Does Illinois charge sales tax on software accessed only through the cloud, like a SaaS subscription or an app membership?

Plain-English summary

An Illinois resident asked the Department of Revenue about a $10 sales tax charge on a $99.99 annual membership to a fitness app, arguing the charge was wrong because a prior private letter ruling (ST 17-0008-PLR) had found membership fees exempt as intangible property. The Department responded with a General Information Letter rather than a binding ruling, and used the opportunity to explain how Illinois taxes computer software generally, including software delivered through cloud-based and software-as-a-service (SaaS) models.

The core takeaway: computer software accessed through a cloud-based delivery system is not subject to Illinois sales tax. The Department defines a cloud-based delivery system as one where the software is never downloaded onto the client's computer and is only accessed remotely. Software-as-a-service providers are treated as "servicemen" rather than retailers, and because no tangible personal property changes hands, no Retailers' Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax applies to the subscription itself. Illinois generally does not tax SaaS subscriptions.

The letter also explains the broader legal backdrop: "canned" (prewritten, off-the-shelf) computer software is taxable tangible personal property regardless of how it's delivered (disc, download, etc.), while truly "custom" software built to a customer's special order may not be taxable. But this canned/custom distinction only matters if software is actually transferred to the customer as tangible personal property in the first place — a pure cloud/SaaS arrangement with no download doesn't trigger that analysis at all, because nothing tangible is ever transferred.

Because the letter is a GIL rather than a PLR, it does not resolve whether this particular taxpayer is owed a refund, and it notes the separate procedure (Form ST-1-X, or the retailer voluntarily filing a claim for credit) that would need to be used to actually recover any tax paid in error.

What this means for you

Software vendors and SaaS companies

If your product is delivered purely through the cloud — accessed remotely with nothing ever downloaded to the customer's device — Illinois does not treat you as making a taxable sale of tangible personal property, so no Retailers' Occupation Tax or Service Occupation Tax applies to the subscription charge itself. That changes if you also hand the customer software to install, such as an API, applet, desktop agent, or remote access agent: providing that kind of software alongside a SaaS subscription is still treated as a transfer of computer software and can be taxable, even if you don't bill for it separately, unless it qualifies as a non-taxable license.

Vendors selling "canned" vs. "custom" software

If you sell prewritten, off-the-shelf software (including software assembled from existing components without real, substantial custom modification), that's "canned" software and it is taxable tangible personal property no matter how you deliver it — disc, download, or otherwise. Software built to a customer's special order, with real and substantial changes or custom interfacing logic, may qualify as non-taxable custom software instead. This canned/custom distinction is separate from the cloud-delivery rule above; it applies when tangible personal property (the software) is actually being transferred.

Accountants and tax professionals advising clients on app/subscription charges

Don't assume every past PLR carries over to your client's facts — a PLR binds the Department only for the specific taxpayer and facts in that ruling, and GILs like this one are not binding at all. If a client has been charged sales tax on a pure cloud/streaming subscription with no download, the analysis in this letter supports that the charge may be improper, but pursuing a refund runs through the retailer's own claim-for-credit process (86 Ill. Adm. Code 130.1501) or an amended Form ST-1-X, not directly through the Department on the customer's behalf.

Common questions

Q: Does Illinois charge sales tax on SaaS subscriptions?
A: No. Illinois does not tax subscriptions to software as a service. A provider of software as a service acts as a "serviceman," and because no tangible personal property is transferred, no Retailers' Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax applies to the subscription charge.

Q: What counts as a "cloud-based delivery system"?
A: One in which the computer software is never downloaded onto the client's computer and is only accessed remotely, per 86 Ill. Adm. Code 130.1935.

Q: If my SaaS subscription is tax-exempt, can any part of it still be taxed?
A: Yes. If the provider gives the subscriber software to install — such as an API, applet, desktop agent, or remote access agent — that transfer of computer software can be taxable, even bundled into the subscription price with no separate charge, unless it qualifies as a non-taxable license.

Q: What's the difference between "canned" and "custom" computer software under Illinois law?
A: Canned (prewritten) software is taxable tangible personal property regardless of delivery method. Custom software prepared to a customer's special order may not be a taxable retail sale; assembling pre-written programs into a package doesn't count as custom unless real, substantial changes or interfacing logic are added. See 86 Ill. Adm. Code 130.1935(c)(3).

Q: Does this letter mean the requester's app membership fee was definitely nontaxable, and can they get a refund?
A: The Department describes the general legal framework but issued this as a GIL, not a binding ruling on the requester's specific transaction. To recover tax already paid, the retailer would need to unconditionally repay the customer and then pursue a credit through the Department's claim-for-credit procedure (86 Ill. Adm. Code 130.1501) or file an amended Form ST-1-X; the Department cannot compel a retailer to file such a claim.

Citations and references

Statutes and rules:

• 86 Ill. Adm. Code 130.1935 (canned vs. custom computer software; cloud-based delivery)
• 35 ILCS 120/2-25 (statutory definition of "computer software")
• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax)
• 86 Ill. Adm. Code 150.101 (Use Tax)
• 86 Ill. Adm. Code 140.101 and 160.101 (Service Occupation Tax and Service Use Tax)
• 35 ILCS 115/3 (Service Occupation Tax on tangible personal property transferred incident to a service)
• 86 Ill. Adm. Code 150.305(b), (c) (donor/donee Use Tax liability)
• 86 Ill. Adm. Code 130.2105(a)(3) (electronically transferred information/data not tangible personal property)
• 86 Ill. Adm. Code 130.1501 (claim for credit for erroneously paid sales tax)
• 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/ST24-0032-GIL.pdf

Original ruling text

ST 24-0032-GIL 10/09/2024 COMPUTER SOFTWARE:
Computer software provided through a cloud-based delivery system is not
subject to tax. A cloud-based delivery system is one in which computer software
is never downloaded onto a client’s computer and only accessed remotely. 86 Ill.
Adm. Code 130.1935. (This is a GIL.)
October 9, 2024
NAME
ADDRESS
Dear NAME:
This letter is in response to your letter dated September 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:
Thank you for taking the time to call me back this afternoon in response to
my inquiry on a sales tax charge for a yearly membership to APP fitness
app.
Attached are the following documents:

1. COMPANY invoice showing assessment of a $10 sales tax charge in
   connection with my yearly subscription to this app. The invoice clearly
   identifies the $99.99 app fee as an “annual membership” renewable one
   year from now.
2. Email thread from customer service department of APP.
3. An Illinois Department of Revenue Private Letter Ruling, ST 17-0008PLR issued on September 14, 2017 that states (highlighted text)

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October 9, 2024
membership fees are exempt from Illinois sales tax because it is an
intangible. Under my membership to APP app, I have no right to download
anything for offline use or otherwise receive any tangible personal property.
I realize that the private letter ruling is not binding on any taxpayer other
than the one who requested it, but I am confident that the Illinois Department
of Revenue would want to follow this private letter ruling when similar facts
as here are present.

4. A response to an AI inquiry on this issue made by AI PLATFORM that
   suggests that an Illinois sales tax should not be imposed for my purchase
   of a membership subscription to this app.
   I thank you for looking into this matter, and look forward to receiving your
   response. COMPANY has already refused to refund the sales tax and
   referred me to the Illinois Department of Revenue for relief. If you agree
   with my position, I ask your assistance when I reach out to COMPANY again
   so that I can get a credit card refund on the sales tax. You may also want
   to issue some written guidance on this matter for me as well as other Illinois
   residents who are currently being charged a sales tax on app membership
   fees. Thank you.
   NAME
   My residence address is:
   ADDRESS.
   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. 86 Ill. Adm. Code 130.101. The Use Tax Act imposes a tax upon the
   privilege of using in this State tangible personal property purchased at retail from a
   retailer. 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 retain the
   amount of Use Tax paid to reimburse themselves for their Retailers’ Occupation Tax
   liability incurred on those sales. If the purchases occur outside Illinois, purchasers must
   self-assess their Use Tax liability and remit it directly to the Department. If no tangible
   personal property is being transferred to the customers, then neither Illinois Retailers’
   Occupation Tax nor Use Tax would apply. Likewise, the Service Occupation Tax and
   Service Use Tax are imposed on the transfer of tangible personal property incident to
   sales of service. 86 Ill. Adm. Code 140.101 and 160.101. If no tangible personal property
   is being transferred to customers incident to the services being provided, then neither
   Illinois Service Occupation Tax nor Service Use Tax would apply.

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October 9, 2024
Donors of Tangible Personal Property
If the arrangement between a business and a customer is such that the business
provides tangible personal property to the customer free-of-charge, then a donor/donee
situation may exist. A donor who purchases tangible personal property and gives the
tangible personal property to a donee makes a taxable use of the property when making
the gift. 86 Ill. Adm. Code 150.305(c). A donor owes Use Tax on the donor’s cost price
of the tangible personal property that is transferred. Although the donor/user is not
taxable on the value of the finished product which he produces himself, such donor/user
is taxable on the purchase price of the tangible personal property that he purchases and
incorporates into such finished product which he uses in this State, such purchase being
a purchase at retail or a purchase for use. 86 Ill. Adm. Code 150.305(b).
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.
Software as a service is generally defined as a cloud computing service model
where the provider licenses the use of computer software to a client and manages all
needed physical and software resources. The possession and ownership of software
remains with the provider, and the client accesses the software on web-enabled devices
over the internet. The software is often provided on a subscription basis. 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 is defined broadly in the Retailers’ Occupation Tax Act.
However, computer software accessed through a cloud-based delivery system – a system

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October 9, 2024
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 such 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. A serviceman may provide such software along with a subscription
for software as a service in a single transaction. 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 or serviceman’s web site or server that is also located out of State, the retailer
or serviceman, 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 or Service Use Tax liability for the serviceman to
collect and remit to Illinois.
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 the Service Occupation Tax Act.
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. Information or data that is electronically
transferred or downloaded is not considered the transfer of tangible personal property in
this State. See 86 Ill. Adm. Code 130.2105(a)(3). Illinois does not tax subscriptions of
software as a service.
Claim for Credit
The Department’s regulation at 86 Ill. Adm. Code 130.1501 describes the
procedures used to obtain a credit for sales tax that is erroneously paid. Please note that
only persons who have actually paid tax to the Department can file a claim for credit.
Since retailers usually pay the tax to the Department, usually only retailers can file a claim
for credit.
To file this claim, however, if a seller has collected tax from a purchaser, it must
first prove to the Department that it has unconditionally repaid the taxes to the purchaser.
The taxpayers must apply for the credit in the manner described in the rule. Under Illinois
sales tax laws, retailers are not required to file claims for credit. Please note that the
Department has no authority to compel the seller to file a claim for credit. As this
regulation explains, this procedure is a matter of business between the purchaser and the
retailer – the retailer is not required by the tax laws to file a claim for credit.

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If a retailer does not agree to file a claim for credit on a given transaction, the
purchaser must enforce his right to any refund of taxes collected as he would any other
debt owed to him.
Please note that the form ST-6, Claim for Prior Overpayment/Request for Action
on a Credit Memorandum, is not the form to use in the situations you have described. If
the retailer has paid the amount that was shown due on an original Form ST-1, Sales and
Use Tax Return, the retailer must file a corresponding ST-1-X, Amended Sales and Use
Tax Return for that same period if it later determines that all or part of the tax shown on
the original return was paid in error.
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,
Alexis K. Overstreet
Deputy General Counsel
Sales and Excise Tax Policy
AKO:slc