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Illinois taxes elements of Software as a Service

In the turbulent world of Software as a Service (SaaS) taxation, Illinois has finally provided taxpayers with additional guidance, ending a decade of uncertainty. The administrative guidance (ST 16-0038-GIL (8/18/2016)) classifies a provider of SaaS as a "serviceman."

As long as the SaaS provider does not transfer any tangible personal property to the customer, then the transaction should not be subject to Retailers’ Occupation Tax (ROT), Use Tax, Service Occupation Tax, or Service Use Tax. If the SaaS provider transfers to the customer an API, applet, desktop agent, or a remote access agent to enable the customer to access the provider’s network and services, the Department will treat that as a sale of computer software, which is subject to tax.

The most interesting part is the applicability of the five-part test pursuant to Ill. Admin. Code 130.1935(a)(1) to the analysis:

  • (A) If no software is downloaded by the customer then the SaaS transaction is not subject to ROT.
  • (B) If software is downloaded by the customer:
    • 1) Apply the five-part test to determine whether the license of software is a taxable retail sale; or
    • 2) Determine if the taxpayer qualifies as a de minimis serviceman.

Takeaway

The Department’s decision to finally issue guidance on the taxability of SaaS lessens the uncertainty in a complex area of tax. This is especially important in light of the City of Chicago’s recent appends to tax SaaS under its Personal Property Lease Transaction Tax ordinance.

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Alexander Korzhen can be reached by phone at 763-703-5713 or email at akorzhen@taxops.com. Follow Alex on LinkedIn.

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