If a rent-to-own agreement has a rental term of consecutive 90-day periods but requires payments every other week, is it subject to Illinois's Rental Purchase Agreement Occupation and Use Tax?

Subject

Rental Purchase Agreement Tax

Plain-English summary

A company that finances dealer-originated "Rent-to-Own" transactions (for goods like furniture, mattresses, and tires) asked the Illinois Department of Revenue whether its hybrid finance agreements made it a "Merchant" subject to the Rental Purchase Agreement Occupation and Use Tax, which took effect January 1, 2018. Under the taxpayer's agreements, a customer could either pay off the purchase within 100 days "same-as-cash," or the deal would default to a rent-to-own arrangement structured as four consecutive 90-day rental intervals, with the customer automatically becoming the owner at the end. Within that structure, rental payments were actually due every other week, not just once per 90-day interval.

The Department explained that Illinois's Rental Purchase Agreement Occupation and Use Tax (35 ILCS 180/1 et seq.) applies to businesses renting merchandise under a "rental-purchase agreement," defined in 35 ILCS 180/5 as an agreement for personal, family, or household use with an initial period of four months or less that automatically renews with each payment after the initial period, and that lets the consumer become the owner. The tax is 6.25% of gross receipts from such rentals (and does not apply to property that must be titled/registered with a state agency).

Applying that definition to the facts described, the Department's opinion was that a rental agreement with a rental term consisting of consecutive 90-day periods, but with payments due every other week, generally does not meet the statutory definition of "rental-purchase agreement" -- because the statute requires the rental term itself to automatically renew with each payment, and here the term only renews every 90 days even though payments come more frequently. The Department also noted that the legislature's House sponsor referred to "rent-to-own dealer[s]" during floor debate, and that the taxpayer's business (financing dealer-originated deals, rather than being a rent-to-own dealer itself) did not appear to fit that category. However, the Department was careful to add that each rental agreement must be evaluated based on its own specific contract terms and the transaction's other facts.

The letter separately walked through Illinois's general leasing rules, distinguishing "conditional sales" (usually marked by a nominal buyout, taxed like a sale under Retailers' Occupation Tax) from "true leases" (no buyout, or only a fair-market-value buyout; lessor pays Use Tax on cost, and lease receipts themselves aren't taxed) under 86 Ill. Adm. Code 130.2010 and 130.2013(g). The Department noted it could not rule definitively in a GIL, but described the general conditions under which a lease would be treated as a true lease.

What this means for you

Rent-to-own financiers and dealers

If your rent-to-own or hybrid finance agreements have a rental term that only renews every 90 days (or some other multi-payment interval), while payments are collected more often (e.g., biweekly), this letter indicates the Department's view that such an arrangement generally does not meet the statutory "rental-purchase agreement" definition in 35 ILCS 180/5 -- and so is not automatically subject to the Rental Purchase Agreement Occupation and Use Tax. But the Department was explicit that this depends on the specific contract; you cannot assume your own agreement is exempt without evaluating its actual terms.

Businesses structuring leases generally

Separate from the rent-to-own tax, the letter reiterates Illinois's long-standing distinction between conditional sales (taxed as sales, with receipts subject to Retailers' Occupation Tax) and true leases (lessor pays Use Tax on cost; lease receipts are not taxed), under 86 Ill. Adm. Code 130.2010. A true lease generally requires no buyout, or only a fair-market-value buyout, and the customer must be free to walk away at the end of a lease term without further payment obligation and without any guaranteed sale at inception.

Anyone relying on this letter

This is a General Information Letter (GIL), not a Private Letter Ruling. The Department expressly said "we cannot rule specifically in the context of a General Information Letter" regarding the true-lease conditions, and more broadly a GIL is not a statement of Department policy and is not binding on the Department (86 Ill. Adm. Code 1200.120(b)/(c)). Taxpayers who need a binding answer on their own specific facts must request a Private Letter Ruling under 2 Ill. Adm. Code 1200.110.

Common questions

Q: Does a rent-to-own agreement with a 90-day rental term but biweekly payments owe the Rental Purchase Agreement Occupation and Use Tax?
A: The Department's opinion is generally no -- because the statute requires the rental term itself to automatically renew with each payment, and here the term only renews every 90 days even though payments are due more often. But the Department stressed that each agreement must be evaluated on its own facts.

Q: What is the tax rate and scope of the Rental Purchase Agreement Occupation and Use Tax?
A: It is imposed at 6.25% of gross receipts from the business of renting merchandise in Illinois under a rental-purchase agreement, effective January 1, 2018. It does not apply to tangible personal property required to be titled and registered by a state agency.

Q: How does Illinois distinguish a "conditional sale" from a "true lease" for tax purposes?
A: A conditional sale is generally marked by a nominal (e.g., one-dollar) buyout option, making it taxable like a sale under Retailers' Occupation Tax. A true lease generally has no buyout, or only a fair-market-value buyout, and the lessor (not the lessee) owes Use Tax on the property's cost; lease receipts themselves are not taxed. See 86 Ill. Adm. Code 130.2010 and 130.2013(g).

Q: Did the Department definitively rule on whether the taxpayer's specific agreement was a true lease?
A: No. The Department explicitly said it "cannot rule specifically in the context of a General Information Letter," and instead described general conditions -- no obligation to purchase, ability to walk away at the end of a term without further payment, and no guaranteed sale at inception -- under which an agreement would generally be considered a true lease.

Q: Is this letter binding on the Illinois Department of Revenue?
A: No. It is a General Information Letter under 86 Ill. Adm. Code 1200.120, which is not a statement of Department policy and is not binding on the Department. A taxpayer wanting a binding answer would need a Private Letter Ruling under 2 Ill. Adm. Code 1200.110.

Q: Does this letter address automobile leases?
A: Only to note that the true-lease/conditional-sale guidelines described apply to leases of tangible personal property generally, except automobiles leased for one year or less, which are instead subject to the separate Automobile Renting Occupation and Use Tax (35 ILCS 155/1 et seq.).

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2018.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2018/st-18-0020-gil.pdf

Original ruling text

ST 18-0020-GIL 09/13/2018 RENTAL PURCHASE AGREEMENT TAX
In general, a rental agreement with a rental term that consists of consecutive 90-day periods,
but with rental payments that are due every other week, does not meet the statutory definition
of “rental purchase agreement” and is therefore not subject to the Rental Purchase Agreement
Occupation and Use Tax. See 35 ILCS 180/5. (This is a GIL.)

September 13, 2018

Dear Xxxxx:
This letter is in response to your letter dated April 13, 2018, in which you requested
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:
During February, we attempted to register to collect sales tax with the State of Illinois.
We contacted NAME, Supervisor, Central Registration Division of the Department who
told us we were not subject to the law. Furthermore, the Department’s online
registration REFUSED to register my client without a permanent Illinois address. My
client would strongly prefer to follow NAME’s advise [sic] but we believe his
understanding of the Illinois law to be incorrect and want to avoid future assessments.
We are writing this letter to request advise [sic] on the proper compliance with Illinois tax
law.
FACTUAL BACKGROUND – HYBRID AGREEMENTS
COMPANY is engaged [sic] the business of financing dealer originated Rent-to-Own
finance transactions on behalf of consumers. The key facts of the Taxpayer’s Rent to
Own Finance Agreements (the “AGREEMENT”) ARE AS FOLLOWS: [See Exhibit A for
typical AGREEMENT]

1. The TAXPAYER is a STATE based LLC with facilities exclusively within the State of
   STATE.

ST 18-0020-GIL
Page 2

2. The Taxpayer enters into contracts with “Dealers” of consumer goods (i.e. furniture,
   mattresses, tires) to offer finance AGREEMENTS to “Customers” that typically do
   not qualify for conventional secured financing.
3. The Dealer offers the AGREEMENT to prospective Customers that request
   assistance in obtaining financing.
4. The AGREEMENT on its face shows the retail price plus sales tax to be paid on the
   purchase, and explains show [sic] both options of paying off the finance and
   obtaining ownership. The DEALER reports and pays the sales tax funded by the
   TAXPAYER to the State of STATE 1 [sic].
5. Historically, the Dealer has collected STATE 1 [sic] sales tax on all purchases
   including the portion financed by the Taxpayer and the portion paid directly by the
   Customer. However, based on preliminary advice, the Taxpayer began issuing
   STATE 1 [sic] resale certificates in early 20XX on its financed portion of the invoice,
   and has been collecting STATE 1 [sic] sales tax on such portions.
6. The CUSTOMER typically pays a $$ origination fee to the DEALER upfront.
7. The AGREEMENT is a hybrid finance arrangement that gives each customer two
   options:
   a. 100 days Same-as-Cash. Most Customers initially intend to take advantage of
   this option, slightly under one-half complete this option.
   b. Otherwise, the AGREEMENT defaults to a Rent to Own for four 90-day intervals
   after which the Customer automatically becomes the owner. The Customer may
   pay off the AGREEMENT and take unconditional ownership at any later time by
   paying off an amount equal to 65 percent of all future payments.
8. While that Customer has the option of terminating the Agreement without taking
   ownership at the end of the first, second and third 90-day intervals, the Customer
   would have to ship the item to the Taxpayer’s facility in CITY, STATE. This simply
   does not occur. Rather, on such instances, the Customer and Taxpayer negotiate
   an acceptable payoff, or the Taxpayer simply charges off the balance. This
   ‘Negotiated’ or ‘charge-off’ represents nearly one-fourth of all AGREEMENTS.
   There simply is no infrastructure for re-renting items where the Customer desires to
   terminate the 12-month agreement.
   ILLINOIS LAW
   Effective January 1, 2018, Illinois appears to impose its “sales” or “use” tax on RTO
   transactions. CHAPTER 815 delineating BUSINESS TRANSACTIONS.
   [http://www.ilga.gov/legislation/ilcs/ilcs2.asp?ChapterID=67]
   815 ILCS 655 wherein the key definition is:
   (6)

“Rental-purchase agreement” means an agreement for the use of
merchandise by a consumer for personal, family or household purposes
for an initial period of 4 months or less that is automatically renewable with
each payment after the initial period and that permits the consumer to
become the owner of the merchandise.

ST 18-0020-GIL
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The law was drafted by an industry group that does not represent the Taxpayer
interests. Under the law, the tax responsibility is passed to the Merchant and to the
‘assignees’ of the Merchant.
Accordingly, the Company becomes a merchant unless it can break from the definition
of “Rental purchase agreement.”
“Merchant” means a person who, in the ordinary course of business, regularly
leases, offers to lease or arranges for the leasing of merchandise under a rentalpurchase agreement, and includes a person who is assigned an interest in a
rental-purchase agreement.
CONCLUSION
It appears that my client is in fact a Merchant as defined above. Notwithstanding, my
client would prefer to pay sales tax on the front end as was required in the prior law and
avoid registration. Please confirm the applicability of the law to my client.
DEPARTMENT’S RESPONSE:
RENTAL PURCHASE AGREEMENT OCCUPATION AND USE TAX:
Effective January 1, 2018, persons who are engaged in the business of renting merchandise in
Illinois under a rental purchase agreement are subject to the Rental Purchase Agreement Occupation
and Use Tax. 35 ILCS 180/1 et seq. A “rental purchase agreement" is an agreement for the use of
merchandise by a consumer for personal, family, or household purposes for an initial period of 4
months or less that is automatically renewable with each payment after the initial period and that
permits the consumer to become the owner of the merchandise. For more information regarding
rental purchase agreements, please see the Rental Purchase Agreement Act (815 ILCS 655/0.01 et
seq.). The Rental Purchase Agreement Occupation and Use Tax is imposed at the rate of 6.25% of
the gross receipts from the business of renting merchandise in Illinois under a rental purchase
agreement. The Rental Purchase Agreement Occupation and Use Tax does not apply to tangible
personal property that is required to be titled and registered by a State agency.
A rental transaction is subject to the Rental Purchase Agreement Occupation and Use Tax if
the transaction meets the definition of “rental purchase agreement” under the Rental Purchase
Agreement Occupation and Use Tax Act (35 ILCS 180/5). The Department is of the opinion that, in
general, a rental agreement with a rental term that consists of consecutive 90-day periods, but with
rental payments that are due every other week, does not meet the statutory definition of “rental
purchase agreement.” That is because, in order to be a “rental purchase agreement” subject to the
Rental Purchase Agreement Occupation and Use Tax, the rental agreement must automatically
renew with each payment after the initial period. If rental payments are due every other week after
the initial period is completed, but the rental term itself does not renew until 90 days after the initial
period, then the statutory requirements have not been met. In addition, the House sponsor of the
legislation referred in debate to “rent-to-own dealer[s]” when discussing taxpayers subject to the Act.
See State of Illinois, 100th General Assembly, House, Transcription of Debate, May 30, 2017, page

17. COMPANY does not appear to fit that category. It is important to note, however, that each rental

ST 18-0020-GIL
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agreement must be evaluated in light of the specific rental contract and the other aspects of the
transaction to determine whether the Rental Purchase Agreement Occupation and Use Tax applies.
LEASES:
Please note that 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 buyout provision at the close of the lease. If a buyout provision
does exist, it must be a fair market value buyout 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. 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 lease receipts.
Consequently, lessees incur no tax liability. See 86 Ill. Adm. Code 130.2010.
The above guidelines are applicable to all true leases of tangible personal property in Illinois
except for automobiles leased under terms of one year or less, which are subject to the Automobile
Renting Occupation and Use Tax found at 35 ILCS 155/1 et seq.
While we cannot rule specifically in the context of a General Information Letter, a lease
contract meeting the following conditions would generally be considered to be a true lease rather than
a conditional sale: (1) a customer who has otherwise met the requirements of the agreement can
cease making payments and return the property at the end of any lease term without further payment
obligation, (2) the customer is never under any obligation to purchase the property, and (3) the
agreement does not guarantee a sale of the tangible personal property at the inception of the
contract. Because, under this type of lease agreement, the lessee is free to walk away from the lease
at the end of each lease term and therefore a sale of the property is not guaranteed at the time the
lease is entered into, it is the Department’s opinion that such an agreement would be a true lease. A
lessor engaging in this type of lease should pay Use Tax to his supplier for all items that he
purchases to lease. Receipts from the rental of tangible personal property under a true lease are not
subject to Retailers’ Occupation Tax liability. See 86 Ill. Adm. Code 130.2013(g). Therefore, none of
the monthly lease payments, including the last lease payment, would be subject to Retailers’
Occupation Tax.
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,

Samuel J. Moore

ST 18-0020-GIL
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Associate Counsel

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