I rent and sell heavy construction equipment and am setting up to do business in Illinois -- do I charge sales tax or use tax on equipment rentals, and is it calculated on the equipment's value or on the rental charge?

Plain-English summary

A business that rents and sells heavy construction equipment wrote to the Department asking a basic sourcing question: once it is set up to do business in Illinois, what tax does it need to charge on equipment rentals -- sales tax or use tax -- and is that tax calculated on the value of the equipment or on the amount charged for the rental?

The core answer: the lessor, not the lessee, is the taxpayer. Under Illinois law, a lessor of tangible personal property under a "true lease" (except automobiles leased for one year or less) is treated as the end user of the property being leased, not as a retailer selling the use of it. See 86 Ill. Adm. Code 130.220 and 130.2010. Because the lessor is the end user of property located in Illinois, the lessor -- not the lessee -- incurs Use Tax, and that Use Tax is measured by the lessor's own cost price to acquire the equipment, not by the rental charges collected from customers.

No sales tax on the rental receipts. Since the lessor is already treated as having paid Use Tax as the end user, no Retailers' Occupation Tax (Illinois' sales tax) applies to the rental receipts the lessor collects from customers. Correspondingly, lessees incur no Illinois Use Tax liability on the rental charges they pay.

What makes a lease a "true lease." A true lease in Illinois generally has no buy-out provision at the end of the lease term. If a buy-out provision does exist, it must be a fair-market-value buy-out in order for the arrangement to keep its true-lease treatment (and thus keep the lessor, not the lessee, as the taxable party).

How the lessor actually pays the Use Tax. The lessor either pays Use Tax to its own supplier (if that supplier is registered to collect Illinois Use Tax), or self-assesses and remits the tax directly to the Department.

Credit for tax already paid in another state. Use Tax does not apply to property that was acquired outside Illinois and brought into the state, to the extent the owner already paid a tax on the sale, purchase, or use of that property in another state -- up to the amount of tax properly due and paid there. See 86 Ill. Adm. Code 150.310(a)(3).

Contractual reimbursement is not a tax obligation. Even though lessees have no Illinois tax liability of their own under a true lease, lease contracts commonly include a clause requiring the lessee to reimburse the lessor for its tax costs. The Department is clear that this is a matter of private contract between lessor and lessee, not a requirement of Illinois tax law -- if a lessee agreed to such a clause, it's bound by the contract, not by any Illinois tax statute.

What this means for you

Equipment lessors doing business in Illinois

If you lease heavy equipment (or other tangible personal property) under a true lease, you -- not your customer -- are the one who owes Illinois Use Tax, and it's based on what you paid to acquire the equipment, not on what you charge in rent. You do not charge Retailers' Occupation Tax on the rental payments themselves.

Structuring your lease agreements

Keep any end-of-lease buy-out option at fair market value. A below-market buy-out can jeopardize true-lease characterization, which is what keeps the lessor (rather than the lessee) as the party responsible for tax.

Paying the Use Tax you owe as lessor

Pay Use Tax to your supplier if the supplier is registered to collect it in Illinois; otherwise self-assess and remit the tax directly to the Department. If you already paid a tax on the equipment in another state, you may be entitled to credit against Illinois Use Tax for the amount already paid there.

Drafting reimbursement clauses

You can still require lessees to reimburse you for your Use Tax costs as a matter of contract -- just be aware (and make clear to lessees) that this is a private agreement term, not an Illinois tax-law pass-through.

Common questions

Q: Do I charge my Illinois lessees sales tax or use tax on equipment rental payments?
A: Neither. Under a true lease, the lessor is treated as the end user of the equipment and owes Use Tax on its own cost to acquire it. No Retailers' Occupation Tax applies to the rental receipts, and the lessee owes no Illinois Use Tax on the rent it pays.

Q: Is the tax calculated on the equipment's value or on the rental charge?
A: On the lessor's cost price to acquire the equipment -- not on the rental charge collected from the customer.

Q: What is a "true lease," and why does it matter?
A: A true lease generally has no buy-out provision at the end of the term (or, if it does, the buy-out must be at fair market value). Keeping true-lease status is what makes the lessor -- rather than the lessee -- the party responsible for Illinois tax.

Q: How does the lessor actually pay the Use Tax it owes?
A: Either by paying it to a supplier that is registered to collect Illinois Use Tax, or by self-assessing and remitting the tax directly to the Department.

Q: If I already paid tax on the equipment in another state, do I owe Illinois Use Tax again?
A: Not to the extent you already paid tax there on the sale, purchase, or use of that property -- Illinois Use Tax doesn't apply to that portion under 86 Ill. Adm. Code 150.310(a)(3).

Q: Can a lease still require the lessee to reimburse the lessor for tax costs?
A: Yes, but that is purely a private contractual arrangement between lessor and lessee -- it is not something Illinois tax law requires.

Citations and references

Statutes cited:

• 86 Ill. Adm. Code 130.220 (lessors under a true lease are treated as end users of the leased property)
• 86 Ill. Adm. Code 130.2010 (Use Tax obligations of lessors as end users of leased property)
• 86 Ill. Adm. Code 150.310(a)(3) (credit against Use Tax for tax already paid to another state)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2019.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2019/st19-0030-gil.pdf

Original ruling text

ST 19-0030-GIL 12/06/2019 LEASING
Information regarding the tax liabilities in lease situations may be found at 86 Ill. Adm.
Code 130.220 and 86 Ill. Adm. Code 130.2010. (This is a GIL.)
December 6, 2019
Dear XXX:
This letter is in response to your letter dated September 9, 2019, 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:
We are located in CITY, STATE and in the business of renting and selling heavy
construction equipment. I contacted the Department of Revenue, but was not able to get
a clear answer on the type of tax that we need to charge when renting equipment in the
state of Illinois. I would like a letter ruling on the type of tax that would need to be
charged once we are set up to do business in your state. It is unclear whether to charge
sales and or use tax and if that amount would be calculated on the value of the
equipment or on the amount charged for the rental.
DEPARTMENT’S RESPONSE:
In Illinois, lessors of tangible personal property under a true lease, except for automobiles
leased for terms of one year or less, are considered to be the end users of the property to be
leased. See 86 Ill. Adm. Code 130.220 and 130.2010. As the end users of tangible personal
property located in Illinois, lessors incur Use Tax on the lessors’ cost price of the property.
Since lessors are considered the end users of the property and have paid the Use Tax, no
Retailers’ Occupation Tax is imposed upon the rental receipts, and the lessees incur no Use Tax
liability for the rental charges. In Illinois, a true lease generally has no buy-out provision at the
close of the lease. If a buy-out provision does exist, it must be a fair market value buy-out option
in order to maintain the character of the true lease.
As mentioned, in the case of a true lease, the lessors of the property being used in Illinois

ST 19-0030-GIL
Page 2
December 6, 2019
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. Use Tax does not apply to the use in this State of tangible personal property 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(a)(3).
Even though lessees do not incur any tax liability in a true lease situation, it is typical of
true leases to contain contractual provisions stating that the lessees will reimburse the lessors for
their tax costs. This is not a matter of Illinois tax law but of private agreement between lessors
and lessees. If the lessees agreed to such provisions, they are bound to satisfy that duty because
of a contractual agreement, not because of Illinois tax law.
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:rkn