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. Specifically, the Department discussed the taxability of computer software and charges related to the sale of software, including associated delivery charges.

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State & Local Tax Alert
Breaking state and local tax developments from Grant Thornton LLP
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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.
Background
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.
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 in-
house 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.
Release date
January 21, 2016
States
Illinois
Issue/Topic
Sales and Use Tax
Contact details
Paul Bogdanski
Chicago
T 312.602.8269
E paul.bogdanski@us.gt.com
Chelsie Nelson
Chicago
T 312.754.7159
E chelsie.nelson@us.gt.com
Jamie C. Yesnowitz
Washington, DC
T 202.521.1504
E jamie.yesnowitz@us.gt.com
Chuck Jones
Chicago
T 312.602.8517
E chuck.jones@us.gt.com
Lori Stolly
Cincinnati
T 513.345.4540
E lori.stolly@us.gt.com
Priya Nair
Washington, DC
T 202.521.1546
E priya.nair@us.gt.com
www.GrantThornton.com/SALT

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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
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.

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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.
Commentary
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
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).

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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.
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