SaaS Considered Service Occupation in IL with Tax Implications for Downloaded Component

The Illinois Department of Revenue has issued two General Information Letters regarding the taxability of Software as a Services (SaaS). In both GIL’s they have taken the position that a SaaS provider is a serviceman and therefore subject to the Service Occupation Tax (SOT) rather than the Retailer’s Occupation Tax (ROT). If the SaaS Provider does not require or provide for any download of any software including an API, applet, desktop agent or a remote access agent, then no tax should apply. However, if any type of software, including any of these de minimus tools are downloaded, they are considered tangible personal property and are deemed computer software. In this case, then the SOT rules apply and the service provide must determine their tax liability in one of four ways:

1. separately-stated selling price of tangible personal property transferred incident to service;
2. 50% of the serviceman’s entire bill;
3. Service Occupation Tax on the serviceman’s cost price if the serviceman is a registered de minimis serviceman; or
4. Use Tax on the serviceman’s cost price if the serviceman is de minimis and is not otherwise required to be registered under Section 2a of the Retailers’ Occupation Tax Act.

It is likely that the cost of the downloaded tools would qualify as de minimus (less than 35% of the total average aggregate cost) such that the service provider can determine its tax liability under option 3 or 4. In the alternative, the service provider could separately charge for the downloaded tool and tax it. If the downloaded software meets the definition of licensed computer software under 86 Ill. Adm. Code 130.1935, then it would be exempt.

This determination will be challenging for SaaS providers to implement and to determine the cost of any downloaded applications. SaaS providers doing business in Chicago must also take into account the Chicago Personal Property Lease Tax provisions.

(General Information Letter ST 16-0035-GIL, Illinois Department of Revenue, August 17, 2016, released November 2016; General Information Letter ST 16-0034-GIL, Illinois Department of Revenue, August 17, 2016, released November 2016)