications by a telecommunications service
provider for use as a component part of the service provided by him to the
ultimate retail consumer who originates or terminates the taxable end-toend communications. 35 ILCS Chapter § 630/2(c). As such, Company’s
Transmitter services are not subject to the Illinois TET.
V.

Conclusion

Company respectfully requests the Department to review this GIL request
and provide confirmation on the analysis of the law provided above.
If you require any additional information to perform your analysis or would
like to discuss or clarify the facts and circumstances, please contact me at
EMAIL. We look forward to working with you to resolve this matter.
DEPARTMENT’S RESPONSE:
As noted in the introduction to this letter, persons seeking binding letter ruling must
comply with the procedures for private letter rulings found in the Department’s regulations
at 2 Ill. Adm. Code 1200.110. For example, requests must be made on behalf of an
identified taxpayer. 2 Ill. Ad. Code 1200.110(a)(1). The purpose of a General Information
Letter, or 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.
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.
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

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liability or Use Tax liability for servicemen, depending upon which tax base they choose
to calculate their liability.
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

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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.
Please note that it is very common for software to be licensed over the internet
and for the customer to check a box that states that the customer accepts the license
terms. Acceptance in this manner does not constitute a written agreement signed by the
licensor and the customer for purposes of subsection (a)(1)(A) of Section 130.1935. To
meet the signature requirement for an exempt software license, the agreement must
contain the written signature of the licensor and customer. An electronic agreement in
which the customer accepts the license by means of an electronic signature that is
verifiable and can be authenticated and is attached to or made part of the license will
comply with this requirement. 86 Ill. Adm. Code 130.1935(a)(1)(A).
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). 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 may be 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.
Under the Service Occupation Tax Act, a serviceman is taxed on tangible personal
property transferred incident to a sale of service. 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; (2) 50% of the entire bill; (3) Service Occupation Tax on cost price if
they are registered de minimis servicemen; or (4) Use Tax on cost price if the servicemen
are de minimis and are not otherwise required to be registered under Section 2a of the
Retailers’ Occupation Tax Act.
If the provider, as a serviceman, is not otherwise required to be registered under
Section 2a of the Retailers’ Occupation Tax Act and qualifies as a de minimis serviceman,

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the provider could elect to pay Use Tax to its supplier on its cost price of the 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
of software-as-a-service.
Telecommunications
The Illinois Telecommunications Excise Tax Act imposes a tax on the act or
privilege of originating or receiving intrastate or interstate telecommunications by persons
in Illinois at the rate of 7% of the gross charges for such telecommunications purchased
at retail from retailers by such persons. 35 ILCS 630/3 and 4. The Simplified Municipal
Telecommunications Tax Act allows municipalities to impose a tax on the act or privilege
of originating in such municipality or receiving in such municipality intrastate or interstate
telecommunications by persons in Illinois at a rate not to exceed 6% for municipalities
with a population of less than 500,000, and at a rate not to exceed 7% for municipalities
with a population of 500,000 or more, of the gross charges for such telecommunications
purchased at retail from retailers by such persons. 35 ILCS 636/5-10 and 5-15.
“Telecommunications”, in addition to the meaning ordinarily and popularly
ascribed to it, includes, without limitation, messages or information
transmitted through use of local, toll and wide area telephone service;
private line services; channel services; telegraph services; teletypewriter;
computer exchange services; cellular mobile telecommunications service;
specialized mobile radio; stationary two way radio; paging service; or any
other form of mobile and portable one-way or two-way communications; or
any other transmission of messages or information by electronic or similar
means, between or among points by wire, cable, fiber-optics, laser,
microwave, radio, satellite or similar facilities.”
The Act defines gross charges as including the amount paid for the act or privilege
of originating or receiving telecommunications in this State and for all services and
equipment provided in connection therewith by a retailer. 35 ILCS 630/2(a). The Act
does exclude charges for customer equipment, including equipment that is leased or
rented by the customer from any source, when those charges are disaggregated and
separately identified from other charges. 35 ILCS 630/2(a)(4).
“Gross charges” does not include charges for the storage of data or information for
subsequent retrieval or charges for the processing of data or information intended to

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change its form or content. 35 ILCS 630/2(a)(3). Charges for automated data storage,
retrieval and processing services or for the use of computer time or other equipment are
not included in gross charges. Automated information retrieval or data processing
charges are not included in gross charges. For example, a customer who accesses an
on-line computer data base is not subject to tax on the charge for the data processing or
inquiry but would be subject to tax on any charge for the transmission of the data. 86 Ill.
Adm. Code 495.100(c).
Telecommunications that are purchased, used or sold by a provider to enable
users to connect to the Internet or to otherwise enable users to access content,
information or other services offered over the Internet are subject to the federal
moratorium. 47 USCA § 151 note; § 1101(B).
A company that purchases telecommunications to provide a service and any
communications that are provided are merely a component of that service may not be
subject to Telecommunications Excise Tax on the communications provided as part of
the service. The determination whether the company is providing a service or
telecommunication services depends on the facts and must be made on a case-by-case
basis. ST 16-0032-GIL (July 29, 2016).
I hope this information is helpful. If you require additional information, please visit
our website at https://tax.illinois.gov/ or contact the Department’s Taxpayer Information
Division at (800) 732-8866.
Very truly yours,
Richard S. Wolters
Associate Counsel
RSW:sce