Were college textbook rental fees taxable when the bookstore allowed a student to buy the book during or after the rental?

Plain-English summary

A college bookstore rented textbooks and allowed customers to purchase them if they chose to keep them. It asked whether the rental fee and late or nonreturn charges were taxable.

IDOR described the difference between a true lease and a conditional sale but did not classify the bookstore's actual agreement.

A conditional sale generally had a nominal or $1 purchase option or otherwise guaranteed at inception that the property would be sold. The lessor's receipts were subject to Retailers' Occupation Tax.

A true lease generally had no buyout or only a fair-market-value option. Illinois imposed no tax on true-lease rental receipts; the lessee had no tax liability, and the lessor owed Use Tax on its cost. The lessor could not pass that liability through as “tax,” though a private reimbursement agreement was possible.

The GIL did not separately state the treatment of late or nonreturn charges.

Common questions

Did IDOR approve the bookstore's arrangement as a true lease? No.

Were true-lease rental receipts taxed? No, under the historical guidance.

What indicated a conditional sale? A nominal buyout or a guarantee that the item would be sold.

Citations and references

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

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-12-0005.pdf

Original ruling text

ST 12-0005-GIL 01/20/2012 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.)

January 20, 2012

Dear Xxxxx:
This letter is in response to your letter received by the Legal Services Office on January 5,
2012, 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 are a college book store with two locations serving both a 4 year public institution
and a 2 year community college. Currently, we offer the service of renting textbooks, as
many or most college book stores today do. Originally, we were told when we called
the IDOR that we should be charging sales tax on the process of renting textbooks
because we did allow customers to purchase the books if they chose to keep them at
any point during the rental process.
Recently, we had a customer question this policy and provided us with the enclosed
copy of a letter from the IDOR, which he interpreted as saying that the rental fee and
any subsequent penalties for late or non return of product were tax exempt. The
interpretation rests on the decision as to whether our rental process is deemed to be a
‘true lease’ or a ‘conditional lease’.
This issue is complicated by the fact that we have two competitors, both of whom are
national college book store retail firms, one of whom does charge sales tax on rental
transactions and one that does not.
What we are requesting is a formal decision on this process specifically directed toward
our procedures so that we can either alter those procedures or have a posted notice
supporting whichever policy we adopt as being correct. I have also enclosed a copy of
our rental agreement for your viewing to see if there is some wording in our document
that needs to be changed to make us compliant with one direction or the other.
This is a fluid situation and the earliest we could get a response the better. The renting
of college textbooks has become part of everyday business at most college book stores

and this tax issue especially in our state seems to be somewhat up in the air for most
college retailers. We are looking for some closure on policy so that we can provide
services to our customers that we know to be accurate.
Thank you for your prompt consideration of our request.

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 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.
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