Did Illinois law require a lessee to pay four years of tax upfront on a true equipment lease?

Plain-English summary

Illinois did not impose tax on true-lease rental receipts or require the lessee, as a tax matter, to pay four years of rent tax upfront. The lessor was the end user and owed Use Tax on its cost of the leased property.

The parties could agree privately that the lessee would reimburse the lessor's tax cost. If so, the payment obligation arose from the lease contract, not Illinois tax law. The Department did not interpret the requester's agreement or decide whether the $430.70 debit was contractually proper.

A nominal or one-dollar purchase option, or a guaranteed sale from the outset, indicated a conditional sale rather than a true lease. Receipts under a conditional sales contract were taxable.

What this means for you

Read the purchase option and tax-reimbursement clause. First determine whether the arrangement is a true lease or conditional sale, then separate the state's tax obligation from any private reimbursement promise.

Common questions

Q: Did Illinois tax each true-lease rental payment?
A: No. The GIL placed Use Tax on the lessor's cost instead.

Q: Could the lease still make the lessee reimburse that cost?
A: Yes. That would be a contractual obligation rather than tax imposed on rental receipts.

Citations and references

• 86 Ill. Adm. Code 130.220 and 130.2010
• 86 Ill. Adm. Code 130.1405
• 86 Ill. Adm. Code 150.310(a)(3)

Subject

Leasing

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2010.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2010/st-10-0018.pdf

Original ruling text

ST 10-0018-GIL 03/15/2010 LEASING
Information regarding the tax liabilities in lease situations may be found at 86 Ill. Adm. Code
130.220 and 86 Ill. Adm. Code 130.2010. (This is a GIL.)

March 15, 2010

Dear Xxxxx:
This letter is in response to your letter dated September 25, 2009, in which you request
information. The Department issues two types of letter rulings. Private Letter Rulings (“PLRs”) are
issued by the Department in response to specific taxpayer inquiries concerning the application of a
tax statute or rule to a particular fact situation. A PLR is binding on the Department, but only as to the
taxpayer who is the subject of the request for ruling and only to the extent the facts recited in the PLR
are correct and complete. Persons seeking PLRs must comply with the procedures for PLRs found in
the Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General Information
Letter (“GIL”) is to direct taxpayers to Department regulations or other sources of information
regarding the topic about which they have inquired. A GIL is not a statement of Department policy
and is not binding on the Department. See 2 Ill. Adm. Code 1200.120. You may access our website
at www.tax.illinois.gov to review regulations, letter rulings and other types of information relevant to
your inquiry.
The nature of your inquiry and the information you have provided require that we respond with
a GIL. In your letter you have stated and made inquiry as follows:
I entered into a lease agreement with ABC. My first month was 119.98. The lease
states 119.98 plus tax. On 08/10/09 they took 430.70 out of my account. When I called
them, they said it’s a law in the State of Illinois that I must pay the four years of the
lease tax up front. My question is this: Is this true and am I going to pay taxes also
very [sic] month? It say’s [sic] nothing about this in the agreement, nor was I told this by
the sales rep. I am a small business and I watch what I put out every month. To be hit
with extra couple hundred dollars not planned on is tough.
Thank you for your time

DEPARTMENT’S RESPONSE:
The State of Illinois taxes leases differently for Retailers’ Occupation Tax and Use Tax
purposes than the majority of other states. For Illinois sales tax purposes, there are two types of
leasing situations: conditional sales and true leases.
A conditional sale is usually characterized by a nominal or one dollar purchase option at the
close of the lease term. Stated otherwise, if a lessor is guaranteed at the time of the lease that the
leased property will be sold, this transaction is considered to be a conditional sale at the outset of the
transaction. Persons who purchase items for resale under conditional sales contracts can avoid

paying tax to suppliers by providing certificates of resale that contain all the information set forth in 86
Ill. Adm. Code 130.1405. All receipts received by a lessor/retailer under a conditional sales contract
are subject to Retailers’ Occupation Tax. See 86 Ill. Adm. Code 130.2010.
A true lease generally has no buy out provision at the close of the lease. If a buy-out provision
does exist, it must be a fair market value buy-out option in order to maintain the character of the true
lease. Lessors of tangible personal property under true leases in Illinois are deemed end users of the
property to be leased. See 86 Ill. Adm. Code 130.220. As end users of tangible personal property
located in Illinois, lessors owe Use Tax on their cost price of such property.
The State of Illinois imposes no tax on rental receipts. Consequently, lessees incur no tax
liability. As stated above, in the case of a true lease, the lessors of the property being used in Illinois
would be the parties with Use Tax obligations. The lessors would either pay their suppliers, if their
suppliers were registered to collect Use Tax, or would self-assess and remit the tax to the
Department. If the lessors already paid taxes in another state with respect to the acquisition of the
tangible personal property, they would be exempt from Use Tax to the extent of the amount of such
tax properly due and paid in such other state. See subsection (a)(3) of 86 Ill. Adm. Code 150.310.
Under Illinois law, lessors may not “pass through” their tax obligation to the lessees as taxes.
However, it is typical of true leases to contain contractual provisions stating that the lessees will
reimburse the lessors for the lessors’ tax costs. This is not a matter of Illinois tax law but of a private
contractual agreement between the lessors and the lessees. If the lessees agree to such provisions,
they are bound to satisfy that duty because of a contractual agreement, not because of Illinois tax
law.
The above guidelines are applicable to all true leases of tangible personal property in Illinois
except for automobiles leased under terms of one year or less, which are subject to the Automobile
Renting Occupation and Use Tax found at 35 ILCS 155/1 et seq. There are also some limited
exceptions to the general rule described in the preceding paragraphs. There is an exemption from
Retailers' Occupation Tax for sales of tangible personal property to lessors who lease that property to
governmental bodies under leases of one year or longer. See 86 Ill. Adm. Code 130.2012. In addition,
the sale of computers and communications equipment and equipment used in the diagnosis, analysis,
or treatment of hospital patients is exempt when sold to lessors who lease that property under leases
of one year or longer with hospitals to whom the Department has issued a tax exemption identification
number. See 86 Ill. Adm. Code 130.2011.
You can find further information on the Department’s website listed below along with copies of
prior letter rulings and administrative rules.
I hope this information is helpful. If you require additional information, please visit our website
at www.tax.illinois.gov or contact the Department’s Taxpayer Information Division at (217) 782-3336.
Very truly yours,

Debra M. Boggess
Associate Counsel
DMB:msk