Illinois

Understanding SaaS Taxability in Illinois

Is SaaS Taxable in Illinois?

At the state level, Illinois does not tax SaaS products. However, the city of Chicago does. For purposes here, we’ll keep the focus on Chicago’s taxation of SaaS rather than returning to Illinois’ general rules.

In Chicago, businesses don’t pay a traditional sales tax on software-as-a-service (SaaS). Instead, the city imposes the Personal Property Lease Transaction Tax (PPLTT), which applies to the lease or rental of tangible personal property (TPP). Since SaaS is considered a lease of TPP, it falls under this tax.

Understanding the Personal Property Lease Transaction Tax (PPLTT)

Unlike a traditional sales tax, Chicago’s PPLTT applies to the lease or rental of tangible personal property (TPP) within city limits. Under this regulation, SaaS is considered the lease of TPP and is therefore subject to tax when accessed or used in Chicago.

The rate has steadily increased over the years and is at 11% as of 1/1/25.

Key Factors for SaaS Taxability in Chicago

Where the User Accesses the Service: If a SaaS product is used by a customer located in Chicago, the transaction is considered taxable under PPLTT, regardless of where the provider is based.
Business vs. Individual Use: Chicago does not distinguish between business-to-business (B2B) and business-to-consumer (B2C) transactions when applying the tax. Whether a business or an individual subscribes to a SaaS product, the tax applies if the service is used in the city.
Potential Exemptions or Reductions: Some businesses, such as financial exchanges, may qualify for reduced tax rates, while other organizations may be eligible for exemptions if the software is used temporarily outside of Chicago.

Nexus Considerations in Chicago

Even if a business is based outside Chicago, it may still be required to collect and remit PPLTT if it has a sufficient connection, or nexus, to the city. Nexus is generally established if:

The business has a physical presence in Chicago, such as an office or employees.
The business regularly leases or rents SaaS products to Chicago-based customers.

Nexus Thresholds for Chicago

Illinois enforces economic nexus, requiring out-of-state sellers to collect sales tax if they meet specific thresholds, such as $100,000 in gross sales. There is no transaction threshold.

Sales Tax Compliance Checklist

Businesses subject to PPLTT must follow several key steps to ensure compliance:

Register with the City of Chicago. Companies selling SaaS to customers in Chicago must register with the Chicago Department of Finance to obtain the necessary tax permits. This is required before collecting or remitting the tax.
Collect and Remit the PPLTT tax. Once registered, businesses must collect the 11% tax from customers using SaaS products within the city and remit these funds to the Chicago Department of Finance according to the city’s tax schedule.
File Regular Tax Returns. Businesses must submit periodic tax returns detailing the amounts collected and remitted. Filing frequencies depend on revenue levels, and failure to submit returns on time can result in penalties.

Examples of Taxable vs. Non-Taxable SaaS

Taxable:
- Chicago Transactions: A business subscribes to a cloud-based accounting software in Chicago. This transaction is subject to the city’s Personal Property Lease Transaction Tax.
Non-Taxable:
- Statewide Transactions: A business subscribes to a cloud-based accounting software in a location outside Chicago. This transaction is generally exempt from state sales tax.

Penalties for Non-Compliance

Non-compliance with Illinois tax laws can result in:

Financial Penalties: Fines and interest on unpaid or late taxes.
Legal Consequences: Potential audits and legal actions by the Illinois Department of Revenue or the City of Chicago Department of Revenue.
Reputational Damage: Negative impact on your business’s credibility and customer trust.