Sales Tax State Activity Update - March 2009

Illinois Taxability of Software Updates – It’s All in the Itemizing

In a general information letter the Illinois Department of Revenue explained that maintenance agreements for canned software updates are taxable as sales of software if the update charges are not separately stated and taxed. This letter rescinds General Information Letter ST 08-0168-GIL.

Background

A Taxpayer made several purchases of software and software maintenance agreements which consisted of the following:

1. The maintenance agreement cost is either identified as a separate line item at the time of the original software purchase or invoiced separately at a later date.

2. The maintenance agreements include software updates or enhancements (when and if they become available) and technical support to be given either through e-mail or telephone contact.

3. The costs relative to obtaining updates and technical support are not separately stated on the invoices or identified in the maintenance agreements.

Department’s Response

In general, maintenance agreements that cover computer software are treated the same as maintenance agreements for other types of tangible personal property. See 86 Ill. Adm. Code 130.1935(b).

The taxation of maintenance agreements is discussed in subsection (b)(3) of Section 140.301 of the Department's administrative rules under the Service Occupation Tax Act. See 86 Ill. Adm. Code Sec. 140.301(b)(3).

The taxability of agreements for the repair or maintenance of tangible personal property depends upon whether charges for the agreements are included in the selling price of the tangible personal property. If the charges for the agreements are included in the selling price of the tangible personal property, those charges are part of the gross receipts of the retail transaction and are subject to tax. In those instances, no tax is incurred on the maintenance services or parts when the repair or servicing is performed.

Conversely, If agreements for the repair or maintenance of tangible personal property are sold separately from tangible personal property, sales of those agreements are not taxable transactions. However, when maintenance or repair services or parts are provided under those agreements, the service or repair companies will be acting as service providers under provisions of the Service Occupation Tax Act that provide that when service providers enter into agreements to provide maintenance services for particular pieces of equipment for stated periods of time at predetermined fees, the service providers incur Use Tax based on their cost price of tangible personal property transferred to customers incident to the completion of the maintenance service. See 86 Ill. Adm. Code Sec. 140.301(b)(3).

This general information letter can be viewed at the Illinois Department of Revenue.

(Illinois Department of Revenue, ST 09-0024-GIL, 01/16/2009)

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