Illinois & Indiana and Sales Tax – SaaS, Software & Other - Multi State Tax Solutions

This month, we continue our blog series with a contrast of a couple of Central North states – Illinois and Indiana – specifically their treatment of technology items for sales tax purposes.

Here’s an overview:

SaaS Taxation in Illinois vs. Indiana

Illinois:
- Cloud computing services, where software is accessed remotely, are generally not subject to sales tax in Illinois.
- SaaS is considered the lease of tangible personal property in Chicago and is subject to the Personal Property Lease Transaction Tax (PPLTT), which applies to SaaS used within city limits.
- The state’s tax regulations on cloud computing are more focused on specific jurisdictions like Chicago, where tax rates can be as high as 11%.
Indiana:
- SaaS is not taxable in Indiana as it is considered a service rather than tangible property.
- There are no specific taxes on cloud computing or SaaS transactions in Indiana.
- SaaS products sold electronically are not subject to sales tax, providing a favorable tax environment for digital service providers.

Prewritten Software Taxation in Illinois vs. Indiana

Illinois:
- Prewritten software (whether downloaded or delivered via tangible media) is subject to sales tax in Illinois.
- This applies to both physical software and software delivered electronically to consumers.
- Prewritten software is taxed at a general sales tax rate of 6.25%, but special taxes can apply in cities like Chicago.
Indiana:
- Prewritten software, whether downloaded or physically transferred, is subject to gross receipts tax in Indiana.
- This includes software sold electronically, as it is treated as tangible personal property under Indiana law.
- Indiana offers some exemptions based on the use of the software, such as when used exclusively for business purposes.

Custom Software Taxation in Illinois vs. Indiana

Illinois:
- Custom software that is tailored for a client’s specific needs is not subject to sales tax, regardless of the delivery method.
- This includes custom software that is delivered either electronically or through tangible media.
- The key factor is whether the software is customized or generic; custom software is exempt.
Indiana:
- Custom software is not subject to sales tax in Indiana, regardless of the delivery method.
- Like Illinois, Indiana distinguishes between custom and prewritten software, applying taxes only to the latter.
- This provides businesses with clarity on the tax-exempt status of custom-designed software solutions.

Digital Goods Taxation in Illinois vs. Indiana

Illinois:
- Digital products, including e-books, music, and streaming video, are generally not taxable in Illinois.
- The state exempts digital products from sales tax, which encourages the consumption of digital goods.
- However, businesses need to verify that the digital goods are not bundled with taxable services.
Indiana:
- Indiana taxes digital products, including e-books, music, and movies, but only when they are sold with a transfer of rights.
- Digital products are subject to sales tax when they are sold in a manner that conveys ownership to the buyer, such as with downloadable media.
- Sales tax applies to retail sales of digital goods to end users.

Sales Tax Holidays in Illinois vs. Indiana

Illinois:
- Illinois does not offer any sales tax holidays. Consumers do not experience temporary sales tax exemptions during certain times of the year.
- This may limit consumer purchasing opportunities in comparison to other states that offer temporary sales tax relief.
Indiana:
- Indiana also does not have statewide sales tax holidays. However, the state has occasionally provided local exemptions or incentives, but nothing like a traditional sales tax holiday for back-to-school or similar events.

Economic Overview

Illinois:
- Illinois is a highly diversified state, with strong industries in manufacturing, agriculture, and services.
- The state is home to major corporations.
- Illinois also has a thriving tourism industry.
Indiana:
- Indiana’s economy is heavily influenced by its manufacturing base, particularly in the automotive industry.
- The state is also a major agricultural hub.
- Indiana’s major sectors include manufacturing, pharmaceuticals, and biosciences.

Wait! Already know you need help with Illinois or Indiana issues? Please reach out to us at info@milesconsultinggroup.com

1. Software as a Service (SaaS) in Illinois vs. SaaS in Indiana

Software as a Service (SaaS) is subject to sales tax in several jurisdictions across the country. Approximately half of states do tax the SaaS revenue stream. As you’ll see below, both states are similar regarding their treatment of sales tax.

Cloud Computing Services are nontaxable in Illinois.

Computer software provided through a cloud-based delivery system is not subject to tax. A cloud-based delivery system is one in which computer software is never downloaded onto a client’s computer and only accessed remotely. If a provider of a service provides to the subscriber an API, applet, desktop agent, or a remote access agent to enable the subscriber to access the provider’s network and services, the subscriber is receiving computer software.

But wait! Before we get too comfortable, please note that SaaS is subject to a special tax if delivered to (used by) a customer in the city of Chicago. Chicago subjects SaaS to its Personal Property Lease Transaction Tax. Under statute, Chicago considers SaaS the lease of tangible personal property and therefore subject tax when used in Chicago. While not technically a sales tax, it looks and feels like a sales tax and can be passed through to the purchaser. The rate has steadily increased over the last several years, and as of 1/1/25, the rate is 11%.

SaaS is nontaxable in Indiana.

A transaction in which an end user purchases, rents, leases, or licenses the right to remotely access prewritten computer software over the Internet, over private or public networks, or through wireless media, is not considered to be a transaction in which prewritten computer software is delivered electronically, and does not constitute a retail transaction. A SaaS application hosted on servers and accessed by customers over the internet is not subject to sales tax.

2. Software in Illinois vs. Software in Indiana

Illinois does impose sales and use tax on prewritten computer software sold electronically.

The sale at retail, or transfer, of canned software intended for general or repeated use is taxable when it is delivered electronically.

Prewritten computer software delivered electronically is subject to tax in Indiana.

Indiana imposes gross receipts tax and use tax on prewritten computer software regardless of the method by which the software is delivered (e.g., via a tangible medium, load and leave, or electronically).

The sale of custom computer software delivered electronically is not subject to tax in Illinois.

Custom computer programs prepared to the special order of the customer are not subject to tax under the retailers’ occupation tax, use tax, service occupation tax or service use tax in Illinois.

The sale of custom computer software delivered electronically is not subject to tax in Indiana.

Custom computer software is not subject to gross retail tax, regardless of the method by which the software is delivered (e.g., via a tangible medium, load and leave, or electronically).

3. Digital Goods

States vary in their treatment of electronically delivered goods including e-books, music, and streaming video. Some states consider all of these types of products to be taxable or not, while others call out specific taxability depending upon the product.

In Illinois, digital products are nontaxable.

Generally, digital products are not taxable in Illinois.

In Indiana, digital products are generally taxable.

Digital products in Indiana are taxable if the seller grants the end user a right of permanent use that is not conditioned upon continued payment by the purchaser.

4. Sales Tax Holidays

States often offer sales tax holidays during specific times of the year, during which certain items are sold tax free. These holidays vary greatly by state. Here’s how Illinois and Indiana shake out:

Illinois does not have any sales tax holidays.
Indiana does not have any sales tax holidays.

For more information on sales tax holidays, click here.

5. Economy

Illinois is the fifth largest state in the nation with approximately 12.8 million residents. The strength of the economy in the state is based on professional and business services, education, healthcare, leisure and hospitality services. While the state’s manufacturing industry has declined over the years, it is consistent with national trends. The largest private employers in Illinois are major retailers, large healthcare providers, equipment manufacturers, and nationwide financial service providers.

Indiana’s five leading exports are motor vehicles and auto parts, pharmaceutical products, industrial machinery, optical and medical equipment, and electric machinery. Northwest Indiana has been the largest steel producing center in the U.S. since 1975 and accounted for 27% of American-made steel in 2016.

Indiana is home to the international headquarters and research facilities of pharmaceutical company Eli Lilly in Indianapolis, the state’s largest corporation. Evansville is also home to the world headquarters of Mead Johnson Nutritionals. Overall, Indiana ranks fifth among all U.S. States in total sales and shipments of pharmaceutical products and second highest in the number of biopharmaceutical related jobs.

Along with corn, soybeans are also a major cash crop. Other crops include melons, tomatoes, grapes, mint, popping corn and tobacco in the southern part of the state. Most of the original land was not prairie and had to be cleared of deciduous trees. Many parcels of woodland remain and support a furniture-making sector in the southern portion of the state.

Fun Facts

Illinois Fun Facts:

World’s first skyscraper was a home insurance building built in Chicago in 1885.
Illinois is home to the first McDonald’s.
Of the 44 presidents of the United States, only 1 was born in Illinois: Ronald Reagan.
In 1922, the first radio station broadcast was made in Illinois from Tuscola.
The largest pinball machine ever made can be seen in the Chicago Museum of Science. The machine is about 15 feet wide and 7 feet high.
After Wyoming and Kentucky, Illinois is the country’s third-largest bituminous coal producer. It has one-fifth of the nation’s demonstrated coal reserves.
Morton, Illinois, is dubbed as “the Pumpkin capital of the world.”
About three-fourths of the state’s area is covered under farms. The rich black soil in the state helps in producing a lot of corn and soybeans.

Indiana Fun Facts:

The first long-distance auto race in the U.S. was held on May 30, 1911 at the Indianapolis Motor Speedway.
Explorers Lewis and Clark set out from Fort Vincennes on their exploration of the Northwest Territory.
Marcella Gruelle of Indianapolis created the Raggedy Ann doll in 1914.
Indiana ships over 70 million tons of cargo by water each year, which ranks 14^th among all U.S. states.
In 1862, Richard Gatling, of Indianapolis, invented the rapid-fire machine gun.
At one time, 12 different stagecoach lines ran through Indiana on the National Road (now U.S. Interstate 40).
Indiana is the first state to have a chapel in its state capitol. It was built in memory of former first lady Beth Bowen.
There have been six men from Indiana who have been elected vice president: Schuyler Colfax, Thomas A. Hendricks, Charles W. Fairbanks, Thomas Marshall, Dan Quayle and Mike Pence. They have earned Indiana the nickname “Mother of Vice Presidents.”
The Indiana Dunes region on the shore to Lake Michigan provides habitats for many unusual plants, including prickly pear cactus, lichen mosses, bearberry and more than 20 varieties of orchids. Mount Baldy, the largest of the sand dunes, is a living dune that moves away from shore a few feet a year.

Our team at Miles Consulting Group is always available to discuss the specifics of your situation, whether in Illinois, Indiana, or other U.S. States, and help you navigate the complex tax structures arising from multistate operations. Book a consultation, drop us a line, or send us an email at info@milesconsultinggroup.com.