Did Illinois tax a $1-purchase-option equipment contract upfront or as installments, and how was a fair-market-value lease taxed?

Plain-English summary

An equipment lessor asked whether Illinois tax on two contract forms was due upfront or over the rental stream.

A nominal or $1 purchase option generally made the contract a conditional sale. The lessor-retailer owed Retailers' Occupation Tax on installment payments when received, and the lessee owed corresponding Use Tax on those payments.

A fair-market-value buyout could preserve a true lease. The lessor was treated as the equipment's end user and owed Use Tax on its cost price; Illinois imposed no tax on rental receipts, so the lessee had no tax liability. A lessor that properly paid tax to another state received credit against Illinois Use Tax to that extent.

Common questions

Was tax on a conditional sale due on the full receivable upfront? The letter said the lessor generally owed tax as installment payments were received.

Was a true lease taxed on monthly rent? No. The lessor owed Use Tax on equipment cost instead.

Could tax paid to another state reduce Illinois Use Tax? Yes, to the extent it was properly due and paid there.

Citations and references

• 86 Ill. Adm. Code 130.220, 130.1405, and 130.2010
• 86 Ill. Adm. Code 150.101 and 150.310(a)(3)
• 86 Ill. Adm. Code 130.2011 and 130.2012

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2013.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2013/st-13-0026.pdf

Original ruling text

ST 13-0026-GIL 05/28/2013 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.)
May 28, 2013
Dear:
This letter is in response to your letter dated April 17, 2013, 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 STATE based lessor that leases medical equipment mainly to veterinarians,
doctors and dentists. The lessees are located in Illinois. We do two types of
transactions.
The first type of contract in question will have monthly rental payments and have a
bargain purchase option of $1 at the end of the lease term, (which many states then
consider the transaction to actually be a Conditional Sales Contract).
The second type of contract will have monthly rental payments and have a Fair Market
Value residual, and the lessee will have the option of buying the equipment at the end of
the lease term or returning the equipment (which many states consider the transaction
to be a true lease).
Our question relates to the payment of sales tax. Is the sales tax in each of these
scenarios due UpFront or on the rental stream? If the tax is due UpFront, is the tax due
on the Equipment Cost or on the Gross Receivable?
Can you please provide us with a ruling on the above?
DEPARTMENT’S RESPONSE:
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

ST 13-0026-GIL
May 28, 2013
Page 2
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.
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 to the lessee, that 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 generally 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 of a true lease 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.
You may wish to review 86 Ill. Adm. Code 130.2011 Sales to Persons Who Lease Tangible Personal
Property to Exempt Hospitals and 86 Ill. Adm. Code 130.2012 Sales to Persons Who Lease Tangible
Personal Property to Governmental Bodies.
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