Illinois Computer, Software, and SaaS Tax Guide

Prepared by Sales Tax Helper

Table of Contents

1. Introduction
2. Nexus Considerations
3. General Rules and Compliance Considerations
4. Specific Exemptions
5. Sourcing Rules
6. Audit Considerations
7. Voluntary Disclosure Agreements (VDAs)
8. Conclusion
9. References & Resources

1. Introduction

For software companies, SaaS providers, and technology firms conducting business in Illinois,
the state's sales and use tax rules present unique challenges. Unlike some states that exempt
electronic software and digital products, Illinois taxes prewritten (canned) software regardless of its delivery method, while maintaining exemptions for custom software. Illinois's tax treatment of software and technology-related services depends on multiple factors, including whether software is prewritten or custom, how it's delivered, and whether services provided are classified as taxable information services or exempt professional services.

Purpose of This Guide

This guide is designed to help businesses navigate Illinois's sales and use tax rules related to
software and technology services. It focuses on:

• Nexus Considerations: Understanding when businesses must register and collect Illinois
  sales tax due to physical or economic presence.
• Taxability of Software & Services: Clarifying the tax treatment of prewritten vs. custom
  software, cloud computing services, and related technology offerings.
• Sourcing Rules: Determining how and where transactions are taxed based on customer
  location and method of software delivery.
• Audit Considerations: Identifying common tax audit triggers and best practices for
  compliance.
• Voluntary Disclosure Agreements (VDAs): Explaining the process for businesses to
  rectify past noncompliance while mitigating penalties and limiting back-tax liability.

Why This Matters for Technology Companies

Illinois's sales tax laws impact software companies, SaaS providers, and technology firms in
multiple ways:

• Sales Tax Obligations: Businesses that sell software or related services to Illinois
  customers may have a duty to collect and remit Illinois sales tax, depending on how the
  product is classified.
• Complex Taxability Rules: Illinois taxes prewritten software regardless of delivery
  method (whether on tangible media or electronically delivered), creating compliance
  challenges for companies that operate in multiple states where electronic delivery is often
  exempt.
• Cloud Computing & SaaS Considerations: Illinois has issued specific guidance
  through Private Letter Rulings indicating that cloud-based software (SaaS) is generally
  not subject to sales tax when no software is downloaded to the customer's computer.
• Compliance Risks: Failure to correctly assess and collect sales tax can result in
  significant penalties, interest, and extended audit exposure.

This guide will walk through Illinois's specific sales tax rules governing software, SaaS, and
technology-related services while referencing applicable statutes, administrative rules, and
Illinois Department of Revenue (DOR) guidance. Throughout the guide, official Illinois
Department of Revenue sources will be linked for further reference.

For more information, visit the Illinois Sales Tax Home and the main Illinois Department of
Revenue website.

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