How did Illinois's 2014 local sourcing rules apply to leases treated as conditional sales?

Plain-English summary

An industry stakeholder asked how lessors should apply Illinois's local tax sourcing rules, adopted in 2014, to leases and other financing arrangements that might be conditional sales.

IDOR would not answer the many hypothetical scenarios individually in a GIL. It explained that Illinois Retailers' Occupation Tax was origin-sourced: the Department could not use the property's ultimate destination as the controlling factor simply because that would be easier for conditional-sale transactions.

Section 220.115(d)(4) provided a presumption for leases with an option to purchase. Two conditions were required: the transaction had to be a conditional sale, and the property had to be in the seller's possession or control when the parties entered the agreement. If both were met, the seller could source the sale to the property's location at that time.

Whether an agreement was a conditional sale depended on Section 130.2010(a) and other Illinois law. When the parties entered the agreement depended on its terms and their intent. If either condition failed and no other subsection (d) shortcut applied, the seller had to use subsection (c)'s primary and secondary selling activities to locate the composite of its selling business.

The 2014 sourcing rules did not change resale certificates, the definition of conditional sale, or the timing of tax payments. IDOR said taxpayers should continue their prior practices on those nonsourcing issues.

What this means for you

This is historical guidance on the 2014 sourcing rules. A conditional-sale lease did not automatically source to delivery destination; eligibility for the property-location presumption depended on the agreement and the seller's possession or control when it was made.

Common questions

Could the lessor always use the customer's destination? No.

When did the property-location presumption apply? When there was a conditional sale and the seller possessed or controlled the property when the agreement was entered.

What happened if those conditions were absent? The retailer generally returned to the composite selling-activities analysis.

Citations and references

• 86 Ill. Adm. Code 220.115(c) and (d)(4).
• 86 Ill. Adm. Code 130.2010(a).
• Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130.

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-14-0050.pdf

Original ruling text

ST 14-0050-GIL 10/31/14 Local Taxes
This letter explains how to determine the local tax rate applicable to conditional sales leasing
transactions. (See 86 Ill. Adm. Code 220.115.) (This is a GIL.)
October 31, 2014

Dear xxx:
This letter is in response to your letter dated July 30, 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 that 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 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:
Since effective date of the new sourcing regulations xxx has collected comments
and questions from industry regarding the Department’s regulations. The
following questions from industry members are offered as evidencing continued
uncertainty. XXX requests response in a General Information Letter providing
guidance to implementation in the marketplace:
General Questions
1.

Will lessors continue to be allowed to provide resale exemption certificates
to their vendors reflecting a purchase for resale in respect to a conditional
sales agreement?

2.

The new rule only makes mention of ‘a lease with a dollar or other nominal
option to purchase’ shall be considered a conditional sale. This simplified
reference is silent with regards to other time payment agreements that could
also be considered conditional sales and raises the following questions:
a.

Will leases with a mandatory end of lease purchase (i.e. balloon
payment, PUT) also be considered a conditional sale for purposes of
applying §(d)(4) of the rule? Stated otherwise, if lessors are
guaranteed at the time of entering into a lease that the leased property
will be sold, will such lease agreements be considered a conditional
sale for purposes of applying §(d)(4)?

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October 31, 2014

b.

Will other time payment agreements entered into by the seller and
purchaser, such as installment sales and equipment finance
agreements, also be considered conditional sales for purposes of
applying §(d)(4)?

3.

With respect to determining the appropriate rate of tax to apply to a sale at
the time the conditional sales agreement is entered into by the parties.

4.

Lessors who enter into conditional sales may not hold the inventory that they are
selling. In cases where the lessor is drop-shipping property from its suppliers or
where the property has to be specially manufactured, the conditional sales
agreement is often entered into prior to the location of the property being known by
the parties. Consequently, we urge the IDOR to adopt simple rules using the
ultimate destination of the property (end-users location) as the determining or safeharbor factor in the taxation of the property being sold through a conditional sales
agreement. Here are some scenarios that could lead to significant confusion among
retailers if not made clear by the Department:

5.

A lessor and its customer enter into a conditional sales agreement prior to the
manufacture of the property subject to the agreement. Would the Department of
Revenue then default to a rate of tax determined from the location of the site of
manufacturing (even if out of state), the lessor’s location (even if out of state), or
the ultimate destination of the property being acquired by the customer in Illinois?
What if all three sites were in Illinois, would your answer change? What if the
lessor records are inconclusive as to the location where the property is being
manufactured?

6.

A lessor and its customer enter into a conditional sales agreement prior to the
lessor’s ordering of the property from a third-party vendor. Would the Department
of Revenue then default to using a rate of tax determined from the location of the
site of shipment FOB origin (even after having been required to issue a resale
exemption certificate), the lessor’s location (even if out of state), or the ultimate
destination of the property being acquired by the customer in Illinois? If FOB
origin is determined to be the correct answer, lessors should not be required to
provide resale exemption certificates to their vendors, as they are under current
regulations. Would your answer change if the conditional sales agreement is
conditioned upon the lessee’s receipt and final acceptance of the property covered
by the agreement (i.e. Sale on approval 810 ILCS 5/2-326)?

7.

A lessor and its customer enter into a conditional sales agreement after the lessor
ordered the property from its third-party vendor. Would the Department of
Revenue then default to using a rate of tax determined from the location of the site
of shipment FOB origin (even after having been required to issue a resale
exemption certificate), the rate of tax determined from the location of the property
while in transit by common carrier if the property had already shipped, the lessor’s

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October 31, 2014

location (even if out of state), or the ultimate destination of the property being
acquired by the customer in Illinois?
8.

A lessor emails its customer a conditional sales agreement just prior to authorizing
the shipment of the property out of lessor’s warehouse to the customer. The
property arrives at the customer’s location just before the customer executes and
returns the signed conditional sales agreement to the lessor. The lessor charges
ROT based upon the location of the property at the customer. Has the lessor chosen
the correct tax jurisdiction under the new regulations?

9.

A lessor and its customer enter into an unconditional interim funding agreement for
property that will be temporarily located at a logistics/configuration/staging center
prior to distribution to various locations of the customer. When the property is
received by the customer at its ultimate destination, the interim funding agreement
terms convert into a conditional sale. Will the temporary location of the property at
time of entering into the interim funding agreement be the correct location for
sourcing? Or will the receipt of the property by the customer at the time the
agreement converts into a conditional be the correct location for sourcing? Would
this answer change if the interim funding agreement was conditioned on final
receipt and acceptance by the customer under the conditional sale?

10.

Under any of the above scenarios could the Department of Revenue envision the
lessor/retailer defaulting back into the jurisdictional analysis required under
Regulations Section 220.115(c)(1)?

Timing of Tax Liability Questions
1.

The difference between the moment in which a conditional sales agreement is
entered into and the moment in which such property is delivered and first invoiced
to the customer can be substantial at times. Will the Department require ROT to be
collected and remitted by the lessor prior to the time of delivery of the property and
invoicing? Can the Department confirm that the contractual lease period and the
rentals due thereunder determine the time of sale and for filing and remittance of
tax rather than the date a conditional sales agreement is entered into?

2.

If a lessor does an outright sale of the conditional sales agreement and is obligated
to report the receipts of the sale pursuant to 130.1960(c), are the additional receipts
sourced to the location of the property at the time of selling the agreement? Or are
they sourced to the location of the property at the time of entering into the
conditional sales agreement with the customer? Will the Department defer to any
provisions of Illinois Uniform Commercial Code such as “Sale on approval” at 810
ILCS 5/2-326 or “Passing of title” at 810 ILCS 5/2-401, for purposes of
determining when the conditional sale agreement is entered into?

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October 31, 2014

DEPARTMENT’S RESPONSE:
I.

The Sourcing Rules

The Department adopted its final sourcing rules on June 25, 2014. The rules implement
retailers’ occupation tax statutes, which allow municipalities, counties and other municipal
corporations to impose taxes on persons “engaged in the business of selling” in their
jurisdictions. See, e.g., 55 ILCS 5/5-1006 (authorizing counties to impose retailers’ occupation
tax on persons “engaged in the business of selling” within the county); 70 ILCS 3615/4.03(e)
(authorizing the Regional Transportation Authority to impose a tax on persons “engaged in the
business of selling” within a six-county region).
The Illinois Supreme Court held in Hartney Fuel Oil Co. v. Hamer that determining
whether a seller is “engaged in the business of selling” in a particular jurisdiction within the
meaning of the retailers’ occupation tax acts requires an analysis of where the retailer engages in
the “composite of activities” that comprise its business. 2013 IL 115130 ¶¶ 32-36.
The local sourcing rules recently adopted by the Department provide guidance and
direction to retailers and local taxing jurisdictions in applying the statute and case law, which
require a fact-specific analysis.
The sourcing rules are divided into four parts. The first part provides relevant definitions.
See, e.g., 86 Ill. Adm. Code 220.115(a). Next, the regulations set forth the legal standard derived
from the statutory language and case law interpreting that language. Id. § 220.115(b).
Subsection (c) then applies that legal standard to retailers conducting selling activities in multiple
jurisdictions. Id. § 220.115(c). In particular, subsection (c) identifies those selling activities
generally most important to the business of selling and explains the combination of selling
activities that comprise the business of selling in a particular location. Id. § 220.115(c)(1)-(c)(6).
Lastly, subsection (d) recognizes that certain selling operations “with unique, complicated or
widely dispersed selling activities” do not fit within traditional retail models. For certain
retailers that meet this standard, subsection (d) provides “administrative shortcuts that balance
the administrative difficulties presented by certain selling operations against the need for
accurate tax assessment.” 86 Ill. Adm. Code 220.115 (d)(1).
II.

Subsection (d)(4): Leases with an Option to Purchase.

Subsection (d)(4) is an “administrative shortcut” for a particular type of sale: “Leases
with an Option to Purchase.” The rule provides:
Leases with an Option to Purchase. A lease with a dollar or other nominal option
to purchase is considered to be a conditional sale subject to retailers’ occupation
tax. (See 86 Ill. Adm. Code 130.2010(a)). Persons selling tangible personal
property to a nominal lessee or bailee for use or consumption under a conditional
sales agreement are presumed to be engaged in the business of selling at the

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physical location of the property at the time the parties entered into the
conditional sales agreement.
Your letter inquired about the application of this provision in various factual
circumstances. It is beyond the scope of a GIL to provide specific answers to hypothetical
questions. However, the following principles inform the meaning and application of subsection
(d)(4).
First, the local sourcing rules recently adopted by the Department of Revenue implement
Illinois’ retail occupation tax acts, or ROTAs. The ROTAs, in turn, fit within a larger category
of sales taxes commonly referred to as “origin sourcing” statutes. Origin sourcing statutes are
distinguishable from “destination sourcing” statutes. Generally, under an origin sourcing statute,
the seller incurs tax at its location while under a destination sourcing regime, tax is incurred
where the property is delivered or used by a purchaser. See Automatic Voting Machs. v. Daley,
409 Ill. 438, 447 (1951); Ex-Cell-O Corp. v. McKibbin, 383 Ill. 316, 321 (1943). Because
Illinois has chosen origin sourcing over destination sourcing, the Department cannot, as your
letter suggests, adopt “rules using the ultimate destination of the property . . . as the determining .
. . factor in the taxation of property being sold through a conditional sales agreement.”
Second, the rules adopted on June 25, 2014 address only the issue of sourcing; that is,
which local jurisdictions, if any, have authority to tax which retailers. The rules do not modify,
alter, or otherwise affect the definition of a “conditional sale” as provided elsewhere in Illinois
law. Nor do the sourcing rules impact any rules and practices governing taxation of conditional
sales unrelated to sourcing. Because the sourcing rules did not impact the use of retail
exemption certificates, the meaning of “conditional sale,” or the timing of tax payments,
questions related to these issues are beyond the scope of this GIL. With respect to issues
unrelated to sourcing, taxpayers should continue to follow the practices and procedures they
followed before issuance of the local sourcing rules.
Third, subsection (d)(4) provides an administrative “shortcut” in the form of a
presumption. Under subsection (d)(4), a retailer may presume that, if certain criteria are met, it
is engaged in the business of selling at the location where the property was located. However, if
the criteria in subsection (d)(4) are not met, the presumption does not apply. The retailer is not
entitled to the “shortcut,” and – if no other “shortcut” in subsection (d) applies – it must
determine where it is engaged in the business of selling by identifying and applying the primary
and secondary selling activities listed in subsection (c). See also 86 Ill. Adm. Code 220.115
(c)(2), (c)(4).
Fourth, for the presumption in subsection (d)(4) to apply, two conditions must be met.
First, the sale must be made under a conditional sales agreement. Second, the property sold must
be under the possession or control of the seller “at the time the parties enter into the conditional
sales agreement.” When these conditions are met, the seller may source the sale to the location
of the property at the time of the agreement.

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October 31, 2014

As to the first criteria, whether an agreement is a conditional sales agreement is based on
the guidance provided in 86 Ill. Adm. Code 130.2010(a) and other sources of Illinois law. The
June 25, 2014 rules only provide guidance on where to source a conditional sale, not on whether
a particular agreement is a conditional sale.
The second criteria – the “time the parties entered into the sales agreement” – is factspecific and dependent on the terms of the agreement and the intent of the parties. Because the
parties largely control the timing of their agreement, it is not possible to provide guidance in
advance on when two contracting parties have entered into a conditional sales agreement.
Rather, the “time the parties entered into the conditional sales agreement” will depend on the
terms of the agreement.
If these two conditions are not met, subsection (d)(4) does not apply and the seller must
determine where it is engaged in the business of selling under subsection (c) of the rules. As
noted above, subsection (c) uses a “composite of selling activities” approach to source sales to
the location of the seller at the time of the sale as required by Illinois law. Hartney Fuel Oil Co.
v. Hamer, 2013 IL 115130.
I hope this information is helpful. If you require additional information, please visit our
website at tax.illinois.gov or contact the Department’s Taxpayer Information Division at (217)
782-3336.

Very truly yours,

Paul Berks
Deputy General Counsel
PB:lkm