Illinois SaaS Taxability: Private Letter Rulings on Online & Mobile App Access

The Illinois Department of Revenue published two private letter rulings clarifying sales and use tax rules for software access via online and mobile applications. Two companies that provide their users access to health, wellness, and lab-tasting information hosted in the cloud on out-of-state servers through a web portal or downloaded onto mobile phones or other electronic devices initiated the procedure for rulings.

Facts of the Cases and the Department Rulings

In these two cases, one company is a foreign company based outside the US, whereas the other is a US-based company. 

The first company offers subscriptions to access information hosted in the cloud through a web portal or downloaded application on mobile devices like phones or tablets. The company provides its customers with access to body data insights, personal health coaching, workouts, meal plans, and progress tracking, which, according to the company, are primarily Software-as-a-Service (SaaS).

The second company facilitates lab testing across the US, including Illinois. The company explained that its services include data processing, translation, and exchange services. The company recently exceeded the economic nexus threshold but believes that its services are not subject to sales and use tax in Illinois.

On separate occasions, both companies requested the Department of Revenue (DOR) to rule on whether their services are exempt from or subject to sales and use tax in Illinois.

After carefully and deliberately analyzing and evaluating the facts of both cases, the DOR concluded that services provided by companies are not taxable in Illinois since the users do not receive any tangible personal property in exchange for a fee that they pay.

Although the prewritten software and specific SaaS are taxable in Illinois, the DOR concluded that services provided by both companies do not meet the criteria for their services to be taxed.

Conclusion

As the ruling states, data processing services, such as electronic transfer or downloaded data, are not considered a transfer of tangible personal property. For SaaS to be taxable in Illinois, two conditions must be met. The provider must enable its users to access SaaS remotely and provide an API, applet, desktop agent, or remote access agent to allow the users to access the provider’s network and services.

Source: Illinois Department of Revenue - ST 24-0002-PLR, Illinois Department of Revenue - ST 24-0003-PLR