Does Illinois sales tax apply to on-premises enterprise software sold under a license agreement, and how does that differ from cloud-based (SaaS) software?

Plain-English summary

A cybersecurity software company asked the Illinois Department of Revenue whether its enterprise on-premises software sales qualify for the sales-tax exemption for licensed computer software. The company had been charging and remitting Illinois sales tax on these transactions, but wanted to know whether it could stop, since customers download the software electronically under a Master Solutions Agreement, Supplemental Terms, and an Order Form rather than receiving it on a disc or other physical medium.

The Department explained that Illinois generally taxes sales of "canned" (prewritten, off-the-shelf) computer software as tangible personal property, no matter how it is delivered — including by electronic download. However, a software license escapes tax entirely if it satisfies all five conditions in 86 Ill. Adm. Code 130.1935(a)(1): (A) a written agreement signed by both the licensor and the customer (an electronic signature that is verifiable and authenticated counts, but simply clicking "I agree" to online terms does not); (B) the agreement restricts the customer's ability to duplicate and use the software; (C) it bars the customer from sublicensing or transferring the software to third parties; (D) the licensor has a policy — stated in the agreement, backed by its books and records, or supported by a notarized statement — of providing a replacement copy at little or no charge if the customer loses or damages the software, or of letting the customer keep an archival copy; and (E) the customer must destroy or return all copies at the end of the license term (this is automatically satisfied for perpetual licenses).

Because the requesting company's agreements did not address what happens if a customer loses or damages its downloaded software, and did not permit the customer to keep an archival copy, the Department could not confirm the exemption applied — that determination depends on facts the Department said only a binding Private Letter Ruling (not a GIL) could resolve. The letter also flagged two related but separate points: custom software built to a customer's specific requirements is not taxable at all (regardless of the five-part test), and computer software delivered purely through a cloud-based system — never downloaded to the customer's own computer — is not subject to tax, meaning Illinois generally does not tax software-as-a-service subscriptions.

What this means for you

Software vendors selling on-premises or downloadable licenses

If you sell prewritten (canned) software under a license, don't assume electronic delivery makes the sale automatically taxable or automatically exempt — the answer turns on your contract terms. Review whether your license agreements are validly signed (electronic signatures must be verifiable and authenticated, not just a clickwrap "I Accept" button), restrict duplication and transfer, and — critically — either state a policy for replacing lost/damaged copies at minimal or no cost or let customers keep an archival copy. Missing that replacement-policy language, as in this letter, can be enough to keep the whole license taxable.

SaaS companies and cloud-service providers

The Department reiterated that computer software delivered only through the cloud — never downloaded to the subscriber's own machine — is not treated as a taxable transfer of software, so SaaS subscriptions are generally not subject to Illinois sales tax. But if your service pushes any component (an API, applet, desktop agent, or remote-access agent) onto the customer's device to enable access, that component itself counts as computer software delivered to the customer, and it is taxable unless it independently qualifies for the license exemption.

Accountants and tax professionals advising software clients

Walk clients through the five-part test in 86 Ill. Adm. Code 130.1935(a)(1) element by element, since all five must be met for exemption — failing even one (as with the replacement/archival-copy requirement here) makes the entire license taxable. Also distinguish canned software (taxable absent the exemption) from custom software prepared to a customer's special order (never taxable), and remember that a GIL like this one is not binding — if a client needs certainty on their specific contract, they should pursue a Private Letter Ruling under 2 Ill. Adm. Code 1200.110.

Common questions

Q: Is all computer software taxable in Illinois?
A: No. "Canned" (prewritten) software is generally taxable as tangible personal property regardless of delivery method, but it becomes exempt if the license meets all five criteria in 86 Ill. Adm. Code 130.1935(a)(1). Custom software built to a customer's special order is not taxable at all.

Q: Does downloading software electronically instead of on a disc change whether it's taxed?
A: No. The rule treats canned software as tangible personal property "regardless of the form in which it is transferred or transmitted," including tape, disc, card, or electronic means.

Q: My customer just clicks "I Agree" to license terms online — does that count as a signed written agreement?
A: Not by itself. Clickwrap acceptance does not satisfy the written-signature requirement in element (A). You need a verifiable, authenticated electronic signature attached to or made part of the license agreement.

Q: Is SaaS (software-as-a-service) taxed in Illinois?
A: Generally no, if the software is delivered only through the cloud and never downloaded onto the subscriber's computer. But any downloaded component (API, applet, agent) that enables the service is itself software and can be taxable unless it meets the license exemption.

Q: Can I rely on this letter to stop charging sales tax on my own software sales?
A: No. This is a General Information Letter, which only directs taxpayers to relevant rules and is not binding on the Department. If you need a binding answer for your specific facts, you must request a Private Letter Ruling under 2 Ill. Adm. Code 1200.110.

Citations and references

Statutes and rules:

• 86 Ill. Adm. Code 130.1935 (canned vs. custom software; five-part license exemption test)
• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax imposition)
• 86 Ill. Adm. Code 150.101 (Use Tax imposition)
• 86 Ill. Adm. Code 150.130 (Use Tax credit for Retailers' Occupation Tax paid)
• 35 ILCS 120/2-25 (statutory definition of "computer software")
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedure)
• 2 Ill. Adm. Code 1200.120 (General Information Letter procedure)

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/ST24-0030-GIL.pdf

Original ruling text

ST 24-0030-GIL 09/11/2024 COMPUTER SOFTWARE
This letter discusses computer software license agreements. See 86 Ill. Adm.
Code 130.1935. (This is a GIL.)
September 11, 2024
NAME
TITLE
COMPANY
ADDRESS
Dear NAME:
This letter is in response to your letter dated August 14, 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.
Whether to issue a private letter ruling in response to a letter ruling request is within
the discretion of the Department. The Department will respond to all requests for private
letter rulings either by issuance of a ruling or by a letter explaining that the request for
ruling will not be honored. 2 Ill. Adm. Code 1200.110(a)(4). A request for a private letter
ruling must be made by, or on behalf of, an identified taxpayer. The Department will not
issue letter rulings to taxpayer representatives for anonymous or unidentified taxpayers.
2 Ill. Adm. Code 200.110(a)(1). If there is case law or there are regulations dispositive of
the subject of the request, the Department will also decline to issue a private letter ruling
on the subject. 2 Ill. Adm. Code 200.110(a)(3)(D). There is also certain information that
must be included in each request for a private letter ruling as provided in 2 Ill. Adm. Code
200.110(b)(1)-(8). The Department determined not to issue a Private Letter Ruling in
response to your request. However, the Department is issuing a General Information
Letter to help address your question. In your letter you have stated and made inquiry as
follows:
Pursuant to 2 Ill. Adm. Code 1200.110, COMPANY (“COMPANY”,
“Taxpayer”, or the “Company”) hereby requests a Private Letter Ruling
from the Illinois Department of Revenue (the “Department”) regarding the
application of Illinois sales tax to our enterprise on-premises software sales.

COMPANY
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September 11, 2024
I. Factual Background
COMPANY, a STATE corporation, is a provider of enterprise cybersecurity
software solutions, which specifically include, for the purposes of this letter
request, on-premises software products. Our on-premises software is sold
to business customers, including those located in the State of Illinois,
pursuant to written license agreements consisting of a Master Solutions
Agreement (“MSA”), Supplemental Terms for On-Premises Software
(“Supplemental Terms”), and an Order Form. The Order Form is executed
by COMPANY and the customer, incorporates the MSA and Supplemental
Terms, and sets forth the specific on-premises software and license period.
COMPANY does not provide perpetual licenses for its software. Upon
execution, the customer may download the on-premises software via
electronic means provided by the Company; the Company does not provide
its software through a tangible medium.
Relevant to this letter request, the Company does not have a formal or
informal policy of providing replacement copies of its software to customers
who may lose or damage their licensed copy of the software originally
provided via electronic means. The absence of such a policy is not a
deliberate decision, but rather a consequence of not needing such a policy
up to this point.
Based on our understanding of Illinois tax law and guidance from our tax
compliance software, we have been charging and remitting sales tax on
these on-premises software transactions to the Illinois Department of
Revenue. We
now seek clarification on whether the sale of our
enterprise on-premises software qualifies for exemption from Illinois sales
tax under 86 Ill. Adm. Code 130.1935.
II. Relevant Authorities
In the State of Illinois, the Retailers’ Occupation Tax Act imposes a tax upon
persons who are engaged in the business of selling tangible personal
property at retail to purchasers for use or consumption. See 86 Ill. Adm.
Code 130.101. Use Tax is imposed on the privilege of using, in the State of
Illinois, 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.
Under 35 ILCS 120/2-25, “computer software” is defined as “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

COMPANY
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September 11, 2024
statements, data, or instructions are capable of being perceived by or
communicated to humans,
and includes prewritten or canned
software that is held for repeated sale or lease…”
Generally, sales of “canned” computer software intended for general or
repeated use 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. However, if the computer
software consists of custom computer programs or software are prepared
to the special order of the customer. Computer software that is not custom
software is considered to be canned computer software. Id.
However, if all of the criteria provided in subsection (a)(1) of Section
130.1935 are met, then neither the sale or transfer of canned software, nor
any subsequent software updates to the canned software, are subject to
Retailers’ Occupation Tax. Specifically, 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.
86 Ill. Adm. Code 130. 1935(a)(1). If a license of canned computer software
does not meet all the criteria, then the software is taxable.
III. Analysis

COMPANY
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September 11, 2024
Though we have been treating our on-premises software sales as taxable,
for the period beginning October 2021 through the current date, we have
received inquiries from customers suggesting that this software may meet
the criteria for tax exemption under 86 Ill. Adm. Code 130.1935. Our
analysis of the five-part test outlined in this code section is as follows:
A. Written Agreement: Our MSA, Supplemental Terms, and Order Form
constitute a written agreement signed by both parties. Section 16.13
of our MSA allows for electronic execution.
B. Restricted Use: Section 4.3 of our MSA explicitly restricts the
customer’s duplication and use of the software.
C. Prohibition on Transfer: Section 4.3 of our MSA prohibits the
customer from licensing, sublicensing, or transferring the software to
any third party.
D. Replacement Policy: Our current agreements do not state an
obligation to provide replacement copies at little or no charge if the
customer loses or damages the software, nor do they permit
customers to keep an archival copy once their license expires. We
do not have a policy internally for the provision of replacement copies
in the event a customer loses or damages the software, as this
situation has not previously arisen. However, if a customer is in
compliance with the license terms set forth in the customer’s written
agreement, the Supplemental Terms state that the Company may
provide updates and bug fixes for its on-premises software, and a
customer could theoretically be given access to redownload the
latest version of the on-premises software via electronic means.
E. Return or Destruction: Section 14.1 of our MSA requires the
customer to cease using, uninstall, and destroy or return all copies
of the software upon termination or expiration of the agreement.
While our enterprise software appears to meet requirement (A), (B), (C),
and (E) under 86 Ill. Adm. Code 130.1935, we are uncertain about the
applicability of requirement (D) to our software given that our contracts do
not contemplate the replacement of lost or damaged software. And as we
have thus far never been presented with a situation where a customer has
lost or damaged its on-premises software and have no formal policy
regarding replacement of software in such situations, we are unclear
whether our current practices satisfy the replacement policy requirement
under (a)(1)(D) of the five-part test.
IV. Request for Ruling

COMPANY
Page 5
September 11, 2024
Based on the facts presented, we respectfully request a ruling on whether
our enterprise on-premises software sales are exempt from Illinois sales tax
under 86 Ill. Adm. Code 130.1935.
V. Statements Relating to Request
Pursuant to Ill. Admin. Code 2 §1200.110(b), the Company makes the
following representations:
•

•
•

To the best of the Company’s knowledge, the Department has not
previously ruled on the same or similar issue for the Company or a
predecessor, nor has the Company submitted the same or similar
issue but withdrawn it before a letter ruling was issued.
The Company has no pending audits, litigation, or administrative
proceedings regarding this issue.
This request is duly signed by the Company.

VI. Statement of Confidentiality Request
Pursuant to 2 Ill. Adm. Code 1200.110(d), we request that all identifying
details be deleted from the ruling prior to publication.
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. 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.
“‘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.

COMPANY
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September 11, 2024
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.
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

COMPANY
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September 11, 2024
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 provision in the license agreement that states the licensor shall permit the
licensee to download a copy of the computer software at minimal or no charge if the
customer loses of damages the software will meet the requirements of subsection
(a)(1)(D).
Computer software is defined broadly in the Retailers’ Occupation Tax and Service
Occupation Tax Acts. However, computer software provided through a cloud-based
delivery system – a system in which computer software is never downloaded onto a
client’s computer and is only accessed remotely – is not subject to tax. If a provider of a
service provides to the subscriber an API, applet, desktop agent, or a remote access
agent to enable the subscriber to access the provider’s network and services, the
subscriber is receiving computer software. Although there may not be a separate charge
to the subscriber for the computer software, it is nonetheless subject to tax, unless the
transfer qualifies as a non-taxable license of computer software.
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 software-asa-service 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

COMPANY
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September 11, 2024
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 canned computer software. See 86 Ill. Adm. Code 130.1935.
I hope this information is helpful. If you have further questions related to the Illinois
sales tax laws, 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 Attorney
RSW:sce