Under Illinois's 2025 lease-tax overhaul, does a party-entertainment company that rents out equipment along with an on-site supervisor owe retailers' occupation tax on the whole package, and how is that tax sourced?

Plain-English summary

A CPA firm wrote to the Illinois Department of Revenue on behalf of a party-entertainment client that rents out equipment (with an on-site supervisor who never gives the customer full control of it) to colleges, universities, municipalities, and corporations, bundling the equipment and services into one package price. The firm asked how the client should charge Illinois sales tax under the state's brand-new leasing regime.

Effective January 1, 2025, Article 75 of Public Act 103-592 rewrote how Illinois taxes leases. Before that date, a lessor generally paid Use Tax up front on its own purchase of the property it intended to lease out, and the lease payments themselves weren't separately taxed. Now, the term "sale" in the Retailers' Occupation Tax Act (and "transfer" in the Service Occupation Tax Act) includes a lease, so lessors collect and remit tax on their ongoing gross receipts from lease payments, just like retailers collect tax on sales. The Department did not discuss any transition or grandfathering rule for leases signed before 2025 — it simply describes the new law as applying to lease receipts received on or after January 1, 2025, for leases in effect, entered into, or renewed on or after that date.

On the merits, the Department did not just say "yes, tax applies" — it walked through the analysis the client actually has to perform:

• Lease vs. service (the "true object" test). Whether this is a taxable lease or a nontaxable/Service-Occupation-Tax-only service depends on the true object of the transaction (Spagat v. Mahin and related cases). If an operator is necessary for the equipment to work as designed and does more than maintain, inspect, or set up the property, the arrangement is not a lease at all — the customer never gets a real right to possess or control the property. But "the rental of equipment for which the lessor provides a person only for supervision or maintenance purposes would be considered a retail rental of the equipment" — i.e., still a taxable lease.
• Bundled service charges. If the transaction is a retail lease, any service charges "inseparably linked" to it (because they aren't separately stated, or because the customer has no option to lease the equipment without paying them) are folded into the lessor's taxable gross receipts, even if the invoice lists them separately.
• Sourcing. Leases with recurring periodic payments are sourced to the property's primary location (typically the address the lessee provides). Leases with a single payment (no recurring periodic payments) are sourced the same way as ordinary retail sales — based on where the retailer's predominant selling activities occur (per the multi-factor test in 86 Ill. Adm. Code 270.115), not simply the vendor's own address or the customer's event location.
• Out-of-state events. The Department did not simply say out-of-state events are automatically exempt. Instead, it pointed to the existing interstate-commerce exemption for leases where the lessor is contractually obligated to deliver the property from Illinois to a point outside Illinois (not to be returned by the lessee) and to retrieve it from outside Illinois at lease-end, with the lessor documented as consignor/shipper — provided such delivery and retrieval actually happen and are properly documented.

What this means for you

Equipment lessors and rental companies

If you supply equipment along with a person who only supervises, maintains, sets up, or inspects it (rather than a true operator required to make the equipment function), the Department still treats you as leasing tangible personal property at retail — not as selling a nontaxable service. That is true even if your invoice is a single package price that doesn't separate "equipment" from "service."

Businesses that bundle a package price (no separate equipment/service line item)

Because the client's contracts don't segregate an equipment-rental fee from the overall event fee, the "inseparable link" rule in 86 Ill. Adm. Code 130.415(b)(1)(B) matters: if you don't separately state a service charge, or you don't give customers the option to rent the equipment alone without the added service charge, the whole bundled price is taxable gross receipts for retailers' occupation tax purposes. Separately stating a genuine, optional service charge (with a real option to lease without it) can keep that charge out of the tax base.

Businesses running events or renting equipment outside Illinois

Don't assume an out-of-state event automatically means no Illinois tax. The interstate-commerce exemption under 86 Ill. Adm. Code 130.605 requires the lessor to be contractually obligated to deliver the property to a point outside Illinois and retrieve it from outside Illinois at the end of the lease (not the lessee returning it), with the lessor shown as consignor/shipper on the bill of lading, and with documentation retained to prove bona fide delivery and retrieval. Absent that specific arrangement, delivering and using property in Illinois can still trigger Illinois Use Tax even if the customer's event or headquarters is elsewhere.

Accountants and tax professionals advising lessors on the 2025 changes

This GIL is a useful primer on how Article 75 of P.A. 103-592 restructured lease taxation (leases as sales/transfers, gross-receipts-based taxation of periodic lease payments, and the new sourcing rule at 35 ILCS 120/2-12(5.5)). But remember a GIL is non-binding: it directs the taxpayer to the applicable statutes and regulations rather than resolving disputed facts. The Department expressly declined to determine, on these facts alone, whether the client's arrangement is a lease or a service — that turns on facts about whether the on-site staff is a genuine "operator" the equipment can't function without.

Common questions

Q: Does Illinois still tax leases the old way (Use Tax paid up front by the lessor on its own purchase)?
A: Not for leases governed by the new regime. Effective January 1, 2025, Article 75 of Public Act 103-592 makes leases taxable as sales, with lessors collecting and remitting tax on their gross receipts from lease payments as those payments come in, for leases in effect, entered into, or renewed on or after that date.

Q: If I provide a supervisor with my rental equipment so my customer never has full control of it, is that still a taxable lease?
A: Generally yes, if the person is there only to supervise or maintain the equipment. The Department said such an arrangement "would be considered a retail rental of the equipment." It's a different result only if an operator is actually necessary to make the equipment function and does substantially more than maintain, inspect, or set up the property — in that scenario there may be no taxable transfer of possession or control at all.

Q: My contract doesn't separate an "equipment rental" charge from the total event price — is any of it exempt?
A: Not automatically. If service charges aren't separately stated, or if the customer has no real option to lease the equipment without paying those charges, the entire bundled price counts as taxable gross receipts under the "inseparable link" rule.

Q: Are equipment rentals for out-of-state events automatically free of Illinois tax?
A: No. The Department pointed to the specific interstate-commerce exemption, which requires the lessor (not the lessee) to be obligated to deliver the property to a point outside Illinois and to retrieve it from outside Illinois at the end of the lease, documented with the lessor as consignor/shipper. Simply holding an event out of state, without that delivery/retrieval arrangement, doesn't by itself avoid Illinois tax.

Q: How is the tax rate/sourcing determined for these leases?
A: For leases with recurring periodic payments, each payment sources to the property's primary location (usually an address the lessee supplies). For leases with a single, non-recurring payment, sourcing instead follows the normal retail-sale rules — based on where the retailer's predominant selling activities occur under the multi-factor test in 86 Ill. Adm. Code 270.115, not simply the vendor's address or the customer's event site.

Citations and references

Statutes:

• 35 ILCS 120/1, 120/2, 120/2-12(5.5), 120/7 (Retailers' Occupation Tax Act, as amended by Article 75 of P.A. 103-592)
• 35 ILCS 115/2, 115/3, 115/12 (Service Occupation Tax Act)
• Article 75 of Public Act 103-592 (2025 leasing overhaul)

Regulations:

• 86 Ill. Adm. Code 130.101, 130.415(b)(1)(B), 130.605 (Retailers' Occupation Tax; inseparable-link test; interstate commerce)
• 86 Ill. Adm. Code 140.101, 140.106, 140.108, 140.109 (Service Occupation Tax; de minimis servicemen)
• 86 Ill. Adm. Code 150.101, 150.130 (Use Tax; credit for Retailers' Occupation Tax paid)
• 86 Ill. Adm. Code 270.115, 280.115 (sourcing/situsing rules)
• 2 Ill. Adm. Code 1200.110, 1200.120 (PLR and GIL procedures)

Case law (true object / situs doctrine):

• Spagat v. Mahin, 50 Ill. 2d 183 (1971)
• Velten & Pulver, Inc. v. Department of Revenue, 29 Ill. 2d 524
• Dow Chemical Co. v. Department of Revenue, 26 Ill. 2d 283
• Kellogg Switchboard & Supply Corp. v. Department of Revenue, 14 Ill. 2d 434
• Ex-Cell-O Corp. v. McKibbin, 383 Ill. 316 (1943)
• Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130
• Automatic Voting Machs. v. Daley, 409 Ill. 438 (1951)
• Mahon v. Nudelman, 377 Ill. 331 (1941)
• Standard Oil Co. v. Dep't of Finance, 383 Ill. 136 (1943)
• Young v. Hulman, 39 Ill. 2d 219 (1968)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2025.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2025/st25-0012-gil.pdf

Original ruling text

ST 25-0012-GIL 03/14/2025 LEASING
Effective January 1, 2025, persons engaged in the business of leasing tangible
personal property at retail (“lessors”) in Illinois are subject to State and local
retailers’ occupation tax on the gross receipts from leases of tangible personal
property made in the course of business. See 35 ILCS 120/2 as amended by Article
75 of Public Act 103-592. (This is a GIL).
March 14, 2025
NAME
COMPANY
ADDRESS
EMAIL
Dear NAME:
This letter is in response to your email dated February 19, 2025, 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 https://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 email you have stated and made inquiry as follows:
We are a CPA firm and one of our clients, COMPANY1 is in the partyentertainment business. They provide/rent equipment as part of their
entertainment services, which are provided to colleges, universities,
municipalities, and corporations. The equipment provided comes with
supervision so that the equipment is never turned over to the control of the
customer, particularly for liabilities reasons. Their customer event contracts
do not segregate an “equipment rental” fee from the total fee for the event…in
other words it’s a package price, depending on the type of equipment the
customer wants. Their website WEBSITE provides more clarity.
Of course, the client is now asking about the new law that went into effect and
how they should go about charging IL sales tax on their equipment rental,

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assuming they are subject to the tax. Since they are providing supervision with
the equipment, we weren’t sure if they would be subject to the lease tax, or if
the state would view their business as more a service business than an
equipment rental business.
Assuming COMPANY1 is subject to the new tax, we had a few questions……
……Many of their customer events are outside of IL (UNIVERSITY,
UNIVERSITY1, etc.) which we assume should be considered out of state sales,
not subject to the IL sales tax?
…..For those clients that are having events based in IL, we assume that
COMPANY1 should charge the sales tax rate based on where COMPANY1 is
located, which is CITY, so TAX RATE%, or do we need to determine the tax rate
at each location where the event is taking place?
…..How would the client determine the amount subject to the IL tax if their
customer contract doesn’t allocate between rental equipment and services
provided?
Thank you in advance!
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, Use Tax is 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. Retailers’ Occupation Tax and Use Tax do not
apply to sales of service. The Service Occupation Tax Act (SOT) imposes a tax upon persons
engaged in this State in the business of making sales of service, based on tangible personal
property transferred incident to sales of service.
The provision of a service in Illinois that is not accompanied by the transfer of tangible
personal property is generally not subject to Retailers’ Occupation Tax or Service
Occupation Tax liability. The sale of service that is accompanied by a relatively insignificant
or incidental transfer of tangible personal property would be subject to liability under the
Service Occupation Tax Act.
Effective January 1, 2025, in accordance with the provisions of Article 75 of Public Act
103-592, persons engaged in the business of leasing tangible personal property at retail
(“lessors”) in Illinois are subject to State and local retailers’ occupation tax on the gross
receipts from leases of tangible personal property made in the course of business. See 35
ILCS 120/2. Persons engaged in the business of making sales of service are subject to State

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and local service occupation tax on all tangible personal property transferred by lease as an
incident of a sale of service. See 35 ILCS 115/3. A “lease” is defined as a transfer of the
possession or control of, the right to possess or control, or a license to use, but not title to,
tangible personal property for a fixed or indeterminate term for consideration, regardless of
the name by which the transaction is called, but does not include a lease entered into merely
as a security agreement that does not involve a transfer of possession or control from the
lessor to the lessee. On and after January 1, 2025, for purposes of State and local retailers’
occupation taxes, the term “sale” includes a lease. See 35 ILCS 120/1. For purposes of
State and local service occupation taxes, the term “transfer” includes a lease. See 35 ILCS
115/2. The tax applies to lease receipts received on or after January 1, 2025 for leases in
effect, entered into, or renewed on or after that date. For sales of service, the tax applies to
tangible personal property transferred by lease by persons engaged in the business of
making sales of service in which leases are in effect, entered into, or renewed on or after
January 1, 2025. The lessor must remit for each tax return period the tax applicable to lease
receipts received during that tax return period. See 35 ILCS 120/2 and 35 ILCS 115/3. For
retail leases and tangible personal property transferred by lease by persons engaged in the
business of making sales of service, tax is due at the lessor’s State and local retailers’
occupation tax or service occupation tax rate based on where the lease is sourced. See 35
ILCS 120/2-12(5.5) and 35 ILCS 115/12 incorporating 35 ILCS 120/2-12(5.5).
When the provision of tangible personal property includes an operator for the
tangible personal property for a fixed or indeterminate period, the arrangement may
constitute a lease taxable under the Retailers’ Occupation Tax Act. If the operator is
necessary for the equipment to perform as designed and is responsible for more than
maintaining, inspecting, or setting up the tangible personal property, the arrangement is not
a lease. When a purchaser enters into such an agreement to use tangible personal property
for a predetermined period, but an owner operator retains possession and control of the
tangible personal property, such agreement does not constitute a lease. The customer may
gain access to the benefit of the tangible personal property, but an owner operator remains
in possession and control of the property throughout its use under the agreement. In this
situation, the customer does not have the unfettered right to possess or control the tangible
personal property, and the transaction does not include any taxable transfer of tangible
personal property. However, if the provision of tangible personal property includes an agent
of the lessor to simply maintain, inspect, set up, or disassemble the tangible personal
property, such arrangement is subject to the provisions of Article 75 of Public Act 103-592.
True Object Test
If it is determined that the transaction includes a taxable transfer of tangible personal
property, it must be determined whether the transaction is a retail lease transaction or a
transfer by lease of tangible personal property incident to a sale of service. To determine
whether a transaction is a retail lease transaction or a transfer by lease of tangible personal

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property incident to a sale of service, the lessor must determine the true object or substance
of the transaction. “If the article sold has no value to the purchaser except as a result of
services rendered by the vendor and the transfer of the article to the purchaser is an actual
and necessary part of the service rendered, then the vendor is engaged in the business of
rendering service and not in the business of selling at retail. If the article sold is the
substance of the transaction and the service rendered is merely incidental to and an
inseparable part of the transfer to the purchaser of the article sold, then the vendor is
engaged in the business of selling at retail.” Spagat v. Mahin, 50 Ill. 2d 183 (1971); Velten &
Pulver, Inc. v. Department of Revenue, 29 Ill. 2d 524, 529; Dow Chemical Co. v. Department
of Revenue, 26 Ill. 2d 283, 285; Kellogg Switchboard & Supply Corp. v. Department of
Revenue, 14 Ill. 2d 434, 437. If the tangible personal property rented would have value even
without the services a company provides, the substance of the transaction is the tangible
personal property.
Sale of Service
If it is determined that the true object of the transaction is the service and that the
tangible personal property is transferred by lease incident to a sale of service, tax on the
transfer of the tangible personal property by lease is calculated under the Service
Occupation Tax Act. Under the Service Occupation Tax Act, businesses providing services
(i.e. servicemen) are taxed on tangible personal property transferred as an incident to sales
of service. See 86 Ill. Adm. Code 140.101. Tangible personal property that is transferred to
the service customer may result in either Service Occupation Tax liability or Use Tax liability
for the serviceman depending upon the serviceman’s activities. The serviceman’s liability
may be calculated in one of four ways:
1)

Service Occupation Tax on the separately stated selling price of tangible
personal property transferred incident to service;

2)

Service Occupation Tax on 50% of the servicemen’s entire bill;

3)

Service Occupation Tax on the servicemen’s cost price if the servicemen are
registered de minimis servicemen; or

4)

Use Tax on the servicemen’s cost price if the servicemen are de minimis and
are not otherwise required to be registered under Section 2a of the Retailers’
Occupation Tax Act.

Using the first method, servicemen may separately state the selling price of each
item transferred as a result of the sale of service. The tax is then calculated on the separately
stated selling price of the tangible personal property transferred. If the servicemen do not
separately state the selling price of the tangible personal property transferred, they must

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use 50% of the entire bill to the service customer as the tax base (the second method
described above). Both of the above methods provide that in no event may the tax base be
less than the servicemen’s cost price of the tangible personal property transferred. See 86
Ill. Adm. Code 140.106.
The third way servicemen may account for their tax liability only applies to de minimis
servicemen who have either chosen to be registered or are required to be registered because
they incur Retailers’ Occupation Tax liability with respect to a portion of their business. See
86 Ill. Adm. Code 140.109. Servicemen may qualify as de minimis if they determine that the
annual aggregate cost price of tangible personal property transferred as an incident of the
sale of service is less than 35% of the total annual gross receipts from service transactions
(75% in the case of pharmacists and persons engaged in graphics arts production).
Registered de minimis servicemen are authorized to pay Service Occupation Tax (which
includes local taxes) based upon their cost price of tangible personal property transferred
incident to the sale of service. Such servicemen should give suppliers resale certificates
and remit Service Occupation Tax using the Service Occupation Tax rates for their locations.
Such servicemen also collect a corresponding amount of Service Use Tax from their
customers, absent an exemption.
The final method of determining tax liability may be used by de minimis servicemen
that are not otherwise required to be registered under Section 2a of the Retailers’
Occupation Tax Act. Such de minimis servicemen handle their tax liability by paying Use Tax
to their suppliers. If their suppliers are not registered to collect and remit tax, the
servicemen must register, self-assess and remit Use Tax to the Department. The
servicemen are considered to be the end-users of the tangible personal property transferred
incident to service. Consequently, they are not authorized to collect a “tax” from the service
customers. See 86 Ill. Adm. Code 140.108.
Sale at Retail - Inseparable Link Between Sale and Service Charges
However, if the true object of the transaction is the lease or rental of tangible
personal property, any service charges, if inseparably linked to the lease or rental of the
tangible personal property, are part of the lessor’s costs of doing business and are
includable in the lessor’s taxable gross receipts. This is true even if the service charges are
separately stated on the agreement or bill between the lessor and its customers.
When an “inseparable link” exists between the lease of tangible personal property
and related service charges, including delivery charges, the related service charges are part
of the gross receipts subject to the Retailers’ Occupation Tax. See, for example, 86 Ill. Adm.
Code 130.415(b)(1)(B)(i). An inseparable link exists when (a) the service charges are not
separately identified to the lessee on the contract or invoice or (b) the service charges are
separately identified to the lessee on the contract or invoice, but the lessor does not offer

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the lessee the option to lease the property without the payment of service charges added to
the lease or rental price of an item (e.g., the lessor does not offer the lessee the option to
lease the tangible personal property separately from the related service, or the lessor does
not offer, or the lessee does not qualify for, a free service option). 86 Ill. Adm. Code
130.415(b)(1)(B)(ii). In contrast, if the lessee can rent or lease the tangible personal property
without payment of service charges to the lessor, then an inseparable link does not exist,
and the service charges should not be included in the lease or rental price of the tangible
personal property. 86 Ill. Adm. Code 130.415(b)(1)(B)(ii)-(iii).
The following example illustrates whether a service charge in a retail rental or lease
transaction constitutes an inseparable link to the rental or lease charges. A business offers
guided kayak tours that include the rental of a kayak for the one-hour tour duration. Renters
are encouraged to participate in the tour but are allowed to venture off on their own. The
business requires tour participants to use the provided rented kayaks. The business does
not offer rentals of kayaks independent of purchasing the tour. The kayak rental is the true
object of the transaction since the tour could not be done without the kayak, but the kayak
rental would still have value without the tour. The charge for the tour is inseparably linked
to the rental charges for the kayak, regardless of if they are separately stated, as you cannot
rent the kayak without the tour charge. As such, the entirety of the proceeds of the
transaction is includable in the business’s gross receipts and subject to tax. However, if the
business were to offer independent kayak rentals in addition to kayak tours, the charge for
the tour would not be inseparably linked to the rental charges for the kayak. In this instance,
if the business separately states the charge for kayak rental from the charge for the tour on
the business’s invoice, the charges for the tour would not be includable in the business’s
gross receipts for retailers’ occupation tax purposes and would be a nontaxable service
charge.
Sourcing
The lease of tangible personal property that is subject to the tax on leases under
Article 75 of Public Act 103-592 is sourced as follows:
i)

For a lease that requires recurring periodic payments and for which the
property is delivered to the lessee by the lessor, each periodic payment
is sourced to the primary property location for each period covered by
the payment. The primary property location shall be as indicated by an
address for the property provided by the lessee that is available to the
lessor from its records maintained in the ordinary course of business,
when use of this address does not constitute bad faith. The property
location is not altered by intermittent use at different locations, such
as use of business property that accompanies employees on business
trips and service calls.

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ii)

For all other leases, including a lease that does not require recurring
periodic payments and any lease for which the lessee takes
possession of the property at the lessor’s place of business, the
payment is sourced as otherwise provided under this Act for sales at
retail other than leases.

See 35 ILCS 120/2-12(5.5) as amended by Article 75 of Public Act 103-592.
A lease requires recurring periodic payments if the lease agreement for the property
provides for a fixed or indeterminate term and requires consideration to be broken into
multiple payments due over the course of multiple return periods. If a lease agreement is
fixed in duration and requires a single payment to be made in consideration for the lease of
a specified item or items, the lease does not require recurring periodic payments.
Sourcing – Retail Leases
For sales at retail, if a lease does not require recurring periodic payments, pursuant
to 35 ILCS 120/2-12(5.5), the payment is sourced as otherwise provided under the Retailers’
Occupation Tax Act. Because the tax is imposed on the retail business of selling and not on
specific sales, the jurisdiction in which the sale takes place is not necessarily the
jurisdiction where the retailers’ occupation tax is owed. Rather, it is the jurisdiction where
the seller is engaged in the business of selling that can impose the tax. Automatic Voting
Machs. v. Daley, 409 Ill. 438, 447 (1951) (“In short, the tax is imposed on the “occupation”
of the retailer and not upon the “sales” as such.”) (citing Mahon v. Nudelman, 377 Ill. 331
(1941) and Standard Oil Co. v. Dep’t of Finance, 383 Ill. 136 (1943)); see also Young v.
Hulman, 39 Ill. 2d 219, 225 (1968) (“the retailers occupational tax...imposes liability upon
the occupation of selling at retail and not on the sale itself”). See, for example, 86 Ill. Adm.
Code 270.115(b)(1). The Illinois Department of Revenue has created administrative rules
that govern the sourcing of local retailers’ occupation taxes. See, for example, 86 Ill. Adm.
Code 270.115. The rules provide that:
The occupation of selling is comprised of “the composite of many activities
extending from the preparation for, and the obtaining of, orders for goods to
the final consummation of the sale by the passing of title and payment of the
purchase price”. Ex-Cell-O Corp. v. McKibbin, 383 Ill. 316, 321 (1943). Thus,
establishing where “the taxable business of selling is being carried on”
requires a fact-specific inquiry into the composite of activities that comprise
the retailer’s business. Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130,
paragraph 32 (citing Ex-Cell-O Corp. v. McKibbin, 383 Ill. 316, 321-22 (1943)).
86 Ill. Adm. Code 270.115(b)(2).

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Some retailers are engaged in retail operations with selling activities in multiple
jurisdictions within the State, or in jurisdictions located in more than one state. The selling
activities that comprise these businesses “are as varied as the methods which men select
to carry on retail businesses.” Ex-Cell-O Corp. v. McKibbin, 383 Ill. 316, 321 (1943).
Consequently, “it is...not possible to prescribe by definition which of the many activities
must take place in [a jurisdiction] to constitute it an occupation conducted in [that
jurisdiction] . . . . It is necessary to determine each case according to the facts which reveal
the method by which the business was conducted.” Ex-Cell-O Corp. v. McKibbin, 383 Ill.
316, 321-22 (1943); see also Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130, paragraph 36.
See, for example, 86 Ill. Adm. Code 270.115(b)(3).
A seller incurs Retailers’ Occupation Tax in a given taxing jurisdiction if its
predominant and most important selling activities take place in that jurisdiction. Isolated or
limited business activities within a jurisdiction do not constitute engaging in the business of
selling in that jurisdiction when other more significant selling activities occur outside the
jurisdiction, and the business predominantly takes advantage of government services
provided by other jurisdictions. Ex-Cell-O Corp. v. McKibbin, 383 Ill. 316, 322- 23 (1943);
Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130, paragraphs 30 through 35. See, for example,
86 Ill. Adm. Code 270.115(b)(5). The Department’s regulations enumerate several “primary
selling activities” and “secondary selling activities” to aid in this inquiry, which are listed at
86 Ill. Adm. Code 270.115(c)(1) and (4). “Primary selling activities” include:
A)

Location of sales personnel exercising discretion and authority to
solicit customers on behalf of a seller and to bind the seller to the sale;

B)

Location where the seller takes action that binds it to the sale, which
may be acceptance of purchase orders, submission of offers subject
to unilateral acceptance by the buyer, or other actions that bind the
seller to that sale;

C)

The location where payment is tendered and received, or from which
invoices are issued with respect to each sale;

D)

Location of inventory if tangible personal property that is sold is in the
retailer’s inventory at the time of its sale or delivery; and

E)

The location of the retailer’s headquarters, which is the principal place
from which the business of selling tangible personal property is
directed or managed. In general, this is the place at which the offices
of the principal executives are located. When executive authority is
located in multiple jurisdictions, the place of daily operational decision
making is the headquarters.

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See, for example, 86 Ill. Adm. Code 270.115(c)(1). If three primary selling activities occur in
the same location, that is the jurisdiction where you are engaged in the business of selling.
If the primary selling activities occur in multiple jurisdictions, but no individual jurisdiction
has more than two primary selling activities, you must consider the listed secondary selling
activities to determine the jurisdiction where you are engaged in the business of selling.
“Secondary selling activities” include:
A)

Location where marketing and solicitation occur;

B)

Location where the seller engages in activities necessary to procure
goods for sale;

C)

Location of the retailer’s officers, executives or employees with
authority to set prices or determine other terms of sale if
determinations are made in a location different than that identified in
subsection (c)(1)(A);

D)

Location where purchase orders or other contractual documents are
received when purchase orders are accepted, processed or fulfilled in
a location or locations different from where they are received;

E)

Location where title passes; and

F)

Location where the retailer displays goods to prospective customers,
such as a showroom.

See 86 Ill. Adm. Code 270.115(c)(4).
Every retailer in this State must determine the taxing jurisdictions where it is engaged
in the business of selling with respect to each of its sales by applying the standards set forth
in Section 270.115(c), except when a retailer is engaged in particular selling activities
identified by a statute that specifies the taxing jurisdiction where retailers engaged in those
activities shall remit retailers’ occupation tax. See 86 Ill. Adm. Code 270.115(c). If you are
engaged in any special selling activity where your remittance of retailers’ occupation tax
would be directed by statute rather than these rules, please refer to the applicable statute.
Except as provided in subsection (d), a retailer that is not engaged in the business of
selling in a jurisdiction under subsection (c)(2) is engaged in the business of selling in the
jurisdiction where its inventory is located under subsection (c)(1)(D), or where its
headquarters is located under subsection (c)(1)(E), whichever jurisdiction is the location
where more selling activities occur, considering both primary and secondary selling

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activities. A retailer that is not engaged in the business of selling in a jurisdiction under
subsection (c)(2) or (c)(5) is presumed to be engaged in the business of selling at the location
of its headquarters absent clear and convincing evidence to the contrary. See 86 Ill. Adm.
Code 270.115(c)(5) and (6).
Sourcing – Sales of Service
For sales of service, if a transfer of tangible personal property by lease incident to a
sale of service does not require recurring periodic payments, pursuant to 35 ILCS 120/212(5.5), the payment is sourced as otherwise provided under the Service Occupation Tax
Act. If the Illinois Service Occupation Tax on a transaction is being remitted to the
Department by the serviceman, the serviceman shall also pay any applicable local service
occupation tax to the Department on the same transaction if such serviceman’s place of
business is located in a taxing jurisdiction which has adopted a local service occupation tax.
If a purchase order is accepted outside this State but the tangible personal property which
is transferred by lease incident to the sale of service is in the inventory of a serviceman
located within a jurisdiction with a locally imposed service occupation tax at the time of its
transfer by lease (or is subsequently produced in such a jurisdiction) then delivered in Illinois
to the service customer, the place where the property is located at the time of the transfer
by lease (or subsequent production in the jurisdiction) will determine where the serviceman
is engaged in business for local service occupation tax purposes with respect to such sale
of service. See 86 Ill. Adm. Code 280.115.
Interstate Commerce
Where tangible personal property is located in Illinois or subsequently produced in
Illinois at the time of its lease, and then delivered to the lessee in Illinois, the lessor is taxable
if the lease is at retail. 86 Ill. Adm. Code 130.605(a). The place at which the lease agreement
is negotiated and executed is immaterial. Further, the place at which the lessee resides is
also immaterial. 86 Ill. Adm. Code 130.605(a)(3).
If the lease occurs in Illinois, the lessee must pay the Use Tax to the lessor at the time
of purchase. The lessors are then allowed to reduce the amount of Use Tax they must remit
by the amount of Retailers’ Occupation Tax liability which they are required to and do pay to
the Department with respect to the same lease. See 86 Ill. Adm. Code 150.130. If the lessor
does not collect the Use Tax from the lessee for remittance to the Department, the lessee is
responsible for remitting the Use Tax directly to the Department. See 86 Ill. Adm. Code
150.130.
Mere possession in Illinois is considered a use. Consequently, if the lease occurs in
Illinois, the lessee must pay the Use Tax to the lessor. Please note that a lease that does not
require recurring periodic payments is taxable even though a lessee that receives physical

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possession of the property in this State immediately transports the property out of this State
for use outside the State. See 86 Ill. Adm. Code 130.605(a)(2). The State of Illinois has no
specific exemption for leases by foreign or domestic travelers if the property is delivered and
used in Illinois. Section 130.605 identifies several exceptions to this rule.
Section 130.605(c) states that the gross receipts from sales are not subject to tax
when a sale is made in which the seller is obligated, under the terms of an agreement with
the purchaser, to make delivery of the property from a point in this State to a point outside
this State, not to be returned to this State, provided that such delivery and retrieval are
actually made. In accordance with Article 75 of P.A. 103-592, leases are not subject to tax
when a lease is made in which the lessor is obligated, under the terms of an agreement with
the lessee, to make delivery of the property from a point in this State to a point outside this
State, not to be returned to this State by the lessee, and which property is to be retrieved by
the lessor from outside this State at the conclusion of the lease, provided that such delivery
and retrieval are actually made. Such leases are leases in interstate commerce and are
exempt from Illinois and local Retailers’ Occupation Tax. Even if the lessee arranges for the
common carrier or pays the carrier who is to make the delivery, the sale will still be exempt.
However, it is critical that the lessor is shown as the consignor or shipper on the bill of lading.
If the lessee is shown as either the consignor or the shipper, the exemption will not apply.
86 Ill. Adm. Code 130.605(d).
Consistent with Section 130.605(f), the lessor will be required to retain in their
records documentation to support any deductions taken on their tax returns. Such
documentation must demonstrate there was an agreement between the lessor and the
lessee for the lessor to deliver the tangible personal property from inside the State to a point
outside the State and that there was also a bona fide retrieval of the property by the lessor
from a point outside of the State back to inside the State at the conclusion of the lease. The
bona fide delivery to and retrieval from outside the State must be to the Department’s
satisfaction. Depending on the mode of delivery and retrieval, the most acceptable proofs
include:
1)

If shipped by common carrier, a waybill or bill of lading requiring delivery
outside the State and the same documentation for the return of the tangible
personal property showing origination outside the State and delivered to a
destination in the State;

2)

if sent by mail, an authorized receipt from the U.S. Post Office for articles sent
by registered mail, parcel post, ordinary mail or otherwise, showing the name
of the addressee, the point outside Illinois to which the property is mailed to
and mailed from for return, and the date of the mailings; if the receipt does not
comply with these requirements, other supporting evidence will be required;
or

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3)

if sent by lessor’s own transportation equipment, a trip sheet signed by the
person making delivery for the lessor and showing the name, address and
signature of the person to whom the goods were delivered and from whom the
goods were retrieved outside this State; or in lieu thereof an affidavit signed by
the lessor or the lessor’s representative, showing the name and address of the
lessor, the name and address of the lessee and the time and place of the
delivery and retrieval outside Illinois by the lessor; together with other
supporting data as required by Section 130.810 and 35 ILCS 120/7.

86 Ill. Adm. Code 130.605(f).
The same interstate commerce principles apply to transfers of tangible personal
property by lease as an incident of sales of service. The serviceman does not incur Service
Occupation Tax liability on property which he transfers by lease as an incident to a sale of
service under an agreement by which the serviceman is obligated to make physical delivery
of the goods from a point in this State to a point outside this State, not to be returned to this
State by the lessee, and which goods are to be retrieved by the serviceman from outside this
State at the conclusion of the lease, provided that such delivery and retrieval are actually
made. Such sales of service are deemed to be within the protection of the Commerce
Clause of the Constitution of the United States. To establish that the selling price of property
transferred by lease as an incident to any given sale of service is exempt because the
property is delivered by the serviceman from a point within this State to a point outside this
State and retrieved from a point outside this State under the terms of an agreement with the
lessee, the serviceman will be required to retain in its records, to support deductions taken
on its tax returns, proof which satisfies the Department that there was such an agreement,
bona fide delivery to, and bona fide retrieval from outside this State of the property
transferred by lease as an incident of the sale of service.
Generally, the rental of equipment for which the lessor provides a person only for
supervision or maintenance purposes would be considered a retail rental of the equipment.
As such, tax on the rental transaction would be analyzed as a retail lease, with the tax base
determined under an inseparable link analysis, and sourcing and interstate commerce
questions resolved under a retail lease analysis.
I hope this information is helpful. If you require additional information, please visit
our website at https://tax.illinois.gov/ or contact the Department’s Taxpayer Information
Division at 800-732-8866.
Very truly yours,

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Alexis K. Overstreet
Deputy General Counsel
AKO:sce