a)
Computer software means all types of software including operational,
applicational, utilities, compliers, templates, shells, and all other forms.
Canned software is considered to be tangible personal property regardless of
the form in which it is transferred or transmitted, including tape, disc, card,
electronic means, or other media. The sale at retail, or transfer, of canned
software intended for general or repeated use is taxable, including the
transfer by a retailer of software which is subject to manufacturer licenses
restricting the use or reproduction of the software.
1) A license of software is not a taxable
retail sale if:
A) it is evidenced by a
written agreement signed by the licensor and the customer;
i) An electronic agreement in which the
customer accepts the license by means of an electronic signature that is
verifiable and can be authenticated and is attached to or made part of the
license will comply with this requirement.
ii) A license agreement in which the customer
electronically accepts the terms by clicking "I agree" does not comply with
this requirement.
B) it
restricts the customer's duplication and use of the software;
C) it prohibits the customer from licensing,
sublicensing, or transferring the software to a third party (except to a
related party) without the permission and continued control of the
licensor;
D) the licensor has a
policy of providing another copy at minimal or no charge if the customer loses
or damages the software, or of permitting the licensee to make and keep an
archival copy, and such policy is either stated in the license agreement,
supported by the licensor's books and records, or supported by a notarized
statement made under penalties of perjury by the licensor; and
E) the customer must destroy or return all
copies of the software to the licensor at the end of the license period. This
provision is deemed to be met, in the case of a perpetual license, without
being set forth in the license agreement.
EXAMPLE: A retailer of computer software and related products
sells or transfers a shrink-wrapped software program to a customer. A "license
agreement" contained on or in the package, which by its terms becomes effective
upon opening of the package, states that the customer does not receive title to
the program and that the customer may not copy the program except to make a
backup or archival copy while the customer owns the program. The license
agreement is not evidenced by a written agreement signed by the customer. The
license does not prohibit the customer from selling the program to a third
party. If the customer loses or damages the program, the vendor will not
replace it for free or for a minimal charge. Since it fails to meet all the
requirements for treatment as an exempt license, the transfer from the vendor
to the customer is a taxable retail sale of software.
2) Value-added resellers who
acquire software for relicensing or transfer to consumers after modification or
adaptation of the software may acquire the software as a sale for resale by
presenting their suppliers with valid certificates (see Section
130.1410 of this
Part).
3) Computer software
provided through a cloud-based delivery system is not subject to tax. A
cloud-based delivery system is one in which computer software is never
downloaded onto a client's computer and only accessed remotely.
4) If a provider of a service provides to the
subscriber an API, applet, desktop agent, or a remote access agent to enable
the subscriber to access the provider's network and services, the subscriber is
receiving computer software.
b) Tax applies to the entire charge made to
the customer, including charges for all associated documentation and materials.
Charges for updates of canned software are considered to be sales of software.
Charges for training, telephone assistance, installation, and consultation are
exempt if they are separately stated from the selling price of canned software.
Maintenance agreements for software will be treated in the same manner as other
maintenance agreements. Sellers of maintenance agreements must pay tax on their
cost price of the materials transferred incident to the completion of a
maintenance agreement.
c) Custom
Computer Programs
1) Custom computer programs
prepared to the special order of the customer are not subject to tax under the
Retailers' Occupation Tax Act, the Use Tax Act, the Service Occupation Tax Act,
or the Service Use Tax Act. To be considered exempt software, the following
elements must be present:
A) Preparation or
selection of the program for the customer's use requires an analysis of the
customer's requirements by the vendor; and
B) The program requires adaptation by the
vendor to be used in a specific work environment, e.g., a particular make and
model of a computer using a specified input or output device.
2) Custom computer programs do not
include "canned" or prewritten computer programs held for general or repeated
sale or lease. Modification of an existing prewritten program to meet the
customer's needs is custom software. If modified software is held for general
or repeated sale or lease, it is canned software. Custom software means the
software which results from real and substantial changes to the operational
coding of canned or pre-written software in order to meet the specific
individualized requirements of the purchaser for the purchaser's limited or
particular use.
EXAMPLE: Canned software is purchased with a resale
certificate by a programmer who modifies it to meet a customer's specific
needs. The transfer to the customer is exempt from tax. If that program, as
modified, is sold to other customers without further modification, it is
taxable canned software, as are copies or repeat orders of such modified
software.
3) The selection
of pre-written or canned programs or program modules assembled by the vendor
into a software package does not constitute custom software unless real and
substantial changes are made to the programs or creation of program interfacing
logic. If the pre-written program or module was previously marketed, the new
program will qualify as a custom program if the price of the pre-written
program was 50% or less of the price of the new program. If the pre-written
program was not previously marketed, the new program will qualify as a custom
program if the charge made to the customer for custom programming services, as
evidenced by the records of the seller, was more than 50% of the contract price
to the consumer.
d) All
software used to operate exempt manufacturing machinery and equipment (see 86
Ill. Adm. Code
130.330) is exempt.
