Illinois – Taxability of Computer Software and an Update on Private Letter Rulings Regarding this Topic

SALT Report 2416 – The Illinois Department of Revenue issued guidance regarding the application of sales and use tax to computer software and maintenance agreements. In this particular case, the Taxpayer requested that the Department review its Software License Agreement and Software Maintenance Agreement as one of its customers was under audit and facing substantial penalties due to the language in the Agreement.

In its response, the Department stated that they would not issue a Private Letter Ruling regarding whether computer software is taxable as canned software or exempt as custom software. Further, the Department stated that they will no longer issue any Private Letter Rulings regarding this matter. The Department stated that regulation 86 Illinois Adm. Code 130.1935 clearly indicates their position on this matter and that the licensee/licensor should read the regulation to determine whether a specific license of prewritten computer software is taxable under subsection (a)(1) of 86 Illinois Adm. Code 130.1935.

Therefore, instead of the Private Letter Ruling the Department issued a General Information Letter. The GIL states that in most cases the retail sale or transfer of “canned” computer software is taxable in Illinois regardless of the means of delivery. For example, the sale or transfer of canned computer software downloaded electronically would be taxable. However, if the computer software consists of custom computer programs prepared to the exact specifications of the customer, they may not be taxable.

Additionally, if all of the following criteria are met a license of software is not a taxable retail sale if:

  • It is supported by a written agreement signed by the licensor and the customer,
  • It prohibits 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

The GIL also addresses the taxability of repair or maintenance agreements, optional maintenance agreements, updates to canned software, training, telephone assistance, installation consultation, and other maintenance agreement charges.

For Further Information

Illinois Department of Revenue – General Information Letter ST 13-0015-GIL