How did Illinois distinguish a taxable conditional sale from a true equipment lease, and who owed tax in each case?

Plain-English summary

Illinois declined to rule on the equipment-finance company's proposed transactions with third-party funders because the alternative contracts were hypothetical. It did not decide whether transferring contracts, title, equipment interests, servicing rights, recourse, remarketing, or residual guarantees created another taxable sale.

The GIL instead explained the basic Illinois distinction between conditional sales and true leases.

Conditional sales

A lease was generally a conditional sale when it had a nominal or one-dollar purchase option at the end, or when the lessor was guaranteed at the outset that the property would be sold.

All receipts received by the lessor/retailer under a conditional-sales contract were subject to Retailers' Occupation Tax. A buyer purchasing property for resale under such a contract could give a resale certificate meeting 86 Ill. Adm. Code 130.1405.

True leases

A true lease generally had no buyout provision. If it had one, the option had to be at fair market value to preserve true-lease treatment.

The lessor was the end user of property leased in Illinois and owed Use Tax on its cost. The lessor paid the supplier if the supplier collected Use Tax, or self-assessed and remitted the tax.

Illinois imposed no tax on rental receipts under the rule described, so the lessee incurred no tax liability. A lessor could not pass its Use Tax obligation to the lessee as a tax, although the parties could privately agree that the lessee would reimburse the lessor.

Tax properly due and paid to another state could reduce Illinois Use Tax to the extent described in 86 Ill. Adm. Code 150.310(a)(3).

What this means for you

Equipment lessors

The economic endpoint matters. A nominal buyout or guaranteed transfer points toward a conditional sale; no buyout or a fair-market-value option points toward a true lease.

Lessees

Under a true lease, Illinois did not tax rental receipts. A contractual reimbursement to the lessor was possible, but it was not the lessor passing through its tax liability as a tax.

Companies selling leases to funders

This GIL does not answer whether the assignment to a funder triggers additional tax. The Department expressly declined the hypothetical PLR request.

Common questions

Q: Is a one-dollar purchase option a true lease?
A: Generally no. The GIL treats a nominal or one-dollar option as a conditional sale.

Q: Who owes tax on a true lease?
A: The lessor, as end user, owes Use Tax on its cost.

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

Q: Did Illinois decide whether selling the lease and equipment to a funder created another tax?
A: No. It declined to rule on the hypothetical arrangements.

Citations and references

• 2 Ill. Adm. Code 1200.110(a)(4) — Department discretion to decline a PLR.
• 86 Ill. Adm. Code 130.2010 — conditional sales.
• 86 Ill. Adm. Code 130.220 — true leases and lessor Use Tax.
• 86 Ill. Adm. Code 130.1405 — certificates of resale.
• 86 Ill. Adm. Code 150.310(a)(3) — credit for tax properly due and paid to another state.

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-11-0103.pdf

Original ruling text

ST 11-0103-GIL 12/28/2011 LEASING
Information regarding sales 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.)

December 28, 2011

Dear Xxxxx:
This letter is in response to your letter dated July 1, 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:
On behalf of our client, I am writing to request a written Sales and Use taxability ruling
related to the following questions and facts scenario. A properly executed Power of
Attorney Form is enclosed for your reference.
Company Description
CLIENT is in the business of acquiring equipment and other personal property for the
purpose of leasing or financing to commercial users. In conjunction with this
arrangement, CLIENT routinely sells the lease/finance contract to a ‘funder’ and signs a
simultaneous service agreement with the funder to continue servicing the payments
between the originating user and newly acquired funder.
Facts related to taxability question:
•

As part of CLIENT’s ‘Sale and Assignment Agreement’ (standard copy of
agreement enclosed for reference purposes), CLIENT transfers their entire right,
title and interest in the equipment leased or otherwise financed to the funding
company.

•

CLIENT has a variety of funders to whom these agreements are entered into.
There is no deviation in the contracts as to the transfer of entire rights, title and
interest with the various funders.

•

CLIENT’s business practice is to collect sales tax (Retailer’s [sic] Occupation
Tax) on all financed purchases (or actual sales) of equipment at the time of the
sale to the commercial user, and pay sales tax to the vendor (or self-remit use
tax) on the upfront cost of all leased equipment in the state of Illinois.

•

CLIENT’s sale of the financed contract/equipment generally occurs at the
beginning of the lease/finance contract but upon occasion could commence after
a payment or two has been received from the commercial user.

•

In conjunction with the above mentioned sale, CLIENT enters into a service
agreement (standard copy enclosed for reference), with the funding company to
continue servicing the lease/finance contract as an independent contractor of the
funder; whereby, payments are collected and appropriate tax remittances are
conducted through CLIENT’s business entity.

•

CLIENT may enter into a secondary agreement to the ‘Sale and Assignment
Agreement’ with the funding company that addresses Residual Value Guaranty,
Remarketing or Recourse actions. All of which speak to CLIENT’s ability/option
to repurchase the equipment or assist in the selling of the equipment after the
originating lease/finance contract has been completed or broken by the
commercial user.

Specific areas of inquiry:
1.)

Sale of a financed purchase contract – When CLIENT sells equipment financed
through a loan agreement, sales tax is charged on the purchase price of the
equipment and incorporated into the total amount considered for financing.
Sales tax is remitted to the Illinois Department of Revenue in the month of the
sale and subsequently sales tax is not charged on the monthly payments
received thereafter. CLIENT typically sells the equipment to a funder, but
remains the servicing entity to the commercial customer in regards to the monthly
payments.

QUESTIONS:
A.

When CLIENT sales [sic] the rights, title and interest of the financed
equipment to a ‘funder’ is there a sales tax burden created on the sale of
the equipment to the funder in addition to the sales tax already collected
from the commercial user at the time of the originating purchase?

B.

Does the fact that the finance contract with the commercial user remains
intact with CLIENT continuing to service the contract payments alter the
tax implication created by the sale mentioned in ‘A’ above?

C.

If a sales tax burden is created, would/should the funder be able to
provide CLIENT an Illinois resell [sic] exemption certificate for the

transaction since the equipment is being purchased with the intent to
resell to the already contracted commercial user?
2.)

Sale of lease contract – When CLIENT leases equipment through a lease
agreement, sales tax will be paid by CLIENT on their purchase price of the
equipment and no tax is charged on the monthly lease payments due from the
commercial user. After CLIENT sells the equipment backed by the lease
contract to a funder, they continue to service the lease payments as an
independent contractor for the funder

QUESTIONS:
A.

When CLIENT sales [sic] the rights, title and interest of the leased
equipment to a ‘funder’ is there a sales tax burden created on the sale of
the equipment in addition to the sales tax already paid on CLIENT’s
original cost when acquiring the equipment?

B.

If a sales tax burden is created on the sale of the equipment, would
CLIENT have a legal right to recoup the sales tax already paid on the
equipment from the state of Illinois under a resale exemption authority?

C.

Would CLIENT be able to purchase the equipment exempt for resell [sic] if
the funder ‘sales agreement’ can be established prior to or simultaneously
with the lease agreement with the commercial user?

D.

Does the tax implication change on the equipment sale if a monthly
payment is received from the commercial user prior to the sale of the
lease contract (along with title and all rights) to the funder, versus if the
funder can be established simultaneously with the leasing of the
equipment?

E.

Does the fact that CLIENT continues to service the lease payments as an
independent contractor of the funder alter the tax implication associated
with the sale of the equipment from CLIENT to the funder?

F.

Does the fact that CLIENT may enter into a subsequent agreement with
the funder in regards, recourse, remarketing or residual guarantee alter
the tax burden if created in question ‘A’ above?

In summary, CLIENT would like to clarify if there is an additional sales tax
application/responsibility created by the selling of the financed/leased contract along
with the rights, title and interest in equipment located in the state of Illinois to a thirdparty funder. The questions posed are for clarification as to the proper handling of
situations that CLIENT would like to enter into on a go-forward basis. To the best of our
knowledge CLIENT is not currently under audit in the state of Illinois and does not have
any formal or informal appeals in progress related to this issue.
FIRM on behalf of CLIENT is available to discuss the above issues with the Illinois
Department of Revenue prior to finalization of the private letter ruling. The undersigned
can be contacted to address additional questions or clarification as may be needed. We
look forward to your response to this private letter-ruling request.

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). Your letter describes a number of alternative contractual arrangements the
Company may enter into with lessees and purchasers of equipment. You have also provided copies
of blank contractual agreements between the Company as seller or lessor and purchasers or lessees
and agreements between the Company and funding company that reflect these various possible
contractual arrangements. Your letter and the documents represent possible, prospective contractual
arrangements that at this time are little more than hypothetical examples. The Department’s rule on
Private Letter Ruling states that will not provide letter rulings based on hypothetical situations. It is the
Department’s position that we must decline to issue a Private Letter Ruling. However, we hope the
following will be helpful in addressing your question.
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 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 resale exemption is applicable when making sales to a purchaser who will in turn sell the
tangible personal property. For general information regarding resale certificates, the Department’s

regulation for resale certificates, “Seller's Responsibility to Obtain Certificates of Resale and
Requirements for Certificates of Resale,” is found at 86 Ill. Adm. Code 130.1405.
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,

Richard S. Wolters
Associate Counsel
RSW:msk