In a letter ruling dated September 17, 2024, the taxpayer, a foreign-based company, who sells subscription-based coaching for health, fitness, mental wellness, and nutrition, has asked the Illinois Department of Revenue for a Private Letter Ruling (PLR) regarding the taxability of its subscriptions. In addition to the coaching services and material, the taxpayer also provides workouts, meal plans, progress tracking, fasting trackers, and hydration trackers; however, the subscribers never receive any tangible personal property. The taxpayer has specified that their subscribers can access the coaching material by signing up on their website or by downloading a free application which they can download directly from an application marketplace such as Apple Store or Google Play.
The taxpayer’s software is hosted on servers located outside of Illinois. Customers can access information and content hosted in the cloud through a web portal or by a downloaded app. For either type of access, there is no charge to download the app but there is a subscription charge for membership. If a subscription ends, the customer loses access. The taxpayer concluded that their services should be characterized as Information Services or Software as a Service, both of what are non-taxable in Illinois when the hosted software is accessed on servers located outside of the state.
In the state’s analysis, they outlined the imposition of the Retailers’ Occupation Tax (ROT) and Service Occupation Tax and definitions of information services and computer software. The Department concluded that the subscription fees for member services (content, trackers) and the fee for personal training are not subject to ROT. In Illinois, the sale, lease, or license of prewritten software (canned software) is taxable, with an exemption for software licenses that meet certain criteria listed under Ill. Adm. Code130.935(a)(1). Additionally, service providers who provide their subscribers with an app download are providing computer software. Even though there was no separate charge for the app, the app download is subject to tax, unless the transfer qualifies as non-taxable license for computer software. In this case, the taxpayer failed to demonstrate that the app download qualified as a non-taxable license of computer software. Furthermore, because the app downloads were provided free of charge from an out-of-state website, the taxpayer was not liable for use tax on the downloads. (Private Letter Ruling ST24-0002-PLR, Illinois Department of Revenue, September 17, 2024)