General Information Letter ST 25-0057-GIL from the Illinois Department of Revenue addresses the tax implications for advanced AI services, specifically a generative AI chatbot.
Key points from the letter include:
- No retailers’ occupation tax or use tax for the AI service provider as long as the transactions do not involve the transfer of any tangible personal property to customers.
- Illinois’ Service Occupation Tax (SOT) applies to tangible personal property transferred incident to a sale of service, including computer software. However, “software as a service (SaaS) provided through a cloud-based delivery system” (where software is never downloaded) is generally not subject to tax.
- If a service provider supplies an API, applet, or remote access agent for a SaaS subscriber to access their network and services, the subscriber is receiving computer software. This software is subject to SOT, even if there’s no separate charge, unless it qualifies as a nontaxable software license.
- If an Illinois customer downloads free computer software “separate from” their SaaS subscription from an out-of-state retailer’s server (also out-of-state), the retailer does not incur tax liability, and the customer does not incur Illinois use tax, as it’s not considered a retail transaction.
Source Deloitte
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