In a ruling issued on September 16, 2025, the Department of Revenue (IDOR) has clarified that companies offering artificial intelligence (AI) tools and services online, such as chatbots or other software hosted in the cloud, do not owe Illinois sales tax on those services.
The ruling, General Information Letter ST 25-0050-GIL, was issued in response to a question from a technology company that offers users access to its chatbot AI through its website or mobile application. The company’s AI chatbot runs only online and never downloaded. Customers log in, type their questions and receive responses through the cloud. According to the IDOR, Illinois taxes tangible goods, not services. Because nothing is physically transferred or installed, the IDOR determined that the services function like Software as a Service (SaaS). SaaS services are not generally taxable in Illinois.
The company also offers developers a software development kit (SDK) and a paid application programming interface (API) key to integrate its AI model into external applications. These tools are free to download under an open-source MIT license and server. Additionally, the SDK has no independent value and is not required to use offline. The IDOR reaffirmed that computer software provided separately and free-of-charge from and out of state server does not trigger Illinois Use Tax because the retailer has no control over the property in Illinois.
The ruling confirms that AI and other cloud-based tools are typically not subject to Illinois sales tax if they are accessed online and not downloaded. It also highlights that businesses using open-source or free developer tools to access AI platforms that are hosted outside of the state don’t have a tax obligation in Illinois. If your business uses or sells AI tools like chatbots or API-based AI, you will likely not have any sales or use tax liability. However, it is wise to always review state tax guidance when offering technology, especially when adding new technologies. Staying informed on tax regulations that affect your business helps avoid surprises and stay compliant.
(General Information Letter ST 25-0050-GIL, Illinois Department of Illinois, September 16, 2025)