What does Illinois General Information Letter ST 20-0006-GIL conclude about Leasing?

Plain-English summary

The Illinois Department of Revenue addressed a common question from out-of-state lessors: if you lease tangible personal property, like a portable building or a piece of equipment, to a customer located in Illinois, who owes the tax and on what amount? The Department's answer is that the lessor, not the lessee, owes Illinois Use Tax, and it's owed up-front on the lessor's own cost price of the property, not on the rental payments the lessee makes.

This rule applies to "true leases" -- leases where the lessee can walk away at the end of the term or buy the item at fair market value, rather than leases that are really disguised installment sales. Under a true lease, Illinois treats the lessor as the "end user" of the property, because the lessor (not the lessee) is deemed to be consuming the property by putting it to its intended use of generating lease income. As the end user, the lessor owes Use Tax on what it paid to acquire the property, and it cannot pass that tax on to the lessee as a separate "tax" charge (though many lease agreements have the lessee reimburse the lessor for the cost as part of the deal).

The letter also confirms there's no mechanism to get a rebate or credit for any leftover value in the property once the lease ends. The tax is calculated once, up-front, on the lessor's cost -- it isn't adjusted later based on how much of the property's useful life is actually consumed during the lease term.

Because this is a General Information Letter (GIL), it doesn't rule on any specific taxpayer's facts. It simply restates the general Use Tax rule for lessors and points to the relevant regulations.

What this means for you

Out-of-state businesses leasing equipment into Illinois

If your business manufactures or owns tangible personal property elsewhere and leases it to a customer located in Illinois under a true lease (no mandatory buyout, and the lessee can walk away at term-end), you are the one who owes Illinois Use Tax -- not your Illinois customer. The tax is based on your cost price for the property, calculated up-front, regardless of how long the lease runs or how much rent you ultimately collect. Registering to do business in Illinois because you lease property there, even without employees or a physical office in the state, can trigger this Use Tax obligation.

Lessors structuring lease agreements

You cannot charge your lessee "sales tax" on the lease payments, because this isn't a retail sale subject to Retailers' Occupation Tax. What you can do is build a reimbursement clause into the lease agreement so the lessee effectively covers the Use Tax cost you incurred. Also plan around the fact that there's no rebate available at lease-end for any residual value left in the property -- the Use Tax liability is fixed at the outset based on your cost.

Common questions

Q: Who owes the tax on leased property in Illinois -- the lessor or the lessee?
A: The lessor. Under a true lease, Illinois treats the lessor as the end user of the tangible personal property and requires the lessor to self-assess Use Tax up-front on its cost price.

Q: Can the lessor charge the lessee sales tax on the lease payments?
A: No. The lessor cannot charge the lessee a "tax." However, lease agreements often require the lessee to reimburse the lessor for the Use Tax the lessor incurs on the property.

Q: What is a "true lease" and why does it matter?
A: A true lease is one where the lessee can walk away at the end of the term or buy the property at fair market value, rather than being obligated to purchase it. This distinguishes a true lease from a conditional sale, and it's what makes the lessor -- not the lessee -- the taxable end user.

Q: Is the Use Tax based on the rent collected or the property's cost?
A: It's based on the lessor's cost price for the property, assessed up-front, not on the ongoing rental income from the lease.

Q: Can a lessor get a rebate for the leftover value of the property after the lease ends?
A: No. The letter states there are no rebate provisions to claim at the end of the lease.

Citations and references

Statutes and regulations:

• 86 Ill. Adm. Code 130.220 (engaging in the business of leasing)
• 86 Ill. Adm. Code 130.2013 (leasing transactions)
• 86 Ill. Adm. Code 130.2010(b) (Use Tax owed up-front on cost price by lessors under true leases)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedures)
• 2 Ill. Adm. Code 1200.120 (General Information Letters)

Subject

Leasing

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2020.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2020/st20-0006-gil.pdf

Original ruling text

ST 20-0006-GIL 02/10/2020 LEASING
Lessors of tangible personal property, including motor vehicles, 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. See 86 Ill. Adm. Code 130.220 and
86 Ill. Adm. Code 130.2013. (This is a GIL.)

February 10, 2020

Dear Xxxx:
This letter is in response to your letter dated September 18, 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:
RE: Sales & Use Tax Applicability on a Product Leased from Out of State
To whom it may concern,
One of our US Divisions manufactures portable buildings in STATE/STATE 1 and
will be leasing to a customer portable buildings with no buy out option in CITY,
Illinois for a 2 year term. The revenue stream for the lease will be in excess of
$$$$ for the year. The portable buildings are placed on blocking and are not
permanently affixed to the [sic] the ground.
As the lessor of the property we understand we do not charge the lessee sales tax.
However, it is unclear whether or not we are required to self assess use tax on the
cost of the property going into the state. We have registered to do business in
Illinois but we currently do not have people or place only product in the state. The
only form of presence we have in the state is through our product we lease in the
state.
The question we have is do we owe any use tax in the state? If we do owe use
tax, can we use our cost price and will we be able to claim a rebate at the end of
the lease for any value of the property after the lease?

ST 20-0006-GIL
Page 2
DEPARTMENT’S RESPONSE:
In Illinois, persons who rent or lease the use of tangible personal property under true leases
owe Use Tax "up-front" on the cost price of the tangible personal property which is rented. See 86 Ill.
Adm. Code 130.2010(b). True leases are those leases in which persons may "walk away" from the
lease at the end of the lease term or purchase the leased item at fair market value. As a result, the
lessor owes Use Tax up-front on the cost price of the tangible personal property. The lessor cannot
charge the lessee a "tax", but many times lessors will require, in the lease agreement, that the lessee
"reimburse" the lessor for the taxes which the lessor incurs incurs on the leased tangible personal
property. There are no rebate provisions to claim at the end of the lease.
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:rkn