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Illinois: The Taxability of Canned Software


 Not these cans: Illinois and the taxation of canned software.

Under Illinois law, canned software is considered to be tangible personal property no matter how it is transmitted or transferred: via card, disc, tape, electronic means, or other media. As such, “the sale at retail, or transfer, of canned software intended for general or repeated use is taxable… [emphasis mine].”  Canned software is defined by pcmag.com as a “software package that provides a fixed solution to a problem.”

Charges for updates of canned software are subject to sales tax, as are charges for “associated documentation and materials.” The transfer of materials for maintenance services are subject to sales tax, although the charges for the service of maintaining the software are exempt.

Exempt

Although the transfer of canned software is taxable, as outlined above, the retail sale of a license of software may not be subject to sales tax. The sale of a license of software is exempt from sales tax if:

  • “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) without the permission and continued control of the licensor;
  • 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; and
  • The customer must destroy or return all copies of the software to the licensor at the end of the license period. This provision is deemed to be met, in the case of a perpetual license, without being set forth in the license agreement.”

Examples of taxable and exempt computer software are provided in the law.

Software purchased for resale is exempt from sales tax, provided a proper resale certificate is provided to the seller at the time of sale. Software used to “operate exempt manufacturing machinery and equipment” is also exempt.

In addition, the sale of custom computer programs “prepared to the special order of the customer” are exempt from the following taxes: retailer’s occupation tax, use tax, service occupation tax, and service use tax. Custom computer programs are not canned or prewritten computer programs.

Do you buy or sell canned software in Illinois? How do you handle sales tax?

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Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.