Is a signed 'past-use license' agreement -- resolving a dispute over unlicensed access to canned software -- a taxable retail sale, or can it be reclassified as a non-taxable settlement?

Plain-English summary

A company that licenses digital fonts as "prewritten/canned software" found itself in a billing dispute with one of its business customers. The vendor's business model: most customers license and pay before using the fonts, but sometimes the vendor discovers a company accessing its fonts without ever having paid for a license. When that happens, the vendor reaches out and offers the company a choice -- become a properly licensed "current-use" customer going forward, or sign a "past-use license" covering the access that already happened. In this dispute, the customer signed the past-use license and paid the invoiced amount, MINUS the sales tax the vendor had charged -- arguing that what they'd really signed was just a "settlement to make the situation go away," admitting to zero actual use, and that "settlements are not subject to sales tax in Illinois." The vendor disagreed and asked the Department to settle who was right.

The Department's answer squarely favors the vendor's reading of the law, even though it declined to issue this as a formal, binding Private Letter Ruling (deciding the issue was already resolved by existing law and regulations). Illinois taxes "sales at retail" -- any transfer of ownership or title to tangible personal property for consideration, not for resale -- and this expressly includes sales of "canned" computer software, which counts as tangible personal property REGARDLESS of how it's delivered: tape, disc, card, electronic means, or any other media. Once all the elements of a sale at retail are present (a transfer of property for consideration), tax is owed on the gross receipts of that sale. Critically, the Department didn't validate the idea that calling an agreement a "settlement" changes its tax character -- the contract itself, in this case, expressly granted a "past use license" in exchange for payment, and separately stated that the fee excluded taxes the customer would be responsible for paying. Those contract terms point to a licensing transaction, not a generic legal settlement.

What this means for you

Software and digital-content licensors

If a customer accesses your product without a license and you later formalize that access with a signed license agreement in exchange for payment, that's still a taxable software transaction under Illinois law -- the "past use" framing doesn't convert it into a non-taxable settlement. Keep your contract language consistent (grant of a license, fee for that license, taxes separately identified as the customer's responsibility) to support that characterization if a dispute arises.

Businesses disputing sales tax on a signed agreement

Don't assume that labeling a signed, paid agreement a "settlement" removes sales tax -- the Department looks at whether the underlying transaction meets the "sale at retail" definition (a transfer of property for consideration), not just what the document calls itself.

Accountants and tax professionals handling software licensing disputes

Review the actual contract language before advising a client either way. Terms like "grants a license" and a separate clause addressing taxes as the customer's responsibility are the kind of language the Department pointed to as evidence of a taxable licensing transaction, not a settlement.

Common questions

Q: Is canned software taxable in Illinois no matter how it's delivered?
A: Yes. Canned computer software is treated as taxable tangible personal property regardless of the means of delivery, including tape, disc, card, or purely electronic/digital access.

Q: Can a company avoid sales tax by calling a paid license agreement a "settlement"?
A: Not just by using that label. The Department looks at whether the transaction actually involves a transfer of property for consideration -- a signed agreement that grants a license and separately addresses taxes as the customer's responsibility points to a taxable sale, not a settlement.

Q: Does it matter whether the customer actually used the software during the disputed period?
A: The Department's answer focused on whether the elements of a taxable "sale at retail" were met based on the license granted and consideration paid -- it didn't validate a theory that the customer's claimed non-use converts the transaction into something else.

Q: Why did the Department issue a GIL instead of the binding Private Letter Ruling the vendor requested?
A: Because it found existing law and regulations already dispositive of the issue -- the Department has discretion to decline a PLR request on that basis and respond with general guidance instead.

Citations and references

Statutes:

• 35 ILCS 120/2 (Retailers' Occupation Tax Act imposition)
• 35 ILCS 105/3, 105/3-45 (Use Tax Act imposition and payment)

Regulations:

• 86 Ill. Adm. Code 130.101(a) (Retailers' Occupation Tax measured by gross receipts)
• 86 Ill. Adm. Code 130.201(a)(1) (definition of "sale at retail")
• 86 Ill. Adm. Code 130.1935(a) (canned computer software taxable regardless of delivery method)
• 86 Ill. Adm. Code 150.130(b) (retailer's reimbursement for Use Tax collected)

Source

• Landing page: Illinois 2025 Sales Tax Letter Rulings
• Original PDF: ST25-0054-GIL.pdf

Original ruling text

ST 25-0054-GIL

10/24/2025

COMPUTER SOFTWARE

Sales of “canned” computer software are taxable retail sales in Illinois regardless of
the means of the delivery of that software. See 86 Ill. Adm. Code 130.1935. (This is a
GIL).
October 24, 2025
NAME
TITLE
COMPANY1
ADDRESS
Dear NAME:
This letter is in response to your letter dated August 25, 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.
Whether to issue a private letter ruling in response to a letter ruling request is within
the discretion of the Department. 2 Ill. Adm. Code 1200.110(a)(4). If there is case law or
there are regulations dispositive of the subject of the request, the Department will decline
to issue a private letter ruling on the subject. 2 Ill. Adm. Code 1200.110(a)(3)(D). Having
reviewed your request, the Department notes that there are laws and regulations dispositive
of the subject of the request. Thus, the Department is declining to issue a private letter ruling
in response to your request. We hope, however, the following General Information Letter
will be helpful in addressing your questions.
In your letter you have stated and made inquiry as follows:
We need to request a Private Letter Ruling in a sales tax dispute with a
customer of ours about the taxability of the sale of canned software accessed
digitally. Specifically, it relates to the timing of the customer’s use of our
product.
Our Information:

COMPANY1
Page 2
October 24, 2025
COMPANY1 FEIN# ##-#######, IL Sales Tax Account# ####-####
Customer’s Information:
COMPANY2, FEIN# ##-#######
Specific Sales Tax Period: MONTH YEAR
Statement of Facts: COMPANY1 is in the business of selling access to
the use of our Fonts via the licensing of “Prewritten/Canned Software, zero
modifications” [NAICS ###### (2017) and ###### (2022)]. This creates a sales
tax liability within the state of IL which considers this a retail sale of tangible
personal property. Most sales are made before the customer attempts to use
our product. In some cases, our research finds where a company is accessing
our product without licensing. We assume good intentions and reach out to
the customer to get them licensed. At that time, they may choose to contract
our services and keep a current license via purchase – these are referred to
internally as “current-use” contracts. Some choose not to enter a relationship
with us and just pay the amount billed to them for their use of our product
without a license – these are referred to internally as “past-use” contracts.
Analysis of Facts:
Our Customer’s Position on Facts: Our customer maintains that the
attached contract is “just a settlement to make the situation go away and
admits zero actual use” of our product by the customer having signed the
contract and paid the invoice, minus the sales tax charged. Their position is
that their interpretation makes this “sale” into a “settlement”. That they are
not liable to pay the billed sales tax because “settlements are not subject to
sales taxes in the state of IL”. They want their purchase to be reclassified as a
settlement and the sales tax removed from their invoice.
Our position on Facts: At no point is a sale of tangible personal
property to be reclassified as a “settlement” – however, we often have
customers push back and assert that these cases are “non-taxable
settlements” and refuse to pay the sales taxes billed. In these cases of “pastuse” contracts (where the customer has accessed our software without a
license agreement in place) our position has always been in support of the
intent of the IL sales tax laws – that regardless of the timing of when the
customer accesses/accessed the product, that if the product type is taxable,
we charge sales tax as of the date of invoicing. (Obviously, this is Except in

COMPANY1
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October 24, 2025
cases where we receive a valid exemption certificate from our customer that
removes our sales tax collection liability).

1. In the contract, it specifies in section 2-Past Use License: “In
   consideration of Customer’s agreement to make the payments called
   for herein, COMPANY1 hereby grants Customer a past use license as
   set forth in Attachment 1 to this Agreement.”
2. In the contract, it specifies in Section 5-Consideration: “The Fee
   excludes taxes, duties or similar charges. Any applicable sales, use,
   excise, withholding, value added, property, duty, customs charges and
   other taxes and government charges imposed on transactions,
   excluding any taxes based on COMPANY1 net income, shall be paid by
   Customer.”
   The two items referenced above show that we were fully
   transparent and up-front that this was not a settlement but a license fee
   that would be subject to sales taxes.
   At this time, due to continued dispute, we request that the state of IL
   make an official determination as to which party is correctly upholding the IL
   Sales Tax laws so that this matter can be resolved. Thank you.
   Declaration of no pending matters: The sales tax was remitted timely
   by COMPANY1 for the period of MONTH YEAR, and the issue is not currently
   under audit or involved in litigation with the Department of Revenue.
   Review of legal authority: We have reviewed the relevant Illinois tax
   statutes, regulations, and administrative opinions but were unable to locate
   dispositive authority on the matter regarding the timing of the use of a
   product at any point causing the sale of tangible personal property to be
   reclassified as a “settlement”.
   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. 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. 35 ILCS 105/3; 86 Ill. Adm. Code 150.101. These two 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. 35 ILCS

COMPANY1
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October 24, 2025
105/3-45; 86 Ill. Adm. Code 150.401. 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. 86 Ill. Adm. Code 150.130(b). If the purchases occur outside Illinois,
purchasers must self-assess their Use Tax liability and remit it directly to the Department.
35 ILCS 105/3-45; 86 Ill. Adm. Code 150.701(a).
Retailer’s Occupation Tax is measured by the retailer’s gross receipts from such
sales made in the course of such business. 86 Ill. Adm. Code 130.101(a). “Sale at retail”
mean any transfer of the ownership of or title to tangible personal property to a purchaser,
for the purpose of use or consumption, and not for the purpose of resale in any form as
tangible personal property to the extent not first subject to a use for which it was purchased,
for a valuable consideration. 86 Ill. Adm. Code 130.201(a)(1). This includes sales or transfers
of “canned” computer software intended for general or repeated use. Canned 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. The sale or
transfer by a retailer of computer software which is subject to manufacturer licenses
restricting the use or reproduction of the software is also taxable. 86 Ill. Adm. Code
130.1935(a). Generally, if all the elements for a sale at retail are met, i.e., the transfer of
tangible personal property for use or consumption, for consideration, tax is owed on the
gross receipts of that sale.
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,

George L. Encarnacion, Jr.
Associate Counsel
GLE:sce