Illinois Sales Tax Update: Cloud-Based SaaS Subscriptions Excluded

As part of its jurisdiction, the Illinois Department of Revenue (IDOR) can issue two types of letter rulings: Private Letter Rulings (PLRs) or the General Information Letter (GIL) to address the question raised by a taxpayer. Whereas the PLRS is binding for the IDOR and the taxpayer who requested the ruling, the GIL directs taxpayers to IDOR regulations or other sources of information regarding the topic they have inquired about. 

The IDOR issued a GIL to answer the buyer's question about applying the sales and use tax to the app's subscription fees.

The Issue and IDOR Position

In its elaborate response to the issue presented by the taxpayer who was charged USD 10 sales tax regarding the app's annual subscription fee, the IDOR clarified two crucial points. The first one is that, as a general rule, canned computer software sales are subject to sales tax in Illinois, regardless of the format in which it is transferred. It is unimportant if the canned software is transferred to the buyer electronically or on any other media. In any case, the transaction is taxable under sales tax rules.

However, the IDOR stated that computer software provided through a cloud-based delivery system is not subject to sales tax because it is not downloaded to the consumer's computer. Consumers access the software remotely and do not buy it; they only pay a subscription fee to use it.

If no tangible personal property, such as software, is transferred to the customer, then the transaction is not subject to sales and use tax. In addition, the IDOR clarified that viewing, downloading, or electronically transmitting video, text, and other data over the Internet is not considered a transfer of tangible personal property.

Therefore, subscription fees to access cloud-based software, also known as Software as a Service (SaaS), are not taxable in Illinois.

Conclusion

The General Information Letter is not binding for any of the included parties. Its purpose is to direct taxpayers to the rules that apply to this case and provide clarification on the presented issue. Moreover, the letter consists of IDOR guidelines on how taxpayers can obtain a credit for erroneously paid sales tax, stating who and in what situation can ask for a credit and what forms to use.

Source: Illinois Department of Revenue