United States: Illinois Department Of Revenue Addresses Charges Associated With Sales Tax Treatment Of Computer Software

The Illinois Department of Revenue has issued guidance in the form of a General Information Letter to a company in the business of selling computer software.1 Specifically, the Department discussed the taxability of computer software and charges related to the sale of software, including associated delivery charges.


The taxpayer was registered in Illinois for sales and use tax purposes, and engaged in the sale of computer systems,2 software,3 computer hardware, labor related to products sold,4 and software maintenance.5 Additionally, the taxpayer charged customers for shipments of equipment and supplies at a 15 percent markup included in, but not separately identified in, the invoice.6 The taxpayer requested that the Department review the taxability of the taxpayer's sales given various technological advancements and various state revisions due to such advancements.

General Information Letter

The Department began its response by citing the general rule that a retailer in the business of selling tangible personal property to purchasers for use for consumption must pay the Illinois Retailers' Occupation Tax to the Department based on its gross receipts or actual amount received from the sale of tangible personal property.7 The Department then addressed the taxability of software and maintenance agreements, labor charges and transportation and delivery charges.

Software and Maintenance Agreements

Sales of canned computer software are taxable as retail sales in Illinois, while sales of custom software, which is prepared to the special order of the customer, are not taxable.8 Computer software that is not custom software is considered to be canned software.9 Selection of canned programs into a software package does not constitute custom software unless substantial changes are made to the programs.10 Licenses of software are not considered to be taxable retail sales in certain circumstances.11

Whether or not a maintenance agreement for tangible personal property is taxable depends on whether the charges for the maintenance agreement are included in the sale price of the tangible personal property.12 If the charges are included in the sale price, they are subject to tax but no tax is incurred on the maintenance services or parts when the repair or servicing is performed.13 If the maintenance agreement is sold separately, the sale of the agreement is not taxable, though maintenance or repair services or parts provided under those agreements will be deemed under the Service Occupation Tax Act to incur use tax based on the cost price of tangible personal property transferred to customers incident to the service provided.14

If the terms of a maintenance agreement include a "patch" or "bug fix" in order to correct an error or defect in software or hardware, the tangible personal property transferred in order to provide this service is taxed based upon the above analysis.15 If the maintenance agreement includes charges for updates of canned software for new releases or improvements, charges for updates of canned software are fully taxable as sales.16 If the charges related to software updates are instead for custom software, they may not be taxable.17

Labor Charges

In calculating the Retailers' Occupation Tax, labor or service costs are not deductible from gross receipts.18 These costs of doing business are an element of gross receipts and are subject to tax even if separately stated on an invoice.19

Transportation and Delivery Charges

In Kean v. Wal-Mart Stores, Inc.,20 the Illinois Supreme Court addressed whether shipping charges for Internet purchases of tangible personal property were subject to sales tax in Illinois. The Court held that there was an "inseparable link" between the sale of the merchandise and its delivery.21 The Court determined that outgoing transportation and delivery charges to the customer were part of the gross receipts subject to the Retailers' Occupation Tax.22

An "inseparable link" exists, the Court said, when the transportation and delivery charges are not separately stated to the customer on the contract or invoice, or if the charges are separately identified but there is no other option for the customer to receive the property other than via delivery by the seller.23 An "inseparable link" does not exist if the personal property can be sold to the customer without the retailer providing the delivery service, and the delivery charges would therefore not be included in the selling price of the property.24

The Department expanded on the Court's decision, clarifying that when charges for transportation and delivery are stated separately, and the customer has the option to pick up the property rather than have it delivered, transportation and delivery is considered a separate service from the sale and is excluded from the gross receipts subject to the Retailers' Occupation Tax. The Department also provided that if the customer has the option to pick up the property, the seller must maintain documentation demonstrating that option.


This General Information Letter provides a summary of Illinois' sales tax treatment of computer software and ancillary charges, and is helpful from an informational perspective both to sellers and purchasers of these items. States are constantly evaluating the sales tax treatment of new technologies, and so any published guidance on the subject is welcomed, even if such guidance in this case is general in nature and primarily points to the Department's own regulations.

The letter also conforms to the Department's proposed regulatory amendments released on August 28, 2015.25 The information letter and the regulatory amendments are the Department's attempt to conform to the Illinois Supreme Court's decision in Kean.26 Under existing regulations, transportation and delivery charges which are separately stated are not subject to Illinois sales tax. These regulations currently conflict with the decision in Kean, causing some retailers to incorrectly believe that they are not required to collect sales tax on delivery charges that are separately stated. The letter and the Department's proposed amendments provide more clarity for retailers on this issue, and align the Department with the decision in Kean.


1 General Information Letter ST 15-0069-GIL, Illinois Department of Revenue, Oct. 26, 2015, released Dec. 2015.

2 The computer systems were sold inclusively with software, hardware, configuration and training being charged as a single amount.

3 The software was sold as a package or as individual modules and charged as a single sale price, including any support required for activation and training.

4 Labor included minor on-site installation or configuration of networks, on-site training, and inhouse repairs.

5 Software maintenance agreements were entered into by customers for a separate fee.

6 Shipments were handled through UPS, FedEx and USPS.

7 ILL. ADMIN. CODE tit. 86 § 130.101.

8 ILL. ADMIN. CODE tit. 86 § 130.1935(c); General Information Letter ST 12-0022-GIL, Illinois Department of Revenue, April 27, 2012.

9 Id.

10 ILL. ADMIN. CODE tit. 86 § 130.1935(c)(3).

11 ILL. ADMIN. CODE tit. 86 § 130.1935(a)(1).

12 ILL. ADMIN. CODE tit. 86 § 140.301(b)(3).

13 Id.

14 Id.

15 Id.

16 ILL. ADMIN. CODE tit. 86 § 130.1935(b).

17 Id.

18 ILL. ADMIN. CODE tit. 86 § 130.410.

19 Id.

20 919 N.E.2d 926 (Ill. 2009).

21 Id.

22 Id.

23 Id.

24 Id.

25 ILL. ADMIN. CODE tit. 86 § 130.415.

26 Kean v. Wal-Mart Stores, Inc., 919 N.E.2d 926 (Ill. 2009).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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