Was Use Tax due on leased computer servers placed in an Illinois data center for cloud-hosting customers outside Illinois?

Plain-English summary

An international cloud-hosting company placed servers in an Illinois third-party data center and served customers outside Illinois. Its leasing company said tax was due on servers bought elsewhere and shipped into Illinois, and the company sought an exemption.

IDOR treated the servers as taxable tangible personal property. It declined the requested Private Letter Ruling and could not determine the exact lease classification without examining the leases and contracts.

A conditional sale—generally involving a nominal purchase option or guaranteed transfer—made all lessor receipts subject to Retailers' Occupation Tax. A qualifying purchaser for resale could provide a proper resale certificate.

Under a true lease, the lessor was the end user and owed Use Tax on the servers' cost because the property was located in Illinois. Illinois imposed no tax on true-lease rental receipts, and the lessee incurred no tax liability under that model.

Tax properly due and paid to another state on the acquisition or use reduced Illinois Use Tax to that extent, preventing duplicate taxation.

What this means for you

Serving only out-of-state customers did not make physical servers used in Illinois exempt. The lease's purchase option and transfer economics determined whether Illinois taxed the lessor's cost or the conditional-sale receipts.

Common questions

Were the servers tangible personal property? Yes.

Did IDOR decide whether the contract was a true lease? No.

Could another state's tax offset Illinois tax? Yes, to the extent properly due and paid.

Citations and references

• 86 Ill. Adm. Code 130.101 and 150.101.
• 86 Ill. Adm. Code 150.310.
• 86 Ill. Adm. Code 130.1405, 130.2010, and 130.220.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2015.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2015/st-15-0016.pdf

Original ruling text

ST 15-0016-GIL 03/16/2015 USE TAX
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. (This is a GIL.)

March 16, 2015

Dear XXXX:
This letter is in response to your letter dated October 25, 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 you per the referral of Gretel in the Illinois Department of
Revenue’s Legal Services Bureau.
COMPANY Technology Group Inc. (COMPANY), a [CITY, COUNTRY]
corporation is seeking a private letter ruling on sales tax payments.
COMPANY is a “cloud” web hosting company and operates servers in
various international geographic locations for optimal connectivity and
redundancy. We were recently informed by our leasing company that we
were required to pay sales tax on servers being purchased in STATE and
shipped to a third party datacenter in [CITY, Illinois] where we pay for
connectivity.
We are not collecting revenue from people residing in Illinois and are
reselling the servers (“software as a service” model) to our clients (outside
of Illinois). This really affects our business model, as this is not the case

in other states we have servers. We are in a very competitive
international market where the markup is less than 10% in some cases.
Because of the low markup in this market, if we are in fact not exempt,
then we will not be able to put additional servers in Illinois in the future. I
imagine that this would hurt the local Illinois economy more so than it
would with us being there and having a sales tax exemption, which does
not make sense to me. I hope that you will find a way for exemption from
the sales tax for our future purchase of servers for use in Illinois-based
data centers.
DEPARTMENT’S RESPONSE:
The Department’s regulation “Public Information, Rulemaking and Organization”
provides that “[w]hether to issue a private letter ruling in response to a letter ruling request
is within the discretion of the Department. The Department will respond to all requests for
private letter rulings either by issuance of a ruling or by a letter explaining that the request
for ruling will not be honored.” 2 Ill. Adm. Code 1200.110(a)(4). Because your request for a
Private Letter Ruling (PLR) does not meet the Department’s criteria set forth in its regulation
governing PLRs, the Department decided that it would decline to issue a PLR in response
to your request. We hope, however, the following General Information Letter will be helpful
in addressing your question.

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. The Department considers the
servers you reference in your letter as tangible personal property subject to tax.
Multi-State Taxation
In order to prevent actual or likely multi-state taxation, however, the Use Tax
does not apply to the use of tangible personal property in this State that is acquired
outside this State and caused to be brought into this State by a person who has already
paid a tax in another state in respect to the sale, purchase, or use of that property, to
the extent of the amount of the tax properly due and paid in the other state. See 86 Ill.
Adm. Code 150.310.
Leases

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. 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.
In contrast, 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 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.
We cannot determine the exact nature of your company’s leasing situation
without examining the leases and contracts involved. However, if the lease is a true
lease, the lessor incurs Use Tax on the cost price of the property located in Illinois.
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:kd