Illinois Issued a Letter Discussing Taxability of Various Digital Goods

The Illinois Department of Revenue issued a general information letter encompassing the applicability of sales and use tax to the sales of various digital goods by a digital goods distributor (taxpayer). The applicable statute considers a provider of software-as-a-service a serviceman. If a provider is transferring an API, applet, desktop agent, or remote access agent to enable the customer to access the provider’s network and services, the customer is receiving computer software that is subject to tax. On the other hand, if a provider does not transfer any tangible personal property to the customer, then the transaction generally would not be subject to retailers’ occupation tax, use tax, service occupation tax, or service use tax. For example, computer software that is provided through a cloud-based delivery system, where the software is never downloaded onto a client’s computer and is only accessed remotely, is not subject to tax.

With the increase in varying digital goods, it is important to stay up to date with the most current letters and rulings from the states you conduct business in. Each state defines and taxes digital products differently, especially regarding cloud storage. Additionally, many states are still operating and taxing under laws that have yet to be clarified in terms of digital goods, enlarging the gap for misunderstandings and varying interpretations. Unfortunately, navigating how to handle taxes on these products can be confusing – making sure you’re aware of states’ stances for digital goods is imperative when handling sales of these products.

(General Information Letter ST 22-0027-GIL, Illinois Department of Revenue, December 2, 2022, released February 2023, ¶403-926)

Posted on March 6, 2023