Does a 5-month operating lease of household goods, where the customer can later continue leasing, return the goods, or buy them at fair market value, qualify as a taxable 'rental purchase agreement' under Illinois's Rental Purchase Agreement Occupation and Use Tax, and is that tax ever subject to local rates?

Subject

Rental Purchase Agreement Tax

Plain-English summary

A tax professional wrote to the Illinois Department of Revenue about a client that leases consumer household goods to end customers under "operating lease" agreements. The client's standard agreement has an initial period of 5 months at a set monthly payment; after that initial period, the customer can (1) keep leasing the goods, (2) return the goods, or (3) buy the goods at fair market value. The requester asked three things: whether the 5-month initial term still counts as a "rental purchase agreement" under 35 ILCS 180/5 even though it exceeds the statute's "4 months or less" language, whether giving the customer an option (rather than an automatic path) to become the owner affects the classification, and whether the tax is ever imposed at more than the 6.25% state rate.

The Department explained that Illinois's Rental Purchase Agreement Occupation and Use Tax Act took effect January 1, 2018, and imposes a 6.25% Occupation Tax on businesses renting merchandise under a "rental purchase agreement," plus a complementary 6.25% Use Tax on the privilege of using such rented merchandise (35 ILCS 180/1 et seq.). A "rental purchase agreement" is defined in 35 ILCS 180/5 as 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. Merchandise subject to this tax gets a corresponding exemption from Retailers' Occupation Tax and Use Tax at the time the merchant purchases it (35 ILCS 120/2-5(43)).

On the requester's first question, the Department was direct: "An agreement to rent tangible personal property for an initial period that exceeds 4 months does not qualify as a rental purchase agreement." Since the client's agreements use a 5-month initial period, they fall outside the Act on that basis alone. For agreements that don't qualify as rental purchase agreements, the Department pointed to 86 Ill. Adm. Code 130.2010 and prior Department letters for determining whether the transaction is instead a true lease or a conditional sale (a separate analysis with its own tax consequences).

On the second question (whether giving the customer an option to purchase, rather than an automatic ownership path, changes anything), the Department's answer was more general: it said a rental agreement that lets the consumer continue renting, purchase, or return the merchandise at the end of the initial period "is consistent with the definition" of a rental purchase agreement, but added that "the agreement must meet all requirements of the Act to qualify." The Department did not walk through this issue separately from the 4-month issue, since the agreement described already failed to qualify due to its 5-month term.

On the third question, the Department confirmed the requester's understanding: the Occupation Tax and Use Tax are both imposed at 6.25% (35 ILCS 180/10 and 15), and "there is no authority under the Rental Purchase Agreement Occupation and Use Tax Act to impose a local Rental Purchase Agreement tax." So, when the tax does apply, it is state-only.

As with all GILs, this letter is not a statement of Department policy and is not binding on the Department (2 Ill. Adm. Code 1200.120).

What this means for you

Businesses that lease consumer goods

If your lease agreements have an initial term longer than 4 months, this letter indicates the Department does not view them as "rental purchase agreements" subject to the 6.25% Rental Purchase Agreement Occupation and Use Tax — regardless of what options the customer has afterward. Instead, you'll need to look at 86 Ill. Adm. Code 130.2010 and general Department guidance to determine whether your lease is a "true lease" or a "conditional sale" for tax purposes, since that determination carries its own separate tax treatment (not addressed in this letter).

Businesses whose agreements do qualify as rental purchase agreements (4 months or less)

If your agreement has an initial period of 4 months or less, is automatically renewable with each payment, and permits the consumer to become the owner, this letter confirms the applicable tax is a flat 6.25% at the state level only — there is no local rental purchase agreement tax to add on top, regardless of where in Illinois the transaction occurs.

Accountants and tax professionals

Note that the Department answered the "initial period" question cleanly (over 4 months = disqualified) but gave a less definitive answer on whether an optional-versus-automatic path to ownership matters, since that question became moot once the 5-month term was addressed. If you have a client with a qualifying (4-months-or-less) agreement that offers the customer a choice rather than automatic ownership, this letter alone doesn't resolve whether that option structure would independently disqualify the agreement — the Department's language ("must meet all requirements of the Act") suggests it depends on the full fact pattern.

Common questions

Q: Does a 5-month lease qualify as a "rental purchase agreement" under Illinois's Rental Purchase Agreement Occupation and Use Tax Act?
A: No. The Department stated plainly that "an agreement to rent tangible personal property for an initial period that exceeds 4 months does not qualify as a rental purchase agreement." The statute requires an initial period of 4 months or less (35 ILCS 180/5).

Q: If a lease doesn't qualify as a rental purchase agreement, what tax applies instead?
A: This letter doesn't say — it points the reader to 86 Ill. Adm. Code 130.2010 and prior Department letters to determine whether the arrangement is a "true lease" or a "conditional sale," each of which has its own tax treatment under other parts of Illinois law.

Q: Does giving the customer a choice to continue renting, return the goods, or buy them affect whether an agreement counts as a rental purchase agreement?
A: The Department said such an option structure "is consistent with the definition" of a rental purchase agreement, but cautioned that "the agreement must meet all requirements of the Act to qualify." The letter doesn't fully resolve this question on its own because the agreement at issue already failed to qualify due to its 5-month initial term.

Q: Can a city or county add a local rate on top of the Rental Purchase Agreement Occupation and Use Tax?
A: No. The Department confirmed there is no authority under the Act to impose a local Rental Purchase Agreement tax — the tax is imposed only at the 6.25% state rate (35 ILCS 180/10 and 15).

Q: Is there a sales-tax benefit for merchants who buy merchandise to rent out under qualifying rental purchase agreements?
A: Yes. Illinois provides an exemption from Retailers' Occupation Tax and Use Tax at the time the merchant purchases merchandise that will be subject to the Rental Purchase Agreement Occupation and Use Tax (35 ILCS 120/2-5(43)).

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

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-18-0021-gil.pdf

Original ruling text

ST 18-0021-GIL 09/13/2018 RENTAL PURCHASE AGREEMENT TAX
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. See 35 ILCS 180/5. (This is a GIL.)

September 13, 2018

Dear Xxxxx:
This letter is in response to your email dated July 10, 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:
It was suggested we reach out to you with our questions regarding the application of the
Illinois Rental Purchase Agreement Occupation Tax to a specific client situation. We
have a client that leases consumer household goods. The lease agreements with the
end consumer are structured as an operating lease. The lease agreement contains an
initial period of 5 months where the customer pays a set monthly amount. After the
initial period, the customer is given the options to
1) continue leasing the goods,
2) return the goods,
or
3) purchase the goods at a fair market value price.

ST 18-0021-GIL
Page 2

Based on our client facts above, and our reading/understanding of how the IL Rental
Purchase Agreement Occupation tax applies, we have the following
clarification/confirmation questions:

1. The standard terms for their operating lease agreement states that the initial period
   is five months. Pursuant to 35 ILCS 180/1, a 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. Does the fact it is not less than 4 months
   impact whether or not it will be deemed a rental purchase agreement? In other
   words, does the 5 month initial period fall outside the statute or is that too close to
   the 4 months and could in fact be deemed a rental purchase agreement?
2. At the end of the initial period the consumer has an option to purchase the item,
   continue to rent it or give it back to the lessor. The consumer could elect to own the
   merchandise but also has an election not to. Does that impact whether the
   agreement will be deemed a “Rental Purchase Agreement?”
3. Based upon a reading of the statute and the local statutes [sic], our understanding is
   that the Illinois Rental Purchase Agreement Occupation Tax is imposed at only the
   6.25% state rate. No local taxes are applied. Can you confirm?
   If you would like more information or to talk live, please let me know and we can set up
   a call/get you additional information.
   Thank you in advance for your assistance in helping us confirm how this would apply to
   our client’s fact pattern.
   DEPARTMENT’S RESPONSE:
   Effective January 1, 2018, the Rental Purchase Agreement Occupation and Use Tax took
   effect in Illinois. See 35 ILCS 180/1 et seq. The Rental Purchase Agreement Occupation Tax is
   imposed upon persons engaged in this State in the business of renting merchandise under a rentalpurchase agreement in Illinois at the rate of 6.25% of the gross receipts received from the business.
   A complementary Rental Purchase Agreement Use Tax is imposed upon the privilege of using, in this
   State, merchandise which is rented from a merchant at the rate of 6.25% of the rental price paid to
   the merchant under any rental purchase agreement. 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. See 35 ILCS 180/5. Illinois
   provides an exemption from Retailers’ Occupation Tax and Use Tax at the time of purchase of
   merchandise that is subject to the Rental Purchase Agreement Occupation and Use Tax. See 35
   ILCS 120/2-5(43).

ST 18-0021-GIL
Page 3

An agreement to rent tangible personal property for an initial period that exceeds 4 months
does not qualify as a rental purchase agreement for purposes of the Rental Purchase Agreement
Occupation and Use Tax Act.
A rental agreement that allows the consumer, at the end of the initial rental period, to continue
renting, purchase, or return the merchandise is consistent with the definition of “rental purchase
agreement” under the Rental Purchase Agreement Occupation and Use Tax Act. However, the
agreement must meet all requirements of the Act to qualify as a rental purchase agreement subject to
the Act. For the tax treatment of rental agreements that are not “rental purchase agreements,” please
see 86 Ill. Adm. Code 130.2010 and letters previously issued by the Department to determine
whether the transaction is a true lease or a conditional sale.
The Rental Purchase Agreement Occupation Tax and the Rental Purchase Agreement Use
Tax are imposed at the rate of 6.25%. See 35 ILCS 180/10 and 15, respectively. There is no
authority under the Rental Purchase Agreement Occupation and Use Tax Act to impose a local
Rental Purchase Agreement 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
Associate Counsel

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