Are judgment or guarantor payments recovered after a defaulted equipment lease subject to Illinois sales or use tax?

Plain-English summary

Illinois did not directly answer whether litigation judgments or guarantor payments received after a lease default were taxable. It declined the requested PLR because its regulations addressed leasing and provided only the general classification rules.

The requester described two defaults: a fair-market-value lease for which Use Tax had been paid up front, and a finance lease with a one-dollar purchase option for which tax was remitted with monthly charges. It asked about later partial recoveries through litigation or a guarantor.

Conditional sales

A nominal or one-dollar purchase option, or a guaranteed sale at the outset, generally made the arrangement a conditional sale. All receipts under a conditional-sales contract were subject to Retailers' Occupation Tax when received.

True leases

A true lease generally had no buyout or only a fair-market-value purchase option. The lessor was the end user and owed Use Tax on cost. Illinois imposed no tax on rental receipts, so the lessee incurred no tax.

The lessor could not pass its Use Tax obligation to the lessee as a tax, though the parties could agree to reimbursement. Tax properly due and paid to another state could reduce Illinois Use Tax under the cited rule.

The GIL did not say whether a post-default judgment or guarantor payment counted as a taxable conditional-sale receipt, a nontaxable true-lease recovery, damages, or something else.

What this means for you

Lessors collecting after default

Do not infer the answer solely from the word "lease." First determine whether the underlying agreement was a conditional sale or a true lease, then separately classify the recovery.

Readers relying on this GIL

This letter is useful for the lease classification rules but not as a holding on litigation or guarantor proceeds.

Common questions

Q: Were the specific judgment payments held taxable?
A: No specific holding was issued.

Q: How are conditional-sale receipts treated?
A: All receipts are subject to Retailers' Occupation Tax when received under the rule described.

Q: How are true-lease rental receipts treated?
A: Illinois imposed no tax on them; the lessor instead owed Use Tax on cost.

Citations and references

• 2 Ill. Adm. Code 1200.110(a)(3)(D) and (a)(4) — grounds for declining the PLR.
• 86 Ill. Adm. Code 130.2010 — conditional sales.
• 86 Ill. Adm. Code 130.220 — true leases.
• 86 Ill. Adm. Code 150.310(a)(3) — credit for tax paid to another state.
• 35 ILCS 155/1 et seq. — separate rule noted for automobiles leased one year or less.

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-11-0091.pdf

Original ruling text

ST 11-0091-GIL 10/28/2011 LEASING
Lessors of tangible personal property under true leases in Illinois are deemed end users of the
property to be leased. As end users of tangible personal property personal property located in
Illinois, lessors owe Use Tax on their cost price of such property. See 86 Ill. Adm. Code
130.220 and 130.2010. (This is a GIL.)

October 28, 2011

Dear Xxxxx:
This letter is in response to your letter dated August 10, 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:
We respectfully request the Illinois Department of Revenue to provide a binding letter
ruling in regards to sales/use tax on funds received from any judgment or litigation of a
deficiency on a lease contract that was charged off in accordance with generally
accepted accounting principles and income tax purposes. We are requesting this
binding letter ruling on behalf of COMPANY. The following is a description of the
relevant facts.
ISSUE:
1.

Scenario 1: A 60 month Fair Market Value lease (non-cancellable / irrevocable)
contract where the use tax had been remitted to the IL Department of Revenue at
the contract commencement date (up-front) based on the purchase price of the
tangible personal property which was financed. The lessee has defaulted on the
lease contract prior to the end of term of the contract, leaving a deficiency
balance of $55,000, which is charged off to bad debt in accordance with
generally accepted accounting principles. No refund request or credit has been
taken for the uncollected portion of the up-front sales tax that was financed into
the contract. Would the subsequent receipt of $20,000 as a final judgment

from litigation or the subsequent receipt of $10,000 from a third party
guarantor be taxable for sales/use tax?
2.

Scenario 2: A 60 month capital/finance lease agreement (non-cancellable /
irrevocable) with an option to purchase the tangible personal property at the end
of the lease for $1.00. The sales tax was remitted to the IL Department of
Revenue based on each monthly lease charge. The customer has defaulted on
the contract prior to the end of term of the contract, resulting in the equipment
being sold to an unrelated third party (applicable sales tax was charged), leaving
a net deficiency balance of $25,000 which is charged off to bad debt in
accordance with generally accepted accounting principles.
Would the
subsequent receipt of $8,000 as a final judgment from litigation or the
subsequent receipt of $2,000 from a third party guarantor be taxable for
sales/use tax?

DEPARTMENT’S RESPONSE:
The Department’s regulation “Public Information, Rulemaking and Organization” provides that
“[w]hether to issue a private letter ruling in response to a letter ruling request is within the discretion of
the Department. The Department will respond to all requests for private letter rulings either by
issuance of a ruling or by a letter explaining that the request for ruling will not be honored.” 2 Ill. Adm.
Code 1200.110(a)(4). Further, the Department’s regulations regarding Private Letter Rulings provide
that “[i]f there is case law or there are regulations dispositive of the subject to the request, the
Department will decline to issue a letter ruling on the subject." 86 Ill. Adm. Code 1200.110(a)(3)(D).
The Department declines to issue a Private Letter Ruling since its regulations are dispositive of the
subject of your request.
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 lessors are 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 person under a conditional sales contract are
subject to Retailers’ Occupation Tax at the time they are received. 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, lessors and lessees may make private contractual arrangements for a reimbursement of
the tax to be paid by the lessees. If lessors and lessees have made private agreements where the
lessees agree to reimburse the lessors for the amount of the tax paid, then the lessees are obligated
to fulfill the terms of the private contractual agreements.
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.
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