The Illinois Department of Revenue (IDOR) released a general information letter outlining the applicability of Illinois Retailers’ Occupation Tax (ROT) on computer software licenses and maintenance agreements.
The letter states that sales of “canned” computer software are taxable retail sales in Illinois and are considered to be tangible personal property regardless of the form in which it is transferred or transmitted. However, if the computer software consists of “custom” computer programs, then the sales of such software may not be taxable retail sales. In addition, if the computer software, including canned software, is licensed and the license agreement meets the specified criteria in 86 Ill. Adm. Code § 130.1935(a)(1) (distinguishing licenses from sales a retail), neither the transfer of the software license nor the subsequent software updates are subject to ROT. With respect to the software maintenance agreements, the letter provides that taxability depends on whether the charges for the agreements are included in the selling price of the tangible personal property. The IDOR notes that software maintenance agreements are not taxable if the agreements for the maintenance of tangible personal property are sold separately from the tangible personal property. However, the service providers would incur use tax based on their cost price of tangible personal property transferred to customers incident to the completion of the maintenance service. On the other hand, if the charges for the software maintenance agreements are included in the selling price of the tangible personal property, the charges are part of the gross receipts of the retail transaction and subject to ROT, but no ROT is incurred on the maintenance services or parts when the repair or servicing is performed.
Ill. Dep’t of Revenue, Gen. Info. Ltr. ST-22-0023-GIL (Oct. 19, 2022) (released Feb. 2023).