Bundled Hardware and Software Subscription Subject to Service Occupation Tax in Illinois

The Illinois Department of Revenue ruled that a taxpayer providing software subscriptions and hardware for a bundled price is subject to the Service Occupation Tax, but not Retailers’ Occupation Tax, Use Tax, or Service Use Tax. The Service Occupation Tax (SOT) is imposed on those engaged in Illinois in the business of sales of service where tangible personal property (TPP) is transferred and incident to the sale of the service. SaaS (software as a service), such as cloud-based delivery of computer software is not subject to tax in Illinois. If a company provides services that are accompanied by the transfer of TPP including computer software, then such service transactions are generally subject to tax. In this ruling, the taxpayer is providing cloud-based services as a serviceman. The Department concluded that the computer software and firmware transferred to the customer incident to the service are TPP and subject to tax. Because the charges for such updates transferred incident to the services were not separately stated, they are subject to tax. In this case, “because the Company does not wish to separately state the selling price of the tangible personal property transferred incident to the service it provides, it must use 50% of the entire bill to its service customers as the tax base.” (Illinois Department of Revenue, Private Letter Ruling 86 Ill. Adm. Code 140.106, September 9, 2021)

Posted on November 29, 2021