TaxByte: Illinois Clarifies Taxability of Web-Based Services (APIs, Applets, Desktop Agents)

by | Jan 29, 2021 | Tax Bytes

In a recent general information letter, Illinois clarified that if a provider of a service provides to the subscriber an API, applet, desktop agent, or a remote access agent to enable the subscriber to access the provider’s network and services, the subscriber is receiving (taxable) computer software and sales tax should be collected and remitted (as long as the business has nexus in Illinois). Keep in mind that  “computer software provided through a cloud-based delivery system – a system in which computer software is never downloaded onto a client’s computer and is only accessed remotely – is not subject to tax’. 

You can find more information in Illinois’ General Information Letter ST 20-0032-GIL 11/09/2020 COMPUTER SOFTWARE.

Computer software is defined broadly in the Retailers’ Occupation Tax Act. However, computer software provided through a cloud-based delivery system – a system in which computer software is never downloaded onto a client’s computer and is only accessed remotely – is not subject to tax. If a provider of a service provides to the subscriber an API, applet, desktop agent, or a remote access agent to enable the subscriber to access the provider’s network and services, the subscriber is receiving computer software. Although there may not be a separate charge to the subscriber for the computer software, it is nonetheless subject to tax, unless the transfer qualifies as a non-taxable license of computer software.

The Department does not consider the viewing, downloading or electronically transmitting of video, text and other data over the internet to be the transfer of tangible personal property. However, if a company provides services that are accompanied with the transfer of tangible personal property, including computer software, such service transactions are generally subject to tax liability under one of the four methods set forth above. If a transaction does not involve the transfer of any tangible personal property to the customer, then it generally would not be subject to Retailers’ Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax.

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Disclaimer: Our attorney wanted you to know that no financial, tax, legal advice or opinion is given through this post. All information provided is general in nature and may not apply to your specific situation and is intended for informational and educational purposes only. Information is provided “as is” and without warranty.

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