Does Illinois Rental Purchase Agreement Occupation and Use Tax, Use Tax, or Retailers' Occupation Tax apply to an out-of-state company's subscription-based "try before you buy" merchandise service?

Plain-English summary

An out-of-state company ran e-commerce subscription platforms where Customers paid month-to-month to receive items of merchandise, try them out, and either buy or swap them for something else. The company asked the Illinois Department of Revenue how three different Illinois "sales tax" regimes applied to that model: the Rental Purchase Agreement Occupation and Use Tax, the Use Tax's demonstration-use exemption, and the sourcing rules for State and local Retailers' Occupation Tax (ROT).

The Department's General Information Letter walks through three separate conclusions grounded in the facts presented:

1. Rental Purchase Agreement Occupation and Use Tax. Because the subscriptions ran for an initial period of four months or less, renewed automatically with each payment, and let Customers eventually own the merchandise, the monthly subscription receipts fit the statutory definition of a "rental purchase agreement" and are taxed at 6.25% of gross receipts under 35 ILCS 180/1 et seq. — not under ordinary sales tax. However, the Department also noted that a subscription model with a separate option to purchase, where customers can just try items and return them, generally isn't what the Act was meant to cover, and that each contract has to be evaluated on its own facts.
2. Demonstration-use exemption from Use Tax. Merchandise the company ships to Illinois Customers so they can try it before buying is otherwise a "use" that would trigger Illinois Use Tax. But the Use Tax Act excludes "demonstration use" from the definition of taxable "use," and the Department's regulation (86 Ill. Adm. Code 150.306) confirms that leasing property to prospective buyers so they can decide whether to buy it counts as demonstration use (except for aircraft and watercraft). So the merchandise is exempt from Use Tax either because it's already covered by the Rental Purchase Agreement Tax, or, alternatively, under this demonstration-use exemption.
3. Sourcing of State and local Retailers' Occupation Tax. When merchandise sold to an Illinois Customer is delivered from company-owned inventory that was physically located in Illinois at the time of sale, that sale is subject to both State and local ROT, sourced to that Illinois location — regardless of whether the item had also qualified for the demonstration-use exemption while it sat in inventory. By contrast, when the company's selling activity and inventory are entirely outside Illinois, the company instead owes Illinois Use Tax (not local sales tax) once it crosses the state's economic nexus thresholds ($100,000 in sales or 200 transactions to Illinois purchasers), because of the "remote retailer" collection rules enacted by the Leveling the Playing Field for Illinois Retail Act.

What this means for you

Subscription-box, rent-to-try, and e-commerce businesses

If your business model lets customers pay recurring fees to receive, try, and optionally buy or swap merchandise, don't assume ordinary sales tax rules apply. Depending on your contract terms (initial period of 4 months or less, automatic renewal, eventual ownership option), Illinois may instead treat your subscription receipts as subject to the Rental Purchase Agreement Occupation and Use Tax at 6.25% — a different tax with its own registration and remittance mechanics. Separately, merchandise you ship into Illinois for trial use generally is not hit with Use Tax on top of that, because of the demonstration-use exemption. But if you keep inventory physically located in Illinois, sales out of that inventory can trigger full State and local Retailers' Occupation Tax, sourced to that Illinois location.

Remote/out-of-state retailers and marketplace facilitators

If you have no store, warehouse, or personnel in Illinois, and your selling activity (contracting, invoicing, payment, shipment, and returns) all happens outside the state, you're generally treated as owing Illinois Use Tax rather than local sales tax on sales sourced to Illinois customers — but only once you exceed $100,000 in cumulative Illinois gross receipts or 200 separate transactions in the preceding four quarters. Below those thresholds you are not required to collect. Once you have any inventory physically in Illinois, this remote-retailer treatment no longer applies, and standard ROT sourcing to the inventory's location takes over instead.

Accountants and tax professionals

This letter is a useful roadmap for untangling three easily-confused Illinois "sales tax family" regimes: (1) the Rental Purchase Agreement Occupation and Use Tax Act (35 ILCS 180), a distinct excise tax from ordinary ROT/Use Tax that catches short-term-renewing rent-to-own-style consumer contracts; (2) the demonstration-use carveout from the Use Tax Act's definition of "use" (35 ILCS 105/2; 86 Ill. Adm. Code 150.306); and (3) the post-Hartney, post-Wayfair sourcing regime that determines whether a sale is subject to State/local ROT (sourced to Illinois inventory) versus Use Tax (owed by remote retailers over the economic nexus thresholds). Note the Department flagged that a subscription model with a separate purchase option may fall outside the Rental Purchase Agreement Tax altogether, so the facts of each contract control.

Common questions

Q: Does Illinois tax a subscription that lets customers try merchandise before buying it?
A: If the subscription runs for an initial period of four months or less, renews automatically with each payment, and lets the customer eventually own the merchandise, the receipts fit Illinois' definition of a "rental purchase agreement" and are taxed at 6.25% of gross receipts under the Rental Purchase Agreement Occupation and Use Tax Act (35 ILCS 180/1 et seq.) — separately from ordinary sales tax. The Department cautioned, though, that a subscription with a genuinely separate option to purchase may not be what this Act was intended to cover, and each contract must be evaluated on its own terms.

Q: If I ship merchandise into Illinois just so a customer can try it out, do I owe Illinois Use Tax on it?
A: Generally no. The Use Tax Act's definition of "use" excludes "demonstration use," and the Department's regulation at 86 Ill. Adm. Code 150.306(b)(2) confirms that leasing property to prospective buyers so they can decide whether to purchase it is demonstration use (except for aircraft and watercraft, which have separate restrictions). The property is exempt from Use Tax either under the Rental Purchase Agreement Tax exemption (35 ILCS 105/3-5(38)) or, alternatively, under this demonstration-use exemption.

Q: When does a sale get sourced to Illinois for State and local Retailers' Occupation Tax purposes?
A: When the tangible personal property sold is in inventory physically located in Illinois at the time of the sale (or is produced there), the sale is sourced to that Illinois location and is subject to both State and local ROT, per rules like 86 Ill. Adm. Code 270.115(d)(2) — even if the item had also qualified for the demonstration-use exemption while sitting in inventory. This applies "whether eligible for the demonstration use exemption or not."

Q: What if my company has no store, warehouse, or staff in Illinois at all?
A: Then your selling activity is treated as occurring outside Illinois, and you generally owe Illinois Use Tax (not local sales tax) instead — but only once you cross the remote-retailer economic nexus thresholds under 35 ILCS 120/2(b): $100,000 or more in cumulative gross receipts from Illinois sales, or 200 or more separate transactions with Illinois purchasers, in the preceding four quarters. These "Leveling the Playing Field" rules for remote retailers and marketplace facilitators took effect January 1, 2021.

Citations and references

Rental Purchase Agreement Occupation and Use Tax:

• 35 ILCS 180/1 et seq. (imposition of the tax)
• 35 ILCS 180/5 (definition of "rental purchase agreement")
• 35 ILCS 180/10 (6.25% rate on gross receipts)
• 815 ILCS 655/2(c), (g) (Rental Purchase Agreement Act contract disclosure/payment requirements)

Use Tax and demonstration-use exemption:

• 35 ILCS 105/2 (definition of "use"; excludes demonstration/interim use)
• 35 ILCS 105/3 (imposition of Use Tax)
• 35 ILCS 105/3-5(38) (exemption for property subject to Rental Purchase Agreement Tax)
• 35 ILCS 105/3-45 (retailer's duty to collect Use Tax)
• 86 Ill. Adm. Code 150.201, 150.306 (taxable "use"; Interim Use and Demonstration Exemption)

Retailers' Occupation Tax and sourcing:

• 35 ILCS 120/1, 2, 2-12 (imposition; "sale at retail"; sourcing of selling activity)
• 86 Ill. Adm. Code 130.201(a) (definition of "sale at retail")
• 86 Ill. Adm. Code 220.115, 270.115, 320.115 (county/municipal/regional-transit ROT sourcing rules)
• Hartney Fuel Oil Co. v. Hamer, 998 N.E.2d 1227 (Ill. 2013)

Remote retailers and economic nexus:

• Public Acts 101-0031 and 101-0604 (Leveling the Playing Field for Illinois Retail Act)
• 35 ILCS 120/2(b) ($100,000 / 200-transaction thresholds)
• 86 Ill. Adm. Code 131 (remote retailer and marketplace facilitator rules)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2021.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2021/st21-0025-gil.pdf

Original ruling text

ST-21-0025 07/27/2021 USE TAX
This letter discusses the Rental Purchase Agreement Occupation and Use Tax
(35 ILCS 180/1 et seq.); the demonstration use exemption from the Use Tax Act
(86 Ill. Adm. Code 150.306); and sourcing of State and local Retailers’
Occupation Tax (86 Ill. Adm. Code 270.115). (This is a GIL.)
July 27, 2021
Dear NAME:
This letter is in response to your letter 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:
Our firm, on behalf of our client (“Company”), and pursuant to Illinois
Administrative Code title 2, section 1200.120, respectfully requests
guidance on the application of Illinois sales/use tax laws to the facts
presented below. Please direct any questions regarding this request to
NAME at PHONE# of E-MAIL.
A. Statement of Facts
The Company is a non-domiciliary corporation that maintains its
headquarters outside of Illinois. The Company operates e-commerce
websites that showcase items of non-titled tangible personal property
(“Merchandise”) that the Company purchases for resale and markets to
individuals located throughout the United States (“Customers”). All of the
Company’s Customers are individuals as the Company’s Merchandise is
used for personal purposes only. Customers can try the Merchandise as
part of a subscription program before making a decision whether to
purchase or return the Merchandise.
The Company’s websites are online platforms whereby Customers enter
into a month-to-month subscription (cancelable at any time) that allows

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them to receive different items of Merchandise in order to ascertain
whether the Merchandise suits their particular needs. The Company’s
subscription-based business model helps induce Customers to purchase
the Merchandise. If the Customer determines that the Merchandise does
not suit their needs, the Customer can return the Merchandise to receive a
different item of Merchandise for an initial demonstration use, which the
Customer can again either purchase or return for another item of
Merchandise. The Merchandise showcased on the Company’s online
platform has a normal shelf-life of less than 24 months for various
reasons, including routine damage.
The Company ships all Merchandise from locations outside of Illinois. Any
returns are accepted only at locations outside of Illinois. The Company
has no store location or other place of business in Illinois. No inventory is
stored at any Illinois warehouse. The Company purchases all
Merchandise for resale free of sales/use taxes.
Merchandise that is shipped to an Illinois Customer pursuant to a
subscription may have already been used by a Customer in another state,
and Merchandise that is returned by an Illinois Customer pursuant to a
subscription may then be subsequently reused by other Customers
located anywhere in the United States.
All Merchandise purchased by the Company that is made available on its
online platform is classified as “inventory” for book and tax purposes.
The Company’s cumulative gross receipts from sales of Merchandise to
purchasers in Illinois exceeds $ 100,000 annually, and/or it enters into 200
or more separate transactions for the sale of Merchandise to Customers in
Illinois. The Company and its Customers do not enter into any conditional
sales agreements (i.e., leases with a dollar or nominal option to purchase).
B. Issue
The Company is seeking guidance on how it should account for Illinois
sales/use taxes, including its monthly subscription receipts and sales
proceeds.
C. Discussion & Analysis
As relevant here, Illinois law imposes a Retailers’ Occupation Tax (“State
Sales Tax”), a Use Tax, and a Rental Purchase Agreement Occupation
and Use Tax. Illinois law also provides for various Retailers’ Occupation

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Taxes that are imposed by counties, municipalities, and special districts
(collectively, “Local Sales Taxes”). All of these taxes are discussed in the
context of the facts discussed above.

1. The Company’s subscription receipts are not subject to
   State Tax or Local Sales Tax
   Illinois imposes a State Sales Tax upon “persons engaged in the business
   of selling at retail tangible personal property…” 1 As a general rule, this tax
   is imposed “at the rate of 6.25% of gross receipts from sales of tangible
   personal property made in the course of business.” 2
   Various counties, municipalities, and special districts impose Local Sales
   Taxes that are imposed on “all persons engaged in the business of selling
   tangible personal property at retail [in the locality].” 3 All of these Local
   Sales Taxes are administered by the state.
   The phrase “sale at retail” is defined in the State Sales Tax law, and that
   same definition is incorporated by reference in the various Local Sales
   Tax laws. As relevant here, the phrase “sale at retail” is defined to mean
   “any transfer of the ownership of or title to tangible personal property to a
   purchaser….” 4
   The Company’s subscription receipts are not derived from ‘any transfer of
   the ownership of … tangible personal property to a purchaser.” As such,
   the Company’s subscription receipts are not subject to State Sales Tax or
   Local Sales Tax.
2. The Company’s subscription receipts are subject to Illinois’
   new Rental Purchase Agreement Occupation and Use Tax
   Illinois law now has a Rental Purchase Agreement Occupation and Use
   Tax Act, which became effective January 1, 2018. 5 This tax is imposed
   “upon persons engaged in this State in the business of renting
   merchandise under a rental-purchase agreement in Illinois at the rate of
   6.25% of the gross receipts received from the business.” 6
   35 ILCS 120/2.
   35 ILCS 120/2-10.
   3
   See, e.g., 55 ILCS 5/5-1006 (home rule county ROT); 65 ILCS 5/8-11-1 (home rule municipal ROT); 70 ILCS
   3615/4.03(e) (regional transportation authority ROT).
   4
   35 ILCS 120/1 (emphasis added).
   5
   35 ILCS 180/1 et. Seq.
   6
   35 ILCS 180/10.
   1
   2

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The term “rental purchase agreement” is defined 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.” 7
The Company’s online subscription platform provides for month-to-month
subscriptions, cancelable at any time, but is automatically renewable with
each payment. The subscription is always for an initial period of 4 months
or less. Further, the terms between the Company and the Customer
permit the Customer to own the Merchandise if the Customer decides to
purchase the Merchandise after an initial demonstration use.
Based on the foregoing, the Company’s monthly subscription receipts are
subject to Illinois’ new Rental Purchase Agreement Occupation and Use
Tax because the Company’s receipts are pursuant to an agreement with
an individual Customer to use the Merchandise for personal purposes for
an initial period of 4 months or less, the agreement is automatically
renewable with each payment after the initial period, and the Customer is
permitted to purchase the Merchandise.

3. The Company does not owe Illinois use tax on the
   Merchandise purchased for resale and made available to its
   subscription-based Customers
   Illinois imposes a use tax on the “privilege of using in the State tangible
   personal property purchased at retail from a retailer….” 8 As a general rule,
   the use tax is imposed “at the rate of 6.25% of either the selling price or
   the fair market value, if any, of the tangible personal property.”9
   Illinois’ use tax provides for various exemptions, including: (1)
   “merchandise that is subject to the Rental Purchase Agreement
   Occupation and Use Tax,” 10 and (2) a demonstration use exemption. 11
   With respect to the first exemption noted, if the Department agrees that
   the Company’s subscription receipts are subject to Illinois’ Rental
   35 ILCS 180/5.
   35 ILCS 105/3.
   9
   35 ILCS 105/3-10.
   10
   35 ILCS 105/3-5(38).
   11
   35 ILCS 105/2 (“’use’ does not mean the demonstration use … of tangible personal property by a retailer before
   he sells that tangible personal property.”)
   7
   8

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Purchase Agreement Occupation Tax, the Company’s Merchandise
purchases are exempt from Illinois use tax.
Alternatively, if it is determined that the Rental Purchase Agreement
Occupation and Use Tax does not apply here, the Company’s
Merchandise is exempt from use tax pursuant to Illinois’ demonstration
use exemption. 12 Illinois’ Use Tax Act defines the term “use” to exclude
the “demonstration use … of tangible personal property by a retailer
before he sells that tangible personal property.” A Department regulation
clarifies that property may qualify for the demonstration use exemption
even if the property is leased. Specifically, the Department’s regulation
states: “the leasing of tangible personal property by a retailer to
prospective buyers for the purpose of allowing them to ascertain whether
the property suits their particular need and for the purpose of trying to
induce them to buy the property is a use for demonstration purposes,
[except as provided otherwise for aircraft and watercraft].”13 The
Company’s Merchandise does not include aircraft or watercraft.
Based on the foregoing, no Illinois Use Tax is due on the Merchandise
that is used in Illinois pursuant to the subscription-based online platform
because the Merchandise is subject to the Rental Purchase Agreement
Occupation and Use Tax or, alternatively, the demonstration use
exemption applies. 14

4. The Company is required to collect and remit Illinois use tax
   (not sales tax) on its Merchandise sales
   Illinois’ Sales Tax is an “occupation tax.” 15 The Tax is imposed upon
   “persons engaged in the business of selling at retail tangible personal
   property.”16 If the state sales tax applies, then the retailer is also
   responsible for collecting and remitting the applicable local sales tax,

35 ILCS 105/3; Ill. Admin. Code tit. 86, § 150.306.
Ill. Admin Code tit. 86, § 150.306(b)(2).
14
We note that should the Department determine that the Company is required to remit use tax on Merchandise that
it transfers to its subscribers via its subscription platform, the Company should be allowed a credit or a refund for
use tax paid on those Merchandise when it subsequently sells Merchandise to Customers via either of its two
platforms. The credit or refund is limited to the lesser of the use tax paid by the Company or the tax collected from
the Company’s customer upon sale of the item. See Illinois Department of Revenue Information Bulletin FY86-54.
15
35ILCS 120/2; see also Automatic Voting Machine Corp v. Daley, 100 N.E. 2d 591 (Ill. 1951)
16
Id.
12
13

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which is imposed on “all persons engaged in the business of selling
tangible personal property at retail [in the locality]. 17
To complement the sales tax, Illinois imposes a use tax. Use tax is
imposed on the “privilege of using in this State tangible personal property
purchased at retail from a retailer….”18 If the retailer “maintains a place of
business in Illinois,” the retailer is required to collect and remit the
applicable use tax from the purchaser. 19 A “retailer maintaining a place of
business in this State” is a defined phrase, which now includes remote
sellers:
beginning October 1, 2018, a retailer making sales of tangible
personal property to purchasers in Illinois from outside of Illinois if:
(A) the cumulative gross receipts from sales of tangible personal
property to purchasers in Illinois are $100,000 or more; or
(B) the retailer enters into 200 or more separate transactions for the
sale of tangible personal property to purchasers in Illinois. 20
As a general rule, if the retailer is not engaged in the business of selling in
any Illinois jurisdiction, then no local sales/use tax is due and, as such,
only the state use tax is due. 21
Turning back to the sales tax, an Illinois statute enacted in 2014
addresses the location where a retailer is deemed to be engaged in the
business of selling. 22 That law applies “only with respect to the particular
selling activities described in the following paragraphs.” 23 The paragraphs
include situations where (1) the purchaser is present at the retailer’s place
of business to make the purchase; (2) the purchaser takes possession of
the tangible personal property at the retailer’s place of business; and (3)
the sourcing of a conditional sale (i.e., a lease with a dollar or other

See, e.g., 55 ILCS 5/5-1006 (home rule county ROT); 65 ILCS 5/8-11-1 (home rule municipal ROT); 70 ILCS
3615/4.03(e) (regional transportation authority ROT); see also Ill. Admin. Code tit. 86, secs. 220.115 (county),
270.115 (municipal), 320.115 (regional transit authority).
18
35 ILCS 105/3.
19
35 ILCS 105/3-45.
20
35 ILCS 105/2.
21
See, e.g., 55 ILCS 5/5-1006 (home rule county ROT); 65 ILCS 5/8-11-1 (home rule municipal ROT); 70 ILCS
3615/4.03(e) (regional transportation authority ROT).
22
35 ILCS 120/2-12.
23
Id.
17

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nominal option to purchase). 24 Additional guidance is set forth in the
Department’s regulations. 25
In 2014, the Department issued revised local sales tax sourcing
regulations after the Illinois Supreme Court invalided those regulations in
its 2013 Hartney decision. 26 Pursuant to the revised regulations, a retailer
is generally required to remit use tax (not sales tax) if (1) the retailer’s
headquarters is located outside of Illinois; (2) invoices are issued and
payment is received outside of Illinois; and (3) the seller takes action to
find [sic] the sale from a location outside Illinois. 27 However, special
sourcing rules apply in other instances, such as with conditional sales, as
well as when the tangible personal property that is sold is in an inventory
“in the possession of the retailer located within a jurisdiction in Illinois at
the time of its sale.”28
The Company acknowledges that it is a “retailer maintaining a place of
business in this State,” particularly given Illinois’ adoption of the Wayfair
economic nexus rules and the Company’s Illinois sales volume. 29 Yet, the
Company’s selling activities occur outside of Illinois for the following
reasons:
i. the Company maintains its headquarters in a state other than
Illinois;
ii. the Company has no store location or other place of business in
Illinois;
iii. the Company has no personnel in Illinois;
iv. the Company takes no action in Illinois to bind it to any sales;
v. all shipments and deliveries are made from a location outside of
Illinois, and any returns are accepted only at a location outside of
Illinois;
vi. the Company and its Customers do not enter into conditional
sales contacts; and
vii. none of the Merchandise that is sold in an inventory in the
possession of the Company is located within Illinois at the time of
sale.
35 ILCS 120/2-12(5).
See Ill. Admin. Code tit. 86, §§ 220.115 (county), 270.115 (municipal), 320.115 (regional transit authority); see
also Hartney Fuel Oil Co. v. Hamer, 998 N.E.2d 1227 (2013) (“The local ROT Acts … with the exception of coal
and other mineral extraction–they do not offer substantial guidance on the proper situs of taxation. For guidance on
the proper situs of retail occupation tax under the local ROT Acts, on must turn to the regulations.”)
26
See id.
27
See, e.g., Ill. Admin. Code tit. 86, § 220.115(b)(c)(1)-(2).
28
See, e.g., Ill. Admin. Code tit. 86, § 220.115(b)(2), (4).
29
See 35 ILCS 105/2(9).
24
25

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Upon applying Illinois law to the Company’s activities, the Company is
engaged in the business of selling outside of Illinois. As such, the
Company is required to collect Illinois use tax (not local sales tax).
We appreciate the Department’s review of this matter and await a
response. Please direct all questions or correspondence to NAME at
PHONE# of E-MAIL.
DEPARTMENT’S RESPONSE:
The Illinois Retailers' Occupation Tax Act imposes a tax upon persons engaged
in this State in the business of selling tangible personal property at retail to purchasers
for use or consumption. See 86 Ill. Adm. Code 130.101. In Illinois, a Use Tax is also
imposed on the privilege of using, in this State, any kind of tangible personal property
that is purchased anywhere at retail from a retailer. See 86 Ill. Adm. Code 150.101.
These taxes comprise what is commonly known as "sales" tax in Illinois.
Subscriptions
The Illinois Retailers’ Occupation Tax and Use Tax are conditioned upon the sale
at retail of tangible personal property. The Retailers’ Occupation Tax Act defines “sale
at retail” as “any transfer of the ownership of or title to tangible personal property to a
purchaser, for the purpose of use or consumption, and not for the purpose of resale . . .
for a valuable consideration . . . .” See 86 Ill. Adm. Code 130.201(a). Subscription
receipts are generally not subject to Retailers’ Occupation Tax or Use Tax, unless the
receipts are derived from a sale at retail as defined in the Retailers’ Occupation Tax Act.
Rental Purchase Agreement Occupation and Use Tax
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. 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.
Generally, a transaction is subject to the Rental Purchase Agreement Occupation
and Use Tax only if the transaction is governed by the Rental Purchase Agreement Act
(815 ILCS 655/0.01 et seq.). The Rental Purchase Agreement Act provides, in

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subsection (c) of Section 2 that “(c) [a] rental-purchase agreement may not contain a
provision: . . . (6) requiring a payment at the end of the scheduled rental-purchase term
in excess of or in addition to a regular periodic payment in order to acquire ownership of
the merchandise. In no event shall the consumer be required to pay a sum greater than
the total amount to be paid to acquire ownership, as disclosed in item (3) of subsection
(g) of this Section. See 815 ILCS 655/2(c). Subsection (g) of Section 2 of the Rental
Purchase Agreement Act provides that “(g) [a] rental-purchase agreement must
disclose: . . . (2) the amount and timing of payments; (3) the total number of payments
necessary and the total amount to be paid to acquire ownership of the merchandise; . .
.” See 815 ILCS 655/2(g).
Transactions in which a customer can try merchandise as part of a subscription
program before making a decision whether to purchase or return the merchandise are
generally not intended to be covered by the Rental Purchase Agreement Occupation
and Use Tax. As further indication of this, the sponsor of this legislation in the Illinois
House of Representatives 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. A subscription model with a separate
option to purchase generally would not fit that category. It is important to note, however,
that each arrangement must be evaluated in light of the specific contract and the other
aspects of the transaction to determine whether the Rental Purchase Agreement
Occupation and Use Tax applies.
Demonstration Use
Generally, when a company ships items of tangible personal property that it owns
to customers in Illinois pursuant to a subscription so that the customers may try the
property before making a decision whether to purchase or return the property, the
company is making a taxable use of the property under the Use Tax Act. The Use Tax
Act defines “use” as the exercise by any person of any right or power over tangible
personal property incident to the ownership of that property . . . .” See 86 Ill. Adm. Code
150.201. However, the Act goes on to provide that “ “‘[u]se’ does not mean the
demonstration use or interim use of tangible personal property by a retailer before he
sells that tangible personal property.” See 35 ILCS 105/2 and 86 Ill. Adm. Code
150.201. See also the Department's regulation at 86 Ill. Adm. Code 150.306 that
describes the Interim Use and Demonstration Exemption. Specifically, subsection (b)(1)
provides guidance regarding when tangible personal property qualifies for the
demonstration exemption, including a provision that, except for certain restrictions on
watercraft and aircraft, “[t]he leasing of tangible personal property by a retailer to
prospective buyers for the purpose of allowing them to ascertain whether the property
suits their particular needs and for the purpose of trying to induce them to buy the
property is a use for demonstration purposes . . . .” See 86 Ill. Adm. 150.306(b)(2). We
note that a month-to-month subscription that allows customers to receive different items
of merchandise is not the same as a lease of an item as discussed in the rule.

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July 27, 2021

Sourcing of sales
When an out-of-state seller (other than, after January 1, 2021, a marketplace
seller) makes sales to Illinois customers from inventory located in Illinois, the sale is
subject to State and local Retailers’ Occupation Tax, sourced to the location of the
inventory. The Department’s administrative rules governing the sourcing of sales
provides as follows: “[i]f a retailer's selling activities take place in taxing jurisdictions
outside the State, except that the tangible personal property that is sold is in an
inventory in the possession of the retailer located within a jurisdiction in Illinois at the
time of its sale (or is subsequently produced by the retailer in the jurisdiction), then
delivered in Illinois to the purchaser, the jurisdiction where the property is located at the
time of the sale or when it is subsequently produced by the retailer will determine where
the retailer is engaged in business with respect to the sale.” See, for example, 86 Ill.
Adm. Code 270.115(d)(2).
Generally, if tangible personal property is maintained as inventory in Illinois,
whether eligible for the demonstration use exemption or not, the sale of the property will
result in State and local Retailers' Occupation Tax liability due to the maintenance of
inventory at an Illinois location, subject to credit for use tax properly due and paid, if
any. For example, if a company ships items of tangible personal property that it owns to
a customer in Illinois pursuant to a subscription so that the customer may try the
property before making a decision whether to purchase or return the property, and the
customer decides to purchase the item, then the sale is subject to both State and local
Retailers’ Occupation Tax at the customer’s location, because the company’s inventory
is at that location at the time of the sale.
We note that Public Acts 101-0031 and 101-0604 enacted the Leveling the
Playing Field for Illinois Retail Act. The Act implements a series of structural changes to
the Illinois sales tax law that are intended to “level the playing field” between Illinoisbased retailers and remote retailers by imposing State and local retailers’ occupation
taxes on Illinois retailers, remote retailers, marketplace sellers, and marketplace
facilitators alike. Public Acts 101-0031 and 101-0604 require “remote retailers” to collect
and remit State and local retailers’ occupation taxes. Beginning January 1, 2021, you
must remit Retailers’ Occupation Tax if you are a remote retailer and either of the
following thresholds was met during the preceding four quarterly periods ending on the
last day of March, June, September, and December:
1) The cumulative gross receipts from sales of tangible personal property
by you to purchasers in Illinois was $100,000 or more; or
2) you entered into 200 or more separate transactions for the sale of
tangible personal property to purchasers in Illinois. [35 ILCS 120/2(b)]

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You are a “remote retailer” if you do not maintain within this State, directly or by a
subsidiary, an office, distribution house, sales house, warehouse or other place of
business, or any agent or other representative operating within this State under your
authority or a subsidiary of yours, irrespective of whether such place of business or
agent is located here permanently or temporarily or whether you or your subsidiary is
licensed to do business in this State. 35 ILCS 120/1. If you have inventory in Illinois, you
are not a remote retailer. The Department has adopted rules implementing the new
requirements for remote retailers and marketplace facilitators. The rules can be found
on the Department’s website. 86 Ill. Adm. Code 131. The new requirements for remote
retailers and marketplace facilitators took effect on January 1, 2021.

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July 27, 2021

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:ter