The Illinois Department of Revenue recently clarified how sales tax applies to subscription membership fees for cloud-based software services. Generally, sales tax does not apply to cloud-based software that customers access remotely without the ability to download it to their devices. However, if the service provider includes downloadable components like an API, applet, desktop agent, or remote access tool to facilitate access to their network and services, these components are considered taxable as computer software.
Example 1: Cloud-Based Fitness App Subscription
A fitness app provider charges a subscription fee for its cloud-based service, allowing users to access workout plans and tracking tools directly from their web browser. Since users access the app exclusively online and can’t download it to their devices, the subscription fee is not subject to Illinois sales tax. The app qualifies as non-taxable cloud-based software because it doesn’t provide any downloadable components.
Example 2: Data Analytics Software with a Desktop Agent
A data analytics company offers a subscription to its cloud-based platform but requires users to download a desktop agent to sync their data with the platform. In this case, the desktop agent is considered a form of computer software. Because the subscription includes this downloadable component, it is subject to Illinois sales tax—unless the service provider can qualify it as a non-taxable license of computer software.
Additionally, Illinois residents who download software from an out-of-state retailer’s or service provider’s website or server located outside of Illinois are generally not liable for use tax on the download.
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