Did an Illinois school district owe sales tax when it sold textbooks to students and later bought them back, and could it instead structure a tax-free rental?

Plain-English summary

A school district bought textbooks from retailers, sold them to students, bought them back after the term, and resold them the next year. It asked whether the arrangement could be treated like a rental.

IDOR said the transactions as described were retail sales. Governmental units generally owed Retailers' Occupation Tax on public sales outside the direct performance of a governmental function, including school-district sales of books and supplies. The district had to register as a retailer, buy resale inventory using certificates rather than its E number, and remit tax on student sales.

A genuine rental could receive different treatment. A true lease had no purchase option or only a fair-market-value option; rental receipts generally were not taxed, and the lessor normally owed Use Tax on cost. IDOR said a school with an E number could buy rental textbooks tax-free because renting them to students generally furthered the school's educational purpose.

A lease transferring title or offering a bargain purchase price was a conditional sale, making receipts taxable.

Common questions

Were the described textbook sales taxable? Yes.

Could the school use its E number to buy resale books? No; it should use resale certificates.

Could a true textbook rental be treated differently? Yes. IDOR said an E-number school could buy rental books tax-free for its educational purpose.

Citations and references

• 86 Ill. Adm. Code 130.2055 and 130.1405
• Follett's Illinois Book & Supply Store, Inc. v. Isaacs, 27 Ill. 2d 600 (1963)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2012.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2012/st-12-0003.pdf

Original ruling text

ST 12-0003-GIL 01/11/2012 GOVERNMENTAL BODIES
Governmental bodies incur Retailers Occupation Tax liability when selling tangible personal
property to the public for use or consumption. The only exception is the sale of an item by a
governmental body in the performance of its governmental function. See 86 Ill. Adm. Code
130.2055. (This is a GIL.)

January 11, 2012

Dear Xxxxx:
This letter is in response to your letter dated October 17, 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:
I am responding in regards to your letter on 10/5/2011 as attached. I am still trying to
figure out if this law really applies to our school district. We purchase our books, like all
other school districts, from Illinois retailers. We are not manufacturing books or
competing with distributers since they are our source for books. I do not understand
where the competition is. We are also buying the books back from the students and
reselling them the following year. Could this not be viewed more as a rental from our
students for our books? How are we different from any other school districts who give
books to their students for an overall fee that is included with other expenses and then
collects the books at the end of the term? They do not pay an extra sales tax to the
state, do they? We would like to be viewed like any other public school who provides
books to their students. They do not have inflated costs based upon paying an extra tax
to the state. What do we need to do to not be in conflict with this Illinois code? Can it
be considered a rental fee? I appreciate any help you can provide our school district in
this time of economic crunch.

DEPARTMENT’S RESPONSE:

In our previous response to you regarding the same subject matter as this request, we
explained that when governmental units make sales that are not in the direct performance of their
governmental function, the sales are generally taxable. See 86 Ill. Adm. Code 130.2055. Examples of
taxable sales by governmental units include the operation of concession stands by park districts,
sales of smoke detectors by fire protection districts, sales of leaf bags by municipalities, sales of
books and supplies by school districts and sales of T-shirts, caps and mugs by State agencies. When
making these types of sales, governmental units must not give their suppliers their exemption
identification “E” numbers. They must, rather, register as retailers with the Department and remit
Retailers' Occupation Tax on their sales. They may make tax-free purchases of the tangible personal
property to be sold by providing Certificates of Resale to their suppliers. See, 86 Ill. Adm. Code
130.1405. The object is to ensure that governmental units do not have a competitive advantage when
selling items that are also sold by Illinois retailers. The Illinois General Assembly did not intend to give
government a competitive selling advantage over Illinois citizens.
The Department once promulgated a regulation that would have permitted school districts and
private schools to sell books and educational supplies to students tax-free. However, retailers of
books and school supplies who were adversely affected by that regulation filed a lawsuit and the
regulation was voided by the Illinois Supreme Court. See, Follett's Illinois Book and Supply Store, Inc.
v. Isaacs, Director of Revenue, 27 Ill. 2d 600, 19 NE 2d 324 (1963).
In your previous letter you indicated that the school district sells its kids “their books at the
beginning of the semester and then they sell them back to us [the school district] at the end of the
semester.” In your letter dated October 17, 2011, you indicate that the school district purchases its
books from ABC, you buy the books back from the students and resell the books to the students the
following year. Clearly, you indicate that sales are taking place. Accordingly, we continue to
conclude that a school district incurs a Retailers' Occupation Tax liability when it makes retail sales of
books and supplies to students because such sales are in competition with other retailers.
In rental or leasing situations, however, with the exception of leases of automobiles for periods
of one year or less, Illinois does not tax rental receipts received under true leases. A true lease either
has no purchase option by the lessee at the end of the lease term, or a purchase option for the fair
market value of the leased item at the end of the lease term. On the other hand, a lease which
transfers title to the property to the lessee at the end of the lease, or contains a provision which
allows for the purchase of the property at the end of the lease for a bargain purchase price, is not
considered a true lease, but rather is a conditional sale.
Tax is due on receipts received under a conditional sale when received by the "lessor."
Lessors of items of tangible personal property are considered to be users of that property, and, as
such, owe Use Tax when they purchase tangible personal property to be used for rental purposes.
The Use Tax liability is the lessor’s, not the lessee's. While it would be permissible for the lessee to
adjust the price he charges his customers to reimburse himself for the Use Tax liability, the lessor
may not charge this amount to his customers designated as "tax". The customers do not, as lessees,
incur the tax liability. The liability falls on the lessor.
Note, although the general rule, as stated above, is that lessors incur Use Tax liability on their
cost price of rental property, the Department has determined that schools that have been issued an E
number can use that number to purchase rental books tax free because the renting of textbooks to
students by schools is generally considered a use of the books by the schools in furtherance of their
educational purposes.
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