When are Illinois trailer sales or leases taxable, and when can the rolling stock exemption apply?

Plain-English summary

A business that rented trailers was considering selling them to customers who would pick them up in Illinois. IDOR explained the general tax rules for outright sales, leases, and the rolling stock exemption.

An outright retail sale is within Illinois Retailers' Occupation Tax. A lease with a nominal or one-dollar purchase option is generally a conditional sale, so the receipts are taxable from the start under 86 Ill. Adm. Code 130.2010.

A true lease generally has no purchase option, or only a fair-market-value option. The lessor is treated as the end user and owes Use Tax on its cost under Rule 130.220; Illinois imposed no tax on the rental receipts. A lessee may contractually reimburse the lessor, but the lessor cannot label that reimbursement as tax passed through to the lessee. Tax properly due and paid to another state can reduce Illinois Use Tax under Rule 150.310(a)(3).

The rolling stock exemption in Rule 130.340 can cover property sold to an interstate carrier for hire for use as rolling stock in interstate commerce, and certain lessors under leases of at least one year that exist when the property is purchased. The exemption turns on how the property is used, not merely on it being a trailer. Qualifying parts must become components of rolling stock, or be dedicated to it and participate directly in transportation. The seller or serviceman must retain a properly executed certificate; Form RUT-7 may be used.

What this means for you

Trailer dealers and lessors

Classify the transaction first. A guaranteed or nominal-price buyout points to a taxable conditional sale, while a true lease puts use-tax liability on the lessor's cost.

Interstate carriers

Trailer status alone is not enough. Document the qualifying interstate-carrier use and give the seller a compliant exemption certificate.

Common questions

Are true-lease rental receipts taxed? The letter says no; the lessor instead owes Use Tax on its cost.

Does every trailer qualify as rolling stock? No. Use by a qualifying interstate carrier for hire controls.

What documentation supports the exemption? A certificate satisfying Rule 130.340(e); Form RUT-7 may be used.

Citations and references

• 86 Ill. Adm. Code 130.101, 130.2010, 130.220, and 130.340
• 86 Ill. Adm. Code 150.101 and 150.310(a)(3)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2014.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2014/st-14-0015.pdf

Original ruling text

ST 14-0015-GIL 04/04/2014 ROLLING STOCK EXEMPTION
This letter concerns the rolling stock exemption. See 86 Ill. Adm. Code Section 130.340.
(This is a GIL.)

April 4, 2014
Dear Xxxx:
This letter is in response to your letter dated February 5, 2014, 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 writing to request your opinion as to the sales tax rate applicable and the required
documents concerning the sale of trailers pulled behind over-the-road-tractors.
Statement of Facts & Analysis
Our client currently rents trailers, however is considering sales of the trailers to its
customers. Customers would pick up the trailers from our clients’ in-state location.
1.

What are the general guidelines for taxing on trailer sales in your state?

2.

Should tax be charged on the invoice at the time of sales?

3.

If the customer is claiming they are tax exempt, what documentation do they
need from their customer at the time of sales?

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
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.
LEASING

Page 2
April 4, 2014
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 lessors are 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, thus making all receipts 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 buyout 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
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 sale, purchase or
use 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 the 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.
ROLLING STOCK EXEMPTION
Under the rolling stock exemption, the Retailers' Occupation Tax does not apply to sales of
tangible personal property to interstate carriers for hire for use as rolling stock moving in interstate
commerce or lessors under leases of one year or longer executed or in effect at the time of purchase
to interstate carriers for hire for use as rolling stock moving in interstate commerce. In addition,
notwithstanding the fact that the sale is at retail, the Retailers' Occupation Tax does not apply to sales
of tangible personal property to owners, lessors, or shippers of tangible personal property that is
utilized by interstate carriers for hire for use as rolling stock moving in interstate commerce as long as
so used by the interstate carriers for hire. See 86 Ill. Adm. Code 130.340. For parts and equipment
purchased for qualifying trucks and trailers, please see subsection (b) and subsection (j)(2) of Section
130.340.
It is not the type of item that determines whether or not it qualifies as rolling stock, rather how
the item is used by a qualifying interstate carrier. Not all items of tangible personal property used by
an interstate carrier for hire qualify for the rolling stock exemption. The exemption is applicable to

Page 3
April 4, 2014

equipment or parts only if they become a component part of qualifying rolling stock and to equipment
which, though not physically incorporated, is dedicated to qualifying rolling stock and participates
directly in the transportation process.
In order to claim the exemption, retailers and servicemen must obtain a properly executed
exemption certification from the purchaser and retain this certification in their books and records.
Exemption certifications must comply with the requirements of subsection (e) of Section 130.340.
Form RUT-7, Rolling Stock Certification, which can be found on the Department’s website, may be
used to provide the required certification to document the rolling stock exemption.
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:lkm