Illinois service occupation tax (SOT) applies to the sale of the cloud services (SaaS) when the seller offers free software to access or use the cloud services. Also, SOT does not apply to sales of access to online software that lets customers print posters. In a ruling, the Department of Revenue stated that it viewed sellers of cloud-based software as providing services.
Sale of Cloud Services
Generally, Illinois does not tax sales of services. However, when a sale involves both a service and property, the seller is liable for SOT. Prewritten software is property. Here, a seller offered its customers free desktop and mobile applications with a few of its cloud services products, sometimes long after the original sales. To use other cloud products, customers needed to download an executable file. The department ruled that the downloaded applications and executable files were property sold with the cloud services.
Sale of Access to Online Software
In addition, standalone online software products are not subject to SOT. The seller’s standalone online product gave customers access to updated labor law posters that are required by federal and state law. Customers did not need to download software to use the product. However, if the seller prints the posters, it is liable for use tax on the posters.
Private Letter Ruling ST 17-0006-PLR, Illinois Department of Revenue, August 14, 2017, released October 2017, ¶403-278
Recently, New York issued a ruling on cloud collaboration services.