Today I want to talk about a multi-level marketing company (“MLM”) that sells its nutritional and diet products through its independent distributors.
The MLM charges its distributors a fee to use its mobile application program. The MLM is not based in Illinois.
The MLM asked Illinois if it must collect use tax on the fee charged to its Illinois distributors for use of its mobile application program. Illinois said; it depends.
There would be no tax if the distributor accessed the MLM mobile application program “through a cloud-based delivery system – a system in which computer software is never downloaded onto a client’s computer and is only accessed remotely”; even if the distributor downloads “video, text and other data over the internet …”
There will be a tax, if computer software is downloaded onto the distributor’s computer or device, unless the use of the software is under a license agreement which is considered a nontaxable lease of software and not a sale of software.
Illinois says that any “API, applet, desktop agent, or a remote access agent to enable … (the distributor) … to access … (the MLM’s) … network and services” is “computer software.” Nontaxable lease treatment is set forth in a regulation and it has 5 requirements. See the comment section.
The Illinois Department of Revenue (Department) general information letter is ST 17-0036-GIL (November 21, 2017) and can be found at: http://www.revenue.state.il.us/LegalInformation/LetterRulings/st/2017/ST-17-0036-GIL.pdf
Comment. The MLM won’t collect use tax even if the distributor downloads MLM software, if the license agreement between the MLM and the distributor meet 5 Illinois requirements for being treated as a lease. One of the requirements may not be feasible. That is that the license agreement to use the MLM software must be signed by the distributor and the MLM. And that means that the distributor and the MLM must sign the license agreement in the old fashion way: with pen and paper: shrink-wrap or click-through licenses won’t cut it.
By John McCauley: I help people buy and sell businesses.
Email: jmccauley@mk-law.com
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