Is a replacement fee charged when a customer loses a rented book subject to Illinois sales tax under a true lease?

Plain-English summary

A replacement fee for a lost rented book was generally not subject to Illinois sales tax when the rental was a true lease.

Illinois treats true leases and conditional sales differently. A true lease generally has no buyout at the end, or only a fair-market-value purchase option. The lessor is the end user and owes Use Tax on its cost of the leased property.

Illinois imposed no Retailers' Occupation Tax on true-lease rental receipts. The GIL says the lessee was therefore generally not subject to sales tax on related lease charges such as late fees or replacement fees.

The letter notes a separate exception for automobiles rented for one year or less, which were subject to the Automobile Renting Occupation Tax.

What this means for you

Book and equipment rental businesses

Confirm that the agreement is a true lease. A nominal purchase option or guaranteed sale can change the tax classification.

Customers charged for lost property

Under the true-lease rule described, the replacement charge follows the nontaxable treatment of related lease charges rather than becoming a retail sale of a replacement book.

Common questions

Q: Is the lost-book fee taxable?
A: Generally no when the book rental is a true lease.

Q: Who pays tax on the rented book?
A: The lessor pays Use Tax on its cost as the end user.

Q: Are true-lease rental receipts taxable?
A: No under the rule described.

Citations and references

• 86 Ill. Adm. Code 130.2010 — conditional sales.
• 86 Ill. Adm. Code 130.220 — true leases and lessor Use Tax.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2011.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2011/st-11-0089.pdf

Original ruling text

ST 11-0089-GIL 10/12/2011 LEASING
Information regarding sales tax liabilities in lease situations may be found at 86 Ill. Adm. Code
130.2010. (This is a GIL.)

October 12, 2011

Dear Xxxxx:
This letter is in response to your letter dated August 22, 2011, 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:
Please let this letter serve as a formal request for a Letter Ruling from your state. By
way of background, COMPANY is in the business of developing software to assist
companies with their transaction-based sales and use tax calculation and compliance
needs, including managing product taxability rules. In that respect, we are inquiring
about the taxability of the following situation:
How does Illinois treat a replacement fee for a rented book that is lost by
the customer? The fee is charged at the end of the rental when the
customer does not return the book. No replacement book is provided to
the customer.
We understand that sales tax would be paid by the lessor at the time of purchase since
the item involved is a rental book. However, it is unclear as to whether or not the
replacement fee charged to the customer would incur any additional sales tax.
Please note that we are only interested in finding out about the taxability of the named
issue and are not asking you to address sales to potentially exempt entities.
We appreciate your clarification of this issue at your earliest convenience. Please feel
free to contact me if you have any questions or need further clarification. Thank you.

DEPARTMENT’S RESPONSE:
When a company rents books to customers, and the transactions are structured so that they
constitute "true leases," then no Retailers' Occupation Tax (sales tax) liability is incurred on the rental
receipts. Under Illinois law, "true leases" and "leases" that are actually conditional sales contracts are
treated differently for Retailers' Occupation and Use Tax purposes.
True leases generally have no buy out provisions at the close of the leases. If buy out
provisions do exist, they must be fair market value buy out options in order to maintain the character
of the true leases. Lessors of tangible personal property under true leases in Illinois are deemed end
users of the leased property and they incur Use Tax liability on their cost price of such property. As
noted above, no tax liability applies to rental receipts under true leases. The only exception is
automobiles rented for one year or less, which are subject to the Automobile Renting Occupation Tax.
As a result, the lessee is not generally subject to sales tax liability for any related lease charges such
as late charges or replacement fees.
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