Illinois – Taxability of Computer Software and Licenses

SALT Report 1471 - The Illinois Department of Revenue issued a general information letter regarding the taxation of computer software and Licenses.  In general, service occupation and use taxes do not apply to sales that do not involve the transfer of tangible personal property, and  Ill. Adm. Code 130.2105(a)(3) states that information or data electronically transferred or downloaded is not considered the transfer of tangible personal property.

Computer Software

Canned computer software is considered taxable tangible personal property regardless of how it is transferred to the customer; tape, disc, card, electronic means, or other media.  However, if the computer software consists of custom computer programs, then these sales may not be taxable retail sales.

Software Licenses

Section 130.1935 states that neither the transfer of software nor any subsequent software updates will be subject to Retailers’ Occupation Tax if:

  • It is evidenced by a written agreement signed by the licensor and the customer,
  • It restricts the customer’s duplication and use of the software,
  • It prohibits the customer from licensing, sublicensing or transferring the software to a third party without the permission and continued control of the licensor,
  • The licensor has a policy of providing another copy at minimal or no charge if the customer loses or damages the software, or permits the licensee to make and keep an archival copy, and this 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
  • 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.
Additionally, it is common for software to be licensed over the internet if the customer checks a box that states that they accept the licensing terms; however Illinois does not accept this as a written agreement signed by a licensor and a customer. To meet the signature requirement for an exempt software license, the agreement must contain the written signature of the licensor and customer.
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