Does an out-of-state company that sells cloud-based software and app subscriptions to an Illinois client owe Illinois Service Use Tax or sales tax on those subscription charges?

Plain-English summary

An out-of-state company that sells cloud-based software and a mobile app to an Illinois client asked the Illinois Department of Revenue whether it needed to start taxing that client and paying Illinois taxes, after an accounting vendor flagged that it had crossed a gross-sales threshold with that client. The company has no physical presence or employees in Illinois; its desktop software is internet-based with no physical download, and its mobile app is a free download that unlocks paid licensed access.

Because this is a General Information Letter (GIL) rather than a Private Letter Ruling, the Department did not issue a yes/no answer tailored to this company's exact contract. Instead, it laid out the general legal framework a business in this situation needs to work through:

• Sales vs. services. Illinois' Retailers' Occupation Tax and Use Tax (together, "sales tax") apply to sales of tangible personal property. They do not apply to sales of services. Businesses that provide services but also transfer tangible personal property (TPP) incident to that service are taxed instead under the Service Occupation Tax / Service Use Tax framework, using one of four tax-base methods (separately stated selling price, 50% of the bill, or a de minimis serviceman's cost-price method).
• Economic nexus threshold for out-of-state servicemen. Since October 1, 2018, an out-of-state serviceman with $100,000 or more in gross receipts from Illinois service sales, or 200 or more separate Illinois transactions in the preceding 12 months, is a "serviceman maintaining a place of business in this State" (35 ILCS 110/2) and generally must register to collect and remit Service Use Tax -- unless it qualifies as an unregistered de minimis serviceman (cost ratio under 35%, or 75% for prescription drugs/graphic arts) that instead just pays Use Tax to its own suppliers.
• Computer software and SaaS. "Canned" computer software is generally taxable tangible personal property, but a license can be exempt if it meets a five-part test (written and signed agreement, restrictions on duplication/transfer, a replacement-copy policy, and a return/destroy-at-end-of-license requirement). Critically, the Department states that cloud-based software that is never downloaded and is only accessed remotely is not subject to tax, and that "Illinois does not tax subscriptions of software as a service." Viewing, downloading, or streaming data over the internet is not, by itself, a transfer of tangible personal property.
• No transfer, no tax. If a transaction involves no transfer of tangible personal property to the customer at all, it generally is not subject to Retailers' Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax.

The Department did not resolve exactly how the inquiring company's specific software/app arrangement nets out -- that turns on facts (e.g., whether any downloadable component, API, applet, or agent is transferred) that a GIL does not adjudicate.

What this means for you

SaaS and cloud-software companies selling into Illinois

If your product is truly cloud-based -- accessed remotely with nothing downloaded to the customer's device -- the Department's position is that the subscription itself is not taxable, and it says so in plain terms: "Illinois does not tax subscriptions of software as a service." But if you also provide the customer an API, applet, desktop agent, or remote access agent to enable that access, the Department treats that as a transfer of computer software, which is potentially taxable unless it qualifies as an exempt license under 86 Ill. Adm. Code 130.1935(a)(1) (signed agreement, use/duplication restrictions, replacement policy, and return/destroy-at-end-of-term terms). A click-through "I agree" box does not satisfy the signed-agreement requirement.

Out-of-state businesses crossing Illinois sales thresholds

Crossing $100,000 in gross receipts or 200 transactions with Illinois customers in a rolling 12-month period can make you a "serviceman maintaining a place of business in this State" under 35 ILCS 110/2, triggering a Service Use Tax registration and collection obligation reassessed quarterly and then annually. But meeting that threshold does not automatically mean you owe tax on every dollar you bill -- it only matters for transactions that involve a taxable transfer of tangible personal property incident to your service. A servicer whose cost ratio of TPP transferred is under 35% of gross receipts (75% for prescription drugs/graphic arts) and who is not otherwise required to register under the Retailers' Occupation Tax Act is not required to register or collect Service Use Tax at all, even after crossing the $100,000/200-transaction threshold.

Accountants and tax professionals

This GIL is a useful map of the decision tree but is not a fact-specific determination. To actually answer "should this client be taxed," you need to (1) confirm whether any tangible personal property (including downloadable software components) is transferred incident to the service, (2) calculate the cost ratio to determine de minimis status, and (3) confirm whether the $100,000/200-transaction threshold is met on a rolling basis. A taxpayer who needs a binding answer on its specific contract should request a Private Letter Ruling under 2 Ill. Adm. Code 1200.110 rather than rely on this GIL, which is expressly non-binding under 2 Ill. Adm. Code 1200.120.

Common questions

Q: Does Illinois tax software-as-a-service (SaaS) subscriptions?
A: Generally no. The Department states that computer software accessed through a cloud-based delivery system -- never downloaded, only accessed remotely -- is not subject to tax, and that "Illinois does not tax subscriptions of software as a service."

Q: If my SaaS product includes a downloadable app, applet, or API, does that change things?
A: Potentially yes. If a provider gives the subscriber an API, applet, desktop agent, or remote access agent to enable access, the Department treats the subscriber as receiving computer software, which can be taxable even if there's no separate charge for it, unless the transfer qualifies as an exempt software license under 86 Ill. Adm. Code 130.1935(a)(1).

Q: What is the dollar/transaction threshold that triggers Illinois nexus for an out-of-state service business?
A: $100,000 or more in gross receipts from Illinois service sales, or 200 or more separate transactions, in the preceding 12-month period, per 35 ILCS 110/2. This is checked quarterly, and once triggered, the obligation to register and collect lasts at least a year before being reassessed.

Q: Did the Department tell this specific company whether to tax its client?
A: No. This is a General Information Letter, not a Private Letter Ruling -- the Department laid out the general rules on Service Use Tax, de minimis servicemen, and SaaS taxability but did not issue a binding determination on this company's specific contract. A GIL is not a statement of Department policy and is not binding on the Department.

Q: What if a customer just downloads free software from an out-of-state server with no further involvement from the seller?
A: The Department notes that if an Illinois customer downloads software for free from an out-of-state seller's own server, and the seller exercises no further power or control over the property in Illinois, the seller has made no taxable use of the property in Illinois and the customer incurs no Use Tax or Service Use Tax liability from that download.

Citations and references

Statutes and rules:

• 35 ILCS 110/2 (Service Use Tax Act -- "serviceman maintaining a place of business in this State" / economic nexus thresholds)
• 35 ILCS 120/2-25 (Retailers' Occupation Tax Act, definition of "computer software")
• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax, general)
• 86 Ill. Adm. Code 150.101 (Use Tax, general)
• 86 Ill. Adm. Code 140.101, 140.101(f) (Service Occupation Tax Act; de minimis serviceman cost-ratio test)
• 86 Ill. Adm. Code 140.108 (de minimis serviceman not required to register)
• 86 Ill. Adm. Code 160.115 (Service Use Tax where registered under Section 2a of the Retailers' Occupation Tax Act)
• 86 Ill. Adm. Code 160.130(c) (out-of-state serviceman must register and collect Service Use Tax)
• 86 Ill. Adm. Code 130.1935, 130.1935(a)(1) (taxability of canned computer software; exempt software license test)
• 86 Ill. Adm. Code 130.2105(a)(3) (viewing/downloading/transmitting data over the internet is not a TPP transfer)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2025.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2025/st25-0034-gil.pdf

Original ruling text

ST 25-0034-GIL 05/21/2025 SERVICE USE TAX
Every out-of-State serviceman maintaining a place of business in this State must
register and collect Service Use Tax from service customers, unless such serviceman
is authorized to pay Use Tax as provided in 86 Ill. Adm. Code 140.108. 86 Ill. Adm.
Code 160.130(c). (This is a GIL).
May 21, 2025
NAME
COMPANY
EMAIL
Dear NAME:
This letter is in response to your email dated January 3, 2025, 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 email you have stated and made inquiry as follows:
We were recently notified by one of our accounting vendors that we have
passed a threshold of gross sales of $XX for a client who uses our cloud based
software in CITY, IL. We provide the client “COMPANY1” with an application
and software that they use. We have no physical presence in the state of
Illinois nor any employees in Illinois. Our desktop software is internet based
and has no physical download. The mobile application they use is a free
download provided on the Apple and Google Play store where they gain
access to use by purchasing licensing from us.
To ensure compliance with the state of Illinois, we have applied for a sales
license and the information is below:

COMPANY/NAME
Page 2
May 21, 2025
Account Type

Account ID/License
no.

IL Business Income Tax

XX-XX

Sales/Use Tax & E911
Surcharge

XX-XX

We are asking you to review our current client contract and advise whether we
should be taxing this client and paying the state taxes.
Note* I have attached a copy of their purchase order agreement as well as a
link to our Master Services Agreement (MSA) for your review which they are
bound to.
Please advise if you need any further information or have any additional
questions. We appreciate your attention to this inquiry.
DEPARTMENT’S RESPONSE:
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. 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.
Service Occupation Tax
Retailers’ Occupation Tax and Use Tax do not apply to sales of service. 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 liability or Use Tax liability for servicemen, depending upon
which tax base they choose to calculate their liability.

COMPANY/NAME
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May 21, 2025
Servicemen may calculate their tax base in one of four ways: (1) separately stated
selling price of tangible personal property transferred incident to service; (2) 50% of the
serviceman’s entire bill; (3) Service Occupation Tax on the serviceman’s cost price if the
serviceman is a registered de minimis serviceman; or (4) Use Tax on the serviceman’s cost
price if the serviceman is de minimis and is not otherwise required to be registered under
Section 2a of the Retailers’ Occupation Tax Act.
Using the first method, servicemen may separately state the selling price of each
item transferred as a result of sales of service. The tax is based on the separately stated
selling price of the tangible personal property transferred. If servicemen do not wish to
separately state the selling price of the tangible personal property transferred, those
servicemen must use the second method where they will use 50% of the entire bill to their
service customers as the tax base. Both of the above methods provide that in no event may
the tax base be less than the cost price of the tangible personal property transferred. Under
these methods, servicemen may provide their suppliers with Certificates of Resale when
purchasing the tangible personal property to be transferred as a part of sales of service.
They are required to collect the corresponding Service Use Tax from their customers.
The third way servicemen may account for their tax liability only applies to de minimis
servicemen who have either chosen to be registered or are required to be registered because
they incur Retailers’ Occupation Tax liability with respect to a portion of their business.
Servicemen may qualify as de minimis if they determine that their annual aggregate cost
price of tangible personal property transferred incident to sales of service is less than 35%
of their annual gross receipts from service transactions (75% in the case of pharmacists and
persons engaged in graphic arts production). See 86 Ill. Adm. Code 140.101(f). This class
of registered de minimis servicemen is authorized to pay Service Occupation Tax (which
includes local taxes) based upon the cost price of tangible personal property transferred
incident to sales of service. Servicemen that incur Service Occupation Tax collect the
Service Use Tax from their customers. They remit tax to the Department by filing returns and
do not pay tax to their suppliers. They provide suppliers with Certificates of Resale for the
tangible personal property transferred to service customers.
The final method of determining tax liability may be used by de minimis servicemen
that are not otherwise required to be registered under Section 2a of the Retailers’
Occupation Tax Act. Servicemen may qualify as de minimis if they determine that the annual
aggregate cost price of tangible personal property transferred as an incident of sales of
service is less than 35% of the servicemen’s annual gross receipts from service transactions
(75% in the case of pharmacists and persons engaged in graphic arts production). Such de
minimis servicemen handle their tax liability by paying Use Tax to their suppliers. If their
suppliers are not registered to collect and remit tax, the servicemen must register, selfassess, and remit Use Tax to the Department. The servicemen are considered to be the endusers of the tangible personal property transferred incident to service. Consequently, they

COMPANY/NAME
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May 21, 2025
are not authorized to collect a “tax” from the service customers. See 86 Ill. Adm. Code
140.108.
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.
Service Use Tax
The Service Use Tax is a privilege tax imposed on the privilege of using, in this State,
tangible personal property that is received anywhere as an incident to a purchase of service
from a serviceman. However, if the serviceman would not be taxable under the Service
Occupation Tax despite all elements of the sale of service occurring in Illinois, then the tax
imposed by the Service Use Tax Act does not apply to the use of such property in this State.
Any evidence that property was sold by any person for delivery to a person residing in or
engaged in business in this State shall be prima facie evidence that such property was sold
for use in this State.
Effective October 1, 2018, an out-of-State serviceman making sales of service to
Illinois purchasers with gross receipts totaling $100,000 or more or making 200 or more
separate sales of service transactions meets the definition of “serviceman maintaining a
place of business in this State”. Out-of-State servicemen must determine on a quarterly
basis whether they meet either of the tax remittance thresholds for the preceding 12-month
period. If a threshold is met, the serviceman will be required to register and collect and remit
Service Use Tax from their Illinois customers for one year. At the end of that one-year period,
the serviceman may reassess on a yearly basis looking at the last four quarters. See 35 ILCS
110/2.
Every out-of-State serviceman maintaining a place of business in this State must
register and collect Service Use Tax from service customers, unless such serviceman is
authorized to pay Use Tax as provided in 86 Ill. Adm. Code 140.108. 86 Ill. Adm. Code
160.130(c). If the serviceman meets the definition of a “serviceman maintaining a place of
business in this State” in Section 2 of the Service Use Tax Act, 35 ILCS 110/2, and either (1)
his or her cost ratio is equal to or greater than 35% (75% in the case of servicemen
transferring prescription drugs or engaged in graphic arts production), or (2) he or she is
required or elects to register under Section 2a of the Retailers’ Occupation Tax Act, the
serviceman must register with the Department to collect and remit Service Use Tax on sales
of service to Illinois purchasers from locations outside of Illinois. The Department is
authorized to require these servicemen to act as tax collectors because they have
established sufficient contacts, or nexus, with Illinois. For servicemen with a cost ratio
greater than 35%, this Service Use Tax would be based on the selling price of the tangible
personal property transferred incident to the sale of service if stated separately on the

COMPANY/NAME
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May 21, 2025
invoice from the serviceman. If not stated separately, then the tax will be imposed on 50%
of the entire billing from the serviceman. For registered de minimis servicemen, the Service
Use Tax will be imposed on the serviceman’s cost price of the tangible personal property
transferred.
Out-of-State servicemen who also make retail sales to Illinois customers that are
sourced outside of Illinois, even if those sales are a small part of their business, are required
to register with the Department and remit, with respect to those transactions, Retailers’
Occupation Tax, if they meet the definition of “retailer maintaining a place of business in this
State”. Any out-of-State serviceman maintaining a place of business in this State who is
required or has elected to register under Section 2a of the Retailers’ Occupation Tax Act
must register with the Department to collect and remit Service Use Tax on all of their sales
of service to Illinois customers. If such serviceman is a de minimis serviceman, the Service
Use Tax for such serviceman is based upon the serviceman’s cost price of tangible personal
property transferred incident to the serviceman’s sales of service. 86 Ill. Adm. Code
160.115.
Finally, out-of-State servicemen who are not required to register under the Retailers’
Occupation Tax Act and whose cost ratio is less than 35% (less than 75% in the case of
servicemen transferring prescription drugs or engaged in graphic arts production) are not
required to register with the Department to collect and remit Service Use Tax on their sales
of service to Illinois consumers. This is true even if a serviceman meets the definition of
“serviceman maintaining a place of business in this State” (e.g. has met a tax remittance
threshold of $100,000 or more in gross receipts from sales of service to purchasers in
Illinois). Such servicemen would owe use tax on their cost price of the tangible personal
property that they transfer in Illinois incident to sales of service and pay that use tax to their
supplier. If that supplier is located outside of Illinois, no Illinois tax is imposed.
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. Computer software includes all types of
software including operational, applicational, utilities, compliers, templates, shells, and all
other forms. 86 Ill. Adm. Code 130.1935(a). 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. The sale or
transfer by a retailer of computer software which is subject to manufacturer licenses

COMPANY/NAME
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May 21, 2025
restricting the use or reproduction of the software is also taxable. 86 Ill. Adm. Code
130.1935(a). However, if all of the criteria provided in subsection (a)(1) of Section 130.1935
are met, then neither the sale or transfer of the software nor the subsequent software
updates 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).
Please note that it is very common for software to be licensed over the internet and
the customer to check a box that states that he or she 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.
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.

COMPANY/NAME
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May 21, 2025
Computer software is defined broadly in the Retailers’ Occupation Tax Act. However,
computer software accessed 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. 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 nontaxable license of computer software.
If an Illinois customer downloads computer software (such as an App, API, applet,
desktop agent, or remote access agent) 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. See 86 Ill. Adm. Code 130.2105(a)(3). 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 and corresponding Service Use 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. Illinois does not tax subscriptions of software as a service.
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,

TG:slc

Thomas Grudichak
Associate Counsel