Does Illinois Retailers' Occupation Tax apply when a leased rail car or truck is destroyed and the lessee pays the stipulated loss value and takes title?

Plain-English summary

An equipment leasing company asked the Illinois Department of Revenue what happens, for sales-tax purposes, when a leased rail car or truck is completely destroyed in an accident partway through a "true lease." Under the company's lease terms, when that happens the customer (lessee) pays the remaining rent, the stipulated "casualty value" of the equipment, and other charges, and the company (lessor) transfers title to the wrecked equipment over to the customer. The company wanted to know whether that transfer of title counts as a taxable sale, and whether it has to charge sales/use tax on the payment.

The Department answered with general background on how Illinois taxes leases before reaching the casualty-loss question. Illinois treats "true leases" (no fixed buyout, or only a fair-market-value buyout) differently from "conditional sales" (essentially a sale disguised as a lease, often with a nominal buyout). Under a true lease, the lessor is treated as the end user of the equipment and owes Use Tax on what it paid to acquire the equipment; the lessor does not owe Retailers' Occupation Tax on the rental payments it collects, and the lessee owes no tax either. A lessor who is strictly a lessor -- and not otherwise in the business of selling similar property -- does not owe Retailers' Occupation Tax when it later sells equipment that has come off lease and is no longer needed for its rental inventory; those are treated as nontaxable occasional sales.

Applying that framework to a casualty loss, the Department concluded that when a true-lease lessor who is not otherwise engaged in selling like-kind property has leased property destroyed, and the lessee pays the stipulated loss value and receives title to the wrecked property as a result, that transaction is not subject to Retailers' Occupation Tax. In other words, the forced transfer of a totaled asset in exchange for the casualty payment is not treated as a taxable retail sale.

There is an important carve-out: this exemption does not apply to leased motor vehicles (as specially defined in the Department's motor-vehicle leasing rule). If the destroyed leased property is a motor vehicle, the lessee's payment of stipulated loss value in exchange for title is treated as a taxable retail sale, though the lessor may be able to claim a credit against that tax for Use Tax or local Retailers' Occupation Tax it already paid when it originally bought the vehicle.

What this means for you

Equipment leasing companies (trucks, rail cars, and similar non-motor-vehicle equipment)

If your company leases out heavy equipment, rail cars, or trucks under true leases (not disguised sales), and a piece of equipment is totaled during the lease, the casualty payment your customer makes -- plus the resulting transfer of title to the wrecked equipment -- generally is not subject to Retailers' Occupation Tax, as long as you are not otherwise in the business of selling similar equipment. You should still confirm whether your specific vehicles fall under the Department's separate motor-vehicle leasing rule, since that changes the answer.

Companies that lease motor vehicles

The general casualty-loss exemption described above does not apply to you. If a leased motor vehicle is destroyed and your customer pays the stipulated loss value in exchange for title, that is treated as a taxable retail sale, and you should collect and remit Retailers' Occupation Tax on it. You may be entitled to a credit against that liability for Use Tax or local Retailers' Occupation Tax you already paid when you purchased the vehicle.

Accountants and tax professionals

This GIL is a useful summary of how Illinois's lease-taxation framework (true lease vs. conditional sale, Use Tax on the lessor's cost, occasional-sale treatment for off-lease sales, and the motor-vehicle carve-out) applies specifically to casualty-loss transfers. Remember that as a GIL it is not binding on the Department and does not carry the force of a Private Letter Ruling -- it only points to the regulations that control.

Common questions

Q: Is the payment a lessee makes when leased equipment is totaled subject to Illinois sales tax?
A: Generally no, if the lessor is strictly a lessor (not otherwise engaged in selling similar property) and the equipment is not a motor vehicle. The stipulated loss value payment and the resulting transfer of title are not treated as a taxable retail sale.

Q: Does the answer change if the destroyed leased item is a car, truck, or other motor vehicle?
A: Yes. For leased motor vehicles as defined in 86 Ill. Adm. Code 130.111, the same casualty-loss payment-for-title transaction is treated as a taxable retail sale, and Retailers' Occupation Tax applies.

Q: If the transaction is taxable because it involves a motor vehicle, can the lessor get any tax credit?
A: Yes. The lessor may claim a credit against the Retailers' Occupation Tax owed on the sale, up to the amount of Illinois Use Tax or local Retailers' Occupation Tax reimbursements it already paid when it originally purchased that motor vehicle.

Q: Does this GIL apply to conditional sales, not just true leases?
A: No. This ruling addresses true leases. Under a conditional sale (typically identified by a nominal or one-dollar buyout at lease-end), all receipts are already subject to Retailers' Occupation Tax from the outset because the arrangement is treated as a sale from the start.

Q: Can this taxpayer rely on this letter as binding on the Department?
A: No. This is a General Information Letter (GIL), not a Private Letter Ruling. A GIL only directs the taxpayer to relevant regulations and is not a statement of Department policy or binding on the Department.

Citations and references

Statutes and regulations:

• 86 Ill. Adm. Code 130.2013(e) (occasional sales by lessors; casualty-loss transfers not subject to Retailers' Occupation Tax)
• 86 Ill. Adm. Code 130.2013(h) (credit for Use Tax/local Retailers' Occupation Tax paid when the lessor purchased the item)
• 86 Ill. Adm. Code 130.2010 (taxation of leases: conditional sales vs. true leases)
• 86 Ill. Adm. Code 130.111 (definition and treatment of leased motor vehicles)
• 86 Ill. Adm. Code 130.110 (occasional sales)
• 35 ILCS 120/1 (Retailers' Occupation Tax Act, definition of selling price/credit)
• 35 ILCS 155/1 et seq. (Automobile Renting Occupation and Use Tax Act)
• 35 ILCS 180/1 et seq. (Rental Purchase Agreement Occupation and Use Tax Act)
• 2 Ill. Adm. Code 1200.110 (procedures for Private Letter Rulings)
• 2 Ill. Adm. Code 1200.120 (General Information Letters)

Subject

Sale At Retail

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/st20-0037-gil.pdf

Original ruling text

ST 20-0037-GIL 12/21/2020 SALE AT RETAIL
In general, in cases where leased property is lost or destroyed, if a lessor is not engaged in
the business of selling tangible personal property to others for use or consumption and loss of
the leased property occurs during the course of the lease agreement, then the lessee’s
payment of the stipulated loss value of the property on the date of loss, and the conveyance to
lessee of all of lessor’s right, title, and interest in the leased property, will not subject the
transaction to Retailers’ Occupation Tax. See 86 Ill. Amd. Code 130.2013(e). (This is a GIL.)
December 21, 2020
NAME
ADDRESS
Dear Xxxx:
This letter is in response to your letter dated September 7, 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:
COMPANY is an equipment leasing company. We lease various assets, among others
[sic] vehicles, trucks and rail cars. A lot of the contracts we do are true leases – the
equipment is a property of COMPANY and the customer (lessee) uses the equipment
for a set period of time and makes monthly payments. At the end of the lease term, the
customer has the option to either return the equipment to COMPANY or purchase it for
FMV.
On occasion, during the lease term the rail car or trucks are completely destroyed in an
accident [sic] in these cases the customer is charged for the remaining rent, casualty
value and other expenses and the title to the destroyed asset is transferred from
COMPANY to the customer – Please read extract from the legal lease documents
below.
We are requesting a State’s opinion – based on the contractual language below, does
the casualty loss event constitute a sale? Is this event subject to sale/use tax? Is
COMPANY obligated to charge tax on the proceeds received from the customer?

10. LOSS AND DAMAGE. (a) Risk of Loss. During the entire Lease Term with
    respect to the Equipment covered by a Lease Schedule and until all of such

Equipment is returned to Lessor, or if applicable, purchased by Lessee, in
accordance with the subject Lease, Lessee shall bear the risk of the occurrences
of a Casualty to Equipment and LESSEE SHALL NOT BE RELEASED FROM ITS
OBLIGATIONS UNDER THE SUBJECT LEASE IF A CASUALTY OCCURS.
(b) Casualty Notice. Lessee shall provide prompt written notice to Lessor of any
Casualty to any Equipment where the repairs or replacement costs are likely to
exceed $100,000.00. Each such notice must be provided together with any
damage reports provided to any governmental authority, the insurer or Supplier,
and any documents pertaining to the repair of such Casualty, including copies of
work orders, and all invoices for related charges.
(c) Casualty Cure. In the event a Casualty occurs with respect to any Equipment
(1) if Lessor determines the Casualty does not constitute a Total Loss, then
Lessee shall promptly repair the Casualty Equipment by utilizing Replacement
Parts in accordance with Section 8(b) above or (2) if Lessor determines the
Casualty constitutes a Total Loss, on the Loss Payment Date, Lessee shall pay to
Lessor (A) the Basic Rent (or Renewal Rent, if the Total Loss occurs during a
Renewal Term) due on the Loss Payment Date, plus (B) the Stipulated Loss Value
of the Casualty Equipment as of the Loss Payment Date, plus
(C) all Other Payments then due. Upon full and indefeasible payment to Lessor of
the sum described in clause (2) of the preceding sentence (x) Lessee’s obligation
to pay future Basic Rent or (Renewal Rent, as applicable) shall terminate solely
with respect to the Casualty Equipment so paid for, but Lessee shall remain liable
for, and pay, all Other Payments, if any, wherever arising connected with the
Casualty Equipment and all Rent related to the remainder of the Equipment as
and when due, and (y) Lessor, without further action, shall be deemed to have
conveyed to Lessee all of Lessor’s right, title and interest in the Casualty
Equipment AS IS, WHERE IS, but subject to the requirements of any third party
insurance carrier in order to settle an insurance claim.
(d) No Lessor Duty. Lessor shall be under no duty to Lessee to pursue any claim
against any person in connection with a Total Loss or other Casualty to any
Equipment.
(e) Insurance Proceeds Credit. If Lessor receives a payment under an insurance
policy required under any Lease Document in connection with any Total Loss or
other Casualty to Equipment, and such payment is both unconditional and
indefeasible, then provided Lessee shall have complied with the applicable
provisions of this Section 10, Lessor shall either (1) if received pursuant to a
Total Loss, remit such proceeds to Lessee up to an amount equal to the amount
paid by Lessee to Lessor as the Stipulated Loss Value of the Casualty Equipment,
or credit such proceeds against any amounts owed by Lessee pursuant to
Section 10(c)(2), or (2) if received with respect to repairs or replacements made
pursuant to Section 10(c)(1), remit such proceeds to Lessee up to an amount
equal to the out-of-pocket costs of repair or replacement actually incurred by
Lessee, as established to Lessor’s reasonable satisfaction.
We would appreciate your response in writing.
If you need to contact me please call NUMBER or email at the address below.

Please return your response to the address below:
ADDRESS
DEPARTMENT’S RESPONSE:
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 rental 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. and except for items subject to the
Rental Purchase Agreement Occupation and Use Tax Act found at 35 ILCS 180/1 et seq.
The question of whether a lessor’s sale of tangible personal property coming off lease that is
no longer needed for the lessor’s rental inventory is subject to Retailers' Occupation Tax liability
depends on whether the seller is strictly a lessor, or whether the seller is otherwise engaged in the
business of selling like-kind property. Except for the sale of certain motor vehicles, as defined and
explained at 86 Ill. Adm. Code 130.111, a person who is strictly a lessor and whose only sales are of
items no longer needed for his rental inventory does not incur Retailers' Occupation Tax liability on
those sales. See 86 Ill. Adm. Code 130.2013(e). Such sales would be considered occasional sales.
See 86 Ill. Adm. Code 130.110.
Lessors who are otherwise engaged in the business of selling like-kind property incur Retailers'
Occupation Tax liability on all their sales, including sales of items coming off lease that are no longer
needed for their rental inventories. Except as otherwise prohibited in the definition of “selling price” in
Section 1 of the Retailers’ Occupation Tax Act (i.e., in cases of certain motor vehicles where the
lessor’s taxable purchase price was equal to the consideration to be received by the lessor pursuant
to the lease contract), a lessor who incurs a Retailers' Occupation Tax liability on the sale of an item
can take a credit against that liability for any Use Tax and any local Retailers' Occupation Tax
reimbursements that he or she paid to a supplier registered to collect Illinois tax when he or she
purchased that particular item. However, this credit cannot exceed the amount of Retailers'
Occupation Tax incurred by the lessor/retailer when he or she sells the item. Further, only the entity
that originally paid the tax on the item can take the credit on the subsequent sale. See 86 Ill. Adm.
Code 130.2013(h) and 35 ILCS 120/1. If a lessor filed a return and paid the tax directly to the
Department, the lessor must file a claim to recover it.
In general, in cases where leased property is lost or destroyed, if a lessor is not engaged in the
business of selling tangible personal property to others for use or consumption and loss of the leased

property occurs during the course of the lease agreement, then the lessee’s payment of the stipulated
loss value of the property on the date of loss, and the conveyance to lessee of all of lessor’s right,
title, and interest in the leased property, will not subject the transaction to Retailers’ Occupation Tax.
This would not be the case, however, if the lost property is a leased motor vehicle, as defined and
explained at 86 Ill. Adm. Code 130.111, for which the lessee pays the stipulated loss value as of the
date of the loss to the lessor and the lessor surrenders title thereto. In such case, a retail sale has
occurred and the transaction is taxable. In this case, however, subject to the prohibition discussed in
the preceding paragraph, the lessor may be entitled to a credit against the Retailers’ Occupation Tax
liability up to the amount of any Illinois Use Tax and any local Retailers' Occupation Tax
reimbursements that he paid when he purchased the motor vehicle. See 86 Ill. Adm. Code
130.2013(h) and 35 ILCS 120/1
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
SJM:bkl