News and Insights

Illinois Department of Revenue Issues Guidance on the Taxability of Software Licenses

Tax Development Aug 23, 2016

The Illinois Department of Revenue (“Department”) issued a Private Letter Ruling (PLR) on the application of Illinois Retailers’ Occupation Tax (ROT) to an Illinois taxpayer’s sale of one-time prepaid software license fees and related monthly license and support fees. The taxpayer was in the business of selling computer systems, computer hardware, computer peripheral equipment, industry-specific computer software application licenses, and mandatory software support services.

Per Ill. Admin. Code tit. 86, § 130.1935(a)(1), the state of Illinois offers an exemption from ROT for software licenses that meet the following criteria:


It is evidenced by a written agreement signed by the licensor and the customer


It restricts the customer’s duplication and use of the software


It prohibits the customer from licensing, sublicensing, or transferring the software to a third party (except to a related party)


The licensor has a policy of providing another copy at minimal or no charge, if the customer loses or damages the software, or of permitting the licensee to make and keep an archival copy, and such policy is either stated in the license agreement, supported by the licensor’s books and records, or supported by a notarized statement made under penalties of perjury by the licensor


The customer must destroy or return all copies of the software to the vendor at the end of the license period

Prior to October 2, 2000, subsection (D) included only the following language: “the vendor will provide another copy at minimal or no charge if the customer loses or damages the software.” The taxpayer had been previously issued a PLR based on the original language. In that ruling, the software license and support services were found to be taxable because although the Master Service Agreement (MSA) permitted customers to make back-up copies of the software, it did not stipulate that the taxpayer would provide an additional copy of the software if damaged or lost by the customer. Therefore, subsection (D) was not met.

On October 2, 2000, language was added to subsection (D) that broadened the requirement, allowing for the provision of an additional copy or allowing the licensee to make an archival copy. In light of this change, the taxpayer requested a second ruling. The Department reviewed the taxpayer’s MSA, which was unchanged from the one provided in the prior ruling request.  The Department, just as it had in the previous ruling, concluded that the MSA met criteria (A), (B), (C), and (E). However, in contrast to the prior ruling, the new language provided in subsection (D) resulted in the Department finding that the last criterion was also met. Therefore, the taxpayer’s software license and related support service sales were found to be nontaxable.