What is the taxability of SaaS in Illinois?

In Illinois, SaaS is taxable only if users remotely access the software and are provided tools like APIs, applets, or remote access agents to interact with the provider's network.

What criteria must SaaS meet to be taxable in Illinois?

For SaaS to be taxable, the provider must enable remote access to the software and supply mechanisms like APIs or remote access agents for users to interact with the service.

Are subscription-based wellness and health apps taxable in Illinois?

According to recent rulings, subscription services providing access to health and wellness data are not taxable in Illinois if no tangible personal property is transferred.

Does economic nexus impact the taxability of digital services in Illinois?

While economic nexus may require companies to register for sales tax in Illinois, the taxability of digital services like SaaS depends on whether tangible property is exchanged or taxable criteria are met.

What did the Illinois Department of Revenue conclude in recent SaaS rulings?

The Illinois Department of Revenue ruled that certain SaaS offerings, including subscription-based access to health data and lab testing facilitation, are not taxable since they do not involve tangible property transfers.

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

Q: Are data processing services subject to Illinois sales tax?

No, data processing services, such as electronic transfer or downloaded data, are not considered a transfer of tangible personal property and are not taxable in Illinois.

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