While Illinois does not typically tax software as a service (SaaS), certain local jurisdictions — including the city of Chicago — do. For example, some SaaS providers may fall under the scope of Chicago’s Personal Property Lease Transaction Tax (PPLTT).
This article will examine the state and local tax regulations that SaaS providers doing business in Illinois need to know in order to stay compliant.
SaaS Taxation Rules in Illinois
Although the state-level sales tax in Illinois is 6.25%, the Illinois Department of Revenue has indicated that SaaS is not taxable as long as specific conditions are met. These conditions, which are listed under Title 86, Part 130, Section 130.1935 of the Illinois Administrative Code, indicate that SaaS is exempt from state tax if:
- It is provided through a cloud-based delivery system with no software downloads.
- It isn’t classified as canned software, which is prewritten, mass-distributed, and intended for general use. This would be taxed as tangible personal property.
- It qualifies as custom software tailored for specific customer use.
- It does not include any downloadable or installed components on the user’s device, like APIs or desktop agents.
These same rules apply to transactions of all types, whether they are classified as business-to-business (B2B) or business-to-consumer (B2C). However, a business that has nexus in Illinois (a physical or economic connection to the state) may be required to collect and remit sales and use tax.
How nexus works in Illinois
Companies operating in Illinois should be aware of whether they have established nexus. Having nexus may require companies to register with tax authorities and comply with local tax regulations, even if their SaaS products are exempt from state sales and use tax. According to the Illinois Department of Revenue, the two primary types of nexus are physical and economic.
- Physical nexus: This type of nexus can be established by having offices, company representatives, or inventory in the state.
- Economic nexus: For companies with no physical presence in Illinois, nexus can still be established by reaching or exceeding $100,000 in cumulative gross receipts or having 200 or more separate transactions in Illinois.
For SaaS companies whose products or services meet the requirements for tax exemption, even if nexus is established, state-level sales and use tax will not apply to SaaS transactions. However, local taxes, such as Chicago’s PPLTT, may still apply.
Are there tax exemptions for SaaS in Illinois?
SaaS is typically exempt from sales and use tax in Illinois. However, for businesses that do not meet the requirements for exemption, sales to qualifying religious, non-profit, or educational organizations may still be exempt. The Illinois Department of Revenue lists several examples of organizations that could qualify for these exemptions, including:
- Exclusively charitable organizations.
- Licensed not-for-profit day care centers.
- Schools.
- Qualifying senior citizen organizations.
- Churches
Are digital goods taxable in Illinois?
The taxability of digital goods in Illinois can depend on their classification. If a digital product qualifies as tangible personal property, such as prewritten, or “canned,” software, it may be taxed.
On the other hand, products that are delivered electronically, including e-books, digital music, and movies, are typically exempt. However, these exemptions, as well as the taxation rules for SaaS, can differ based on where a provider's customers access their products.
How local tax rates apply to SaaS in Illinois
Although SaaS products may be exempt from state tax, sales in the city of Chicago could be subject to the city’s Personal Property Lease Transaction Tax (PPLTT). This tax applies to the non-possessory lease of personal property used in Chicago, which can include SaaS. As of January 1, 2025, the PPLTT tax rate is 11%.
Example: Say a SaaS provider has customers in Chicago. Despite not being subject to the state sales and use tax, sales to those customers would be subject to Chicago’s PPLTT (as long as the provider had nexus in Chicago). As a result, the provider must collect an 11% tax on transactions involving Chicago customers and remit the collected amounts to the city.
Do Illinois SaaS tax rates vary by region?
Sales and use tax rates in Illinois can vary significantly, but SaaS is typically not taxable in Illinois jurisdictions (other than Chicago, which has the PPLTT). When sales and use tax does apply, it may range from the statewide 6.25% to as high as 11.5%. The Illinois Department of Revenue lists rates for specific locations in its tax rate database. This database can help companies determine the correct rate to apply.
How to stay compliant as a SaaS provider in Illinois
Staying compliant in Illinois typically involves the following steps.
- Registration: First, you’ll have to determine whether your business has a tax obligation in Illinois, often by assessing nexus. Then you’ll need to register with the Illinois Department of Revenue. This can be done through the state’s online tax portal, MyTax Illinois.
- Calculation: While SaaS products that meet Illinois exemption standards are not taxed at a state level, SaaS transactions in Chicago may be subject to the city’s PPLTT. You’ll need to determine whether these and other taxes apply in order to calculate the correct rate.
- Collection: Once you’ve determined the correct rates, you’ll need to collect that amount from customers during transactions. For SaaS providers, this could apply to subscriptions, renewals, and any other features or services you charge for.
- Filing: Registered companies must file sales tax returns. These filings are typically done according to the frequency assigned by the Department of Revenue. In most cases, this frequency is monthly, quarterly, or annually, and based on your company’s tax liability.
- Remittance: Taxes are paid (or remitted) to the Department of Revenue via MyTax Illinois. These payments are typically sent at the same time as tax returns are filed.
In addition to these steps, SaaS companies should consider other aspects of compliance, such as a Voluntary Disclosure Agreement (VDA) for addressing unpaid taxes or deregistration for businesses that no longer meet nexus thresholds. A company that doesn’t adhere to compliance standards could face penalties, interest charges on unpaid taxes, a higher risk of audits, and even the revocation of their business license. To avoid these consequences, services like Numeral, a software tool that manages all aspects of sales tax compliance, or resources provided by the state of Illinois can be invaluable.
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SaaS tax compliance resources in Illinois
There are several resources that can help SaaS providers in Illinois stay compliant, including:
- Illinois Department of Revenue Official Website
- The state’s online tax portal, MyTax Illinois, which can be used to register, file returns, and remit taxes
- The University of Chicago’s list of tax resources, which can help to address tax issues specific to the city of Chicago
The Illinois Department of Revenue can also be reached directly by calling 1-800-732-8866 or 217-782-3336. Representatives are typically available to address questions and concerns Monday through Friday, 8 a.m. to 5 p.m.
The bottom line
SaaS companies are typically exempt from state-level sales and use tax in Illinois. However, sales to customers in the city of Chicago could be subject to that city’s Personal Property Lease Transaction Tax (PPLTT), which is 11%.
This is one of several tax-related topics SaaS providers may need to consider, along with nexus, tax-exempt customers, and whether they sell any other products that could be considered taxable.
In order to stay compliant, SaaS providers may also need to register with the state, calculate taxes correctly, collect them, and remit the appropriate amounts along with their tax returns. The Illinois Department of Revenue provides many helpful resources for SaaS businesses. And these processes can be greatly simplified by services like Numeral.
