Does Illinois charge sales or use tax on a video game's in-app purchases, like in-game currency and game extras?

Plain-English summary

A foreign game-distribution company asked the Illinois Department of Revenue whether its online video game — free to download, with optional in-app purchases of virtual items like in-game currency, weapons, and equipment — triggers Illinois sales or use tax. The Department's answer draws a clear line between the free download and the in-app purchases that follow it.

Downloading the game itself is not a taxable event in Illinois. The Department treats information or data that is electronically transferred or downloaded — including viewing, downloading, or streaming video, text, and other data over the internet — as something other than the transfer of tangible personal property. Because the free game download from an out-of-state server involves no transfer of tangible personal property into Illinois, and the retailer exercises no power or control over the property in the state, no Retailers' Occupation Tax or Use Tax applies to that free download.

In-app purchases are different. Under Illinois law, "computer software" is defined broadly and includes prewritten or "canned" software. Sales of canned computer software are taxable retail sales, and canned software is treated as tangible personal property no matter how it's transferred (tape, disc, card, electronic means, or other media). So when a player buys in-game currency, tools, weapons, or other extras beyond the original free download, the Department views that purchase as the sale of tangible personal property, downloaded onto the customer's computer in Illinois — a sale subject to Retailers' Occupation Tax, or Use Tax if the seller doesn't collect Retailers' Occupation Tax directly.

The ruling also walks through the mechanics of who actually owes and remits the tax. A seller located outside Illinois with no physical presence in the state is a "remote retailer." Remote retailers become obligated to collect and remit Illinois Retailers' Occupation Tax only once they cross an economic nexus threshold — $100,000 or more in cumulative gross receipts from Illinois sales, or 200 or more separate transactions with Illinois purchasers, in a rolling period. Below either threshold, a remote retailer isn't required to collect the tax, though it can voluntarily register to collect Use Tax as a courtesy to its Illinois customers, since those customers otherwise must self-assess and remit the tax themselves.

What this means for you

Game publishers and app developers

If your game (or app) is free to download but sells virtual currency, weapons, cosmetic items, or other in-app extras, those in-app sales are treated as taxable sales of tangible personal property in Illinois once you meet an economic nexus threshold — $100,000 in cumulative Illinois gross receipts or 200 separate Illinois transactions. The free download itself, by contrast, generally isn't a taxable event, since Illinois doesn't treat electronically transferred data as tangible personal property. Track your Illinois-bound sales volume and transaction count so you know when you cross into remittance obligations, and re-check your status each quarter as the rule requires.

SaaS and cloud-software companies

This letter is specifically about downloaded computer software (a game client plus purchasable in-app items), not cloud-delivered software. The ruling's core distinction — download versus no download — lines up with the broader Illinois rule that software delivered through a cloud-based system, where nothing is ever downloaded onto the customer's computer, is generally not taxed the same way as downloaded "canned" software. If your product is accessed only remotely with no download, this specific ruling's download-based reasoning doesn't automatically extend to you; consult the underlying regulation and your own facts.

Accountants and tax professionals advising remote sellers

Two separate tax concepts are doing the work here: (1) the tangible-personal-property test for whether a transaction is taxable at all (downloaded data usually is not; canned software delivered onto a customer's device usually is), and (2) the remote-retailer economic nexus test for whether your client actually has a collection obligation in Illinois. A client can have taxable sales in the first sense while having no collection duty yet in the second sense, if they haven't crossed the $100,000/200-transaction threshold. Clients under threshold can still voluntarily register to remit Use Tax as a courtesy to customers, which shifts the compliance burden off individual purchasers.

Common questions

Q: Is a free-to-download video game taxable in Illinois?
A: No. The Department does not treat the electronic download or transmission of data over the internet as a transfer of tangible personal property, so a free download from an out-of-state server is not a taxable event in Illinois.

Q: Are in-game currency and in-app purchases taxable?
A: Yes. Once a player buys in-game currency, tools, weapons, or similar extras in addition to the free download, the Department treats that as the sale of tangible personal property (canned computer software) subject to Retailers' Occupation Tax or Use Tax.

Q: My company has no office or warehouse in Illinois — do I still have to collect the tax?
A: Only if you meet the state's remote-retailer economic nexus thresholds: $100,000 or more in cumulative gross receipts from Illinois sales, or 200 or more separate transactions with Illinois purchasers. Below those thresholds you aren't required to collect and remit, though you may register voluntarily to remit Use Tax as a courtesy to your customers.

Q: What if my in-app purchases are delivered through a subscription instead?
A: This letter states that Illinois does not tax subscriptions, based on the facts presented (a non-subscription game with a la carte in-app purchases). The letter does not analyze a subscription model in depth, so a subscription-based product should be evaluated against 86 Ill. Adm. Code 130.1935's cloud-delivery and licensing provisions specifically.

Q: Does this letter bind the Department in future cases?
A: No. This is a General Information Letter (GIL), which only directs the taxpayer to relevant regulations and other sources of information. It is not a statement of Department policy and is not binding on the Department, unlike a Private Letter Ruling.

Citations and references

Statutes and regulations:

• 35 ILCS 120/2; 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax on sales of tangible personal property)
• 35 ILCS 105/3; 86 Ill. Adm. Code 150.101 (Use Tax on tangible personal property purchased at retail)
• 86 Ill. Adm. Code 130.2105(a)(3) (electronically transferred/downloaded data is not tangible personal property)
• 35 ILCS 120/2-25 (definition of "computer software")
• 86 Ill. Adm. Code 130.1935, including 130.1935(a)(1), (a)(3)-(4), and (c)(3) (canned vs. custom software, cloud delivery, licensing)
• 35 ILCS 120/1, 120/2(b); 86 Ill. Adm. Code 131.105, 131.110, 131.115, 131.120, 131.125 (remote retailer nexus thresholds and obligations)
• 86 Ill. Adm. Code 150.305(b) and (c) (donor/donee taxable use)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedure); 2 Ill. Adm. Code 1200.120 (General Information Letters are non-binding)

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/ST24-0036-GIL.pdf

Original ruling text

ST 24-0036-GIL 11/06/2024 COMPUTER SOFTWARE
The sale of computer software, including online video games, game extras, and
in-game currency, downloaded onto a customer’s computer in Illinois constitutes
the sale of tangible personal property subject to Retailers’ Occupation Tax. See
86 Ill. Adm. Code 130.101 and 130.1935. (This is a GIL.)
November 6, 2024
COMPANY
NAME
EMAIL
Dear NAME:
This letter is in response to your letter dated September 5, 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:
Hi,
Thank you for the information.
I’d like to point out again as mentioned in the previous email below that we
are a game distribution company and so the in-app purchases are virtual
items (in-game currency, tools, etc.). Are these considered as tangible items
and therefore subject to use tax in IL? Thank you.
(Third Email of August 27, 2024)
Hope all is well.

COMPANY/NAME
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November 6, 2024
I’d like to reach out further for the below sales tax question. You mentioned
that in-app purchases are subject to Illinois sales tax. When I did the sales
and use tax registration, it did not let me to select sales tax as we are a
remote seller that does not have physical location in Illinois. Therefore, we
selected use tax and are currently filing the use tax return. However, it also
looks like the use tax is only applicable for personal property. Do in-app
purchases fall under the personal property category and subject to use tax?
Thank you.
(Second Email of July 3, 2024)
Further to your previous email below, I’d like to point out that the game
(software) is free to download. Additionally, below is what I received from a
tax advisor stating that in-app purchases are nontaxable because it is
considered transfers of data downloaded electronically. “In-app purchases
are downloaded electronically and thus, do not constitute the taxable
transfer of tangible personal property. See Ill. Admin. Code tit. 86, §
130.2105(a)(3).”
Therefore, I’d like to confirm with you and see if the above understanding is
not correct. Any comments and/or thoughts would be greatly appreciated.
Thank you.
(Original Email of June 7, 2024)
Dear Sir or Madam,
We are contacting you regarding the sales and use tax question in the State
of Illinois. We are a foreign corporation based in COUNTRY and provide
online video games to players in the US. The online game is free to
download in the app store and the players can choose to make in-game
purchases for game currency, weapon, equipment, etc. to enhance their
gaming experience and it is purely optional. All the in-game purchases
made can only be used in the game and cannot be converted to real money
or any equivalent.
We looked through the state department website and could not find a clear
answer whether the service we are providing is subject to sales and use tax
in the State of Illinois. Could you please advise and provide the relevant tax
codes, if possible? Thank you.
DEPARTMENT’S RESPONSE:

COMPANY/NAME
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November 6, 2024
Retailers’ Occupation Tax and Use Tax
The Illinois Retailers’ Occupation Tax Act imposes a tax upon persons engaged in
this State in the business of selling tangible personal property to purchasers for use or
consumption. See 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. 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 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. 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. See 86 Ill. Adm. Code 130.2105(a)(3).
A remote retailer is a retailer that does not maintain within Illinois, directly or by a
subsidiary, an office, distribution house, sales house, warehouse or other place of
business, or any agent or other representative operating within this State under the
authority of the retailer or its subsidiary, irrespective of whether that place of business or
agent is located in Illinois permanently or temporarily or whether the retailer or subsidiary
is licensed to do business in this State. A retailer that fulfills any orders from its inventory
in Illinois is not a remote retailer. See 35 ILCS 120/1; 86 Ill. Adm. Code 131.105. As of
January 1, 2021, a remote retailer is engaged in the occupation of selling at retail in Illinois
for purposes of the Retailers’ Occupation Tax Act if either of the following thresholds is
met:
A)

the cumulative gross receipts from sales of tangible personal property to
purchasers in Illinois are $100,000 or more; or

B)

the remote retailer enters into 200 or more separate transactions for the
sale of tangible personal property to purchasers in Illinois.

See 35 ILCS 120/2(b); 86 Ill. Adm. Code 131.115. A remote retailer meeting either of
these thresholds is liable for all applicable State and local retailers’ occupation taxes
administered by the Department on all retail sales shipped or delivered to Illinois
purchasers. See 86 Ill. Adm. Code 131.110(a) and131.115(a). Sections 131.115 and

COMPANY/NAME
Page 4
November 6, 2024
131.120 further discuss how to calculate sales to determine whether a retailer meets
either of these thresholds.
If you are a remote retailer meeting either threshold, you are deemed to be
engaged in the business of selling at the Illinois location to which the tangible personal
property is shipped or delivered or at which possession is taken by the purchaser. State
and local retailers’ occupation taxes are incurred at the rate in effect at this location. See
86 Ill. Adm. Code 131.110(b).
If, pursuant to the criteria set out in Section 131.115, the remote retailer determines
that its sales to Illinois purchasers did not meet either threshold, it is not required to collect
and remit State and local retailers’ occupation taxes. However, it may notify the
Department that it wishes to change its registration status to collect and remit use tax as
a courtesy to its Illinois purchasers, since those purchasers will still incur a Use Tax
liability that they must otherwise self-assess and remit directly to the Department. See
86 Ill. Adm. Code 131.115(d). Remote retailers not required to remit State and local
retailers’ occupation taxes must redetermine, on a rolling quarterly basis, whether they
are obligated to begin remitting State and local retailers’ occupation taxes. See 86 Ill.
Adm. Code 131.115(e).
Please review the criteria for determining whether your company meets either
threshold set out in 86 Ill. Adm. Code 131.115. If your company meets either threshold,
you must change your registration with the Department to reflect your new status and
begin collecting and remitting all State and local retailers’ occupation taxes in effect at the
Illinois location to which the tangible personal property is shipped or delivered or at which
possession is taken by the purchaser. See 86 Ill. Adm. Code 131.125. However, if your
company does not meet either threshold, you may continue in your current registration
status with the Department and remit Illinois Use Tax as a courtesy to your customers at
the rate of 6.25%.
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 taxed
on the value of the finished product which it produces themself, such donor/user is taxable
on the purchase price of the tangible personal property that the donor/user purchases
and incorporates into such finished product which it 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

COMPANY/NAME
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November 6, 2024
“‘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, including video games, that is not custom software
is considered to be canned computer software.
Computer software is defined broadly in the Retailers’ Occupation Tax Act.
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 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. 86 Ill. Adm. Code 130.1935(a)(3) and (4). 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. See
86 Ill. Adm. Code 130.1935(a)(1) for taxability of licenses. Your letter has not stated any
facts indicating this is a computer software licensing issue.
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 does not tax subscriptions.
According to your emails, the company provides online game play without a
subscription and sells virtual items that the user can purchase and use in the game as
currency or tools. In-app purchases that are in addition to the original, free download are
taxable under the Retailers’ Occupation Tax. While the original download of the game
from a server located outside of Illinois would not be a taxable event in Illinois, the
subsequent sale of extras and in-game currency would constitute a sale of tangible
personal property in Illinois subject to State and local retailers’ occupation tax. A taxpayer
making such sales would have a remittance obligation as long as a threshold described

COMPANY/NAME
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November 6, 2024
above has been met. If no tax remittance threshold has been met, a taxpayer may
register to voluntarily remit Illinois Use Tax as a courtesy to its customers.
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 (217) 782-3336.
Very truly yours,

Kimberly Rossini
Associate Counsel
KAR:slc