- Tax Exemption for Generative AI Services: The Illinois Department of Revenue clarified in a General Information Letter that providers of advanced AI services, such as generative AI chatbots, are not liable for Illinois retailers’ occupation tax or use tax if their transactions do not involve the transfer of tangible personal property.
- Service Occupation Tax (SOT) Applicability: While the Department does impose a service occupation tax on tangible personal property transferred with a service, subscriptions for software as a service (SaaS) are generally not taxed in Illinois. This includes cloud-based software that is accessed remotely without being downloaded.
- Conditions for Tax Liability on Software Transfers: If a service provider supplies software tools (like APIs) to facilitate access to their services, this may incur SOT unless it qualifies as a nontaxable license. In contrast, if an Illinois customer downloads free software from an out-of-state retailer, no Illinois use tax applies, as the retailer does not exercise control over the property within the state.
Source Deloitte
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