Who owed Illinois tax on equipment provided under a lease with a $1 purchase option when the out-of-state lessor lacked Illinois nexus?

Plain-English summary

An Illinois business received equipment under an agreement with an out-of-state leasing company. The equipment was shipped into Illinois, and the agreement gave the lessee a $1 purchase option at the end of the term.

IDOR explained that a nominal or $1 buyout generally characterizes a conditional sale: the lessor is effectively guaranteed at the outset that the property will be sold. Under a conditional sale, installment receipts are the tax base, and the purchaser owes corresponding Use Tax on those installments.

The collection path depended on the lessor's Illinois connection under the historical nexus analysis in the GIL. A retailer maintaining a place of business in Illinois had to register and collect Use Tax. But if the out-of-state lessor lacked sufficient nexus and was not registered, it did not have to collect; the Illinois lessee instead had to register, self-assess, and remit Use Tax on each installment. IDOR added that out-of-state lessors in this position often registered voluntarily to collect and remit the tax as a customer courtesy.

The GIL contrasted a true lease. A true lease generally had no buyout or only a fair-market-value option; the lessor was treated as the end user, owed Use Tax on its cost, and Illinois did not tax the rental receipts.

Common questions

Why was the $1 buyout important? It indicated a conditional sale rather than a true lease.

Who paid when the lessor had no nexus and was unregistered? The Illinois lessee had to register and self-assess Use Tax on each installment payment.

Could the lessor collect anyway? The GIL said out-of-state lessors often registered to collect and remit Use Tax as a courtesy.

Did Illinois tax receipts from a true lease? The GIL said no; for a true lease, the lessor generally owed Use Tax on its cost instead.

Citations and references

• 86 Ill. Adm. Code 130.2010, 130.220, and 130.1405
• 86 Ill. Adm. Code 150.201(i), 150.801, and 150.310(a)(3)
• Quill Corp. v. North Dakota, 112 S. Ct. 1904 (1992)
• Brown's Furniture, Inc. v. Zehnder, 171 Ill. 2d 410 (1996)

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-12-0035.pdf

Original ruling text

ST 12-0035-GIL 07/20/2012 LEASING
Information regarding the 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.)
July 20, 2012
Dear:
This letter is in response to your letter dated June 13, 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:
I write to you seeking a General Information Letter on a particular sales/use tax question
on which I have received two directly contradictory verbal opinions from two different tax
specialists in the Illinois Department of Revenue (the “Department”).
The following are the pertinent facts:
A business (the “Lessee”) domiciled and doing business in Illinois entered into an
equipment lease (the “Lease”) with an out-of-state leasing company (“Lessor”). The
Lessor is incorporated in and has its principal place of business in a State other than
Illinois, and has no office or employees in Illinois. The Lessor paid the equipment
purchase directly to an equipment vendor (the “Vendor”) located outside of Illinois. The
Vendor then shipped the equipment from outside Illinois directly to the Lessee’s place of
business in Illinois.
For purposes of this letter and your response, you may assume that neither the Lessor
nor the Vendor is not and “Illinois retailer” for purposes of the Illinois Retailers’
Occupation Tax (“Sales Tax”) law. The vendor did not collect sales (or any other) tax in
its (or any other) State, relying on the fact that the Lessor would be billing and collecting
from the Lessee, and then remitting to the Department, a sales or use tax on each
monthly installment payment.
The Lease grants to the Lessee an option to purchase the equipment at the end of the
Lease term for one dollar ($1.00). Given the nominal purchase option amount, I believe
the Lease is considered a conditional sale contract (“CSC”) rather than a true lease in
Illinois. See, e.g., ST 09-0109-GIL 08/24/2009 LEASING.)

ST 12-0035-GIL
July 20, 2012
Page 2
The question posed to the Department here is: Should the Lessor be collecting and
remitting Illinois Sales Tax, or instead should the Lessor be collecting and remitting
Illinois Use Tax? (Based on the Lessee’s locale, the percentage amount for each tax
are different.)
One tax specialist in the Department gave me a verbal opinion that because this is a
CSC, each installment payment made by the Lessee is subject to Illinois Sales Tax.
Another tax specialist in the Department indicated that because the equipment was sold
by an out-of-state seller and shipped into Illinois for use there, each installment payment
is subject to Illinois Use Tax.
Thank you very much for your time and consideration.
DEPARTMENT’S RESPONSE:
Sales Tax
The Illinois Retailers' Occupation Tax Act imposes a tax upon persons engaged in this State in the
business of selling tangible personal property to purchasers for use or consumption. See 86 Ill. Adm.
Code 130.101. In Illinois, Use Tax is imposed on the privilege of using, in this State, any kind of
tangible personal property that is purchased anywhere at retail from a retailer. See 86 Ill. Adm. Code
150.101. These taxes comprise what is commonly known as "sales" tax in Illinois. If the purchases
occur in Illinois, the purchasers must pay Use Tax to the retailer at the time of purchase. The
retailers are then allowed to retain the amount of Use Tax paid to reimburse themselves for the
Retailers’ Occupation Tax liability incurred on those sales.
Nexus
An “Illinois Retailer” is one who either accepts purchase orders in the State of Illinois or maintains an
inventory in Illinois and fills Illinois orders from that inventory. The Illinois Retailer is then liable for
Retailers' Occupation Tax on gross receipts from sales and must collect the corresponding Use Tax
incurred by the purchasers.
Another type of retailer is the retailer maintaining a place of business in Illinois. The definition of a
“retailer maintaining a place of business in Illinois” is described in 86 Ill. Adm. Code 150.201(i). This
type of retailer is required to register with the State as an Illinois Use Tax collector. See 86 Ill. Adm.
Code 150.801. The retailer must collect and remit Use Tax to the State on behalf of the retailer’s
Illinois customers even though the retailer does not incur any Retailers' Occupation Tax liability.
The United States Supreme Court in Quill Corp. v. North Dakota, 112 S.Ct. 1904 (1992), set forth the
current guidelines for determining what nexus requirements must be met before a person is properly
subject to a state's tax laws. The Supreme Court has set out a 2-prong test for nexus. The first
prong is whether the Due Process Clause is satisfied. Due process will be satisfied if the person or
entity purposely avails itself or himself of the benefits of an economic market in a forum state. Quill at
1910. The second prong of the Supreme Court's nexus test requires that, if due process
requirements have been satisfied, the person or entity must have physical presence in the forum
state to satisfy the Commerce Clause.

ST 12-0035-GIL
July 20, 2012
Page 3
A physical presence is not limited to an office or other physical building. Under Illinois law, it also
includes the presence of any agent or representative of the seller. The representative need not be a
sales representative. Any type of physical presence in the State of Illinois, including the vendor’s
delivery and installation of his product on a repetitive basis, will trigger Use Tax collection
responsibilities. Please refer to Brown’s Furniture, Inc. v. Zehnder, 171 Ill.2d 410 (1996).
The final type of retailer is the out-of-State retailer that does not have sufficient nexus with Illinois to
be required to submit to Illinois tax laws. A retailer in this situation does not incur Retailers’
Occupation Tax on sales into Illinois and is not required to collect Use Tax on behalf of its Illinois
customers. However, the retailer’s Illinois customers will still incur Use Tax liability on the purchase
of the goods and have a duty to self-assess and remit their Use Tax liability directly to the State.
Rentals and Leases
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. The lessors/retailers owe Retailers’ Occupation Tax on any installment
payments when they are received by the lessors/retailers.
The lessees/purchasers owe
corresponding Use Tax on the amount of the installment payments that are collected by the
lessors/retailers.
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.

ST 12-0035-GIL
July 20, 2012
Page 4
In a conditional sale situation, if the out-of-State lessor does not have nexus and is not registered with
the Department, the lessee/purchaser is obligated to self-assess and remit Use Tax. Since the
lessee/purchaser owes Use Tax on the amount of each installment payment, he or she is required to
register with the Department to make such tax payments. In many cases out-of-State lessors in
these situations register with the Department to collect and remit the use Tax as a courtesy to their
customers.
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