Did leasing manufacturing equipment to an Illinois manufacturer preserve the machinery exemption, and who owed tax on a true lease?

Plain-English summary

A lessor's purchase of manufacturing equipment could remain exempt when the lessee-manufacturer used the equipment in a qualifying manner and the supplier received a complete exemption certificate. If the lessee's use did not qualify, the purchaser-lessor became liable for the previously exempt tax.

The GIL distinguished two lease forms. A true lease generally had no buyout, or only a fair-market-value option. The lessor was the end user and owed Use Tax on its cost; Illinois imposed no tax on rental receipts, so the lessee had no tax liability on those receipts. The lessor could not pass its obligation through as a tax, though the parties could privately agree to reimbursement.

A nominal or one-dollar purchase option, or a guaranteed sale at the outset, indicated a conditional sale. The lessor-retailer's receipts under that contract were subject to Retailers' Occupation Tax.

What this means for you

Start with the lease economics, then test the equipment's actual manufacturing use. A document called a lease may be a conditional sale, and a true-lease exemption depends on qualifying use and complete documentation.

Common questions

Q: Were true-lease rental receipts taxed under this GIL?
A: No. The lessor instead owed Use Tax on its cost unless an exemption applied.

Q: Could qualifying lessee-manufacturer use exempt the lessor's purchase?
A: Yes, with qualifying use and a proper exemption certificate.

Citations and references

• 86 Ill. Adm. Code 130.2010 and 130.220
• 86 Ill. Adm. Code 130.330(f) and (g)
• 86 Ill. Adm. Code 150.310(a)(3)
• 35 ILCS 120/2-10(14) and 105 ILCS 3-5(1), as printed in the GIL

Subject

Leasing

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2010.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2010/st-10-0028.pdf

Original ruling text

ST 10-0028-GIL 03/31/2010 LEASING
Information regarding sales tax liabilities in lease situations may be found at 86 Ill. Adm. Code
130.220 and 86 Ill. Adm. Code 130.2010. (This is a GIL.)

March 31, 2010

Dear Xxxxx:
This letter is in response to your letter dated January 20, 2010, in which you request
information. The Department issues two types of letter rulings. Private Letter Rulings (“PLRs”) are
issued by the Department in response to specific taxpayer inquiries concerning the application of a
tax statute or rule to a particular fact situation. A PLR is binding on the Department, but only as to the
taxpayer who is the subject of the request for ruling and only to the extent the facts recited in the PLR
are correct and complete. Persons seeking PLRs must comply with the procedures for PLRs found in
the Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General Information
Letter (“GIL”) is to direct taxpayers to Department regulations or other sources of information
regarding the topic about which they have inquired. A GIL is not a statement of Department policy
and is not binding on the Department. See 2 Ill. Adm. Code 1200.120. You may access our website
at www.tax.illinois.gov to review regulations, letter rulings and other types of information relevant to
your inquiry.
The nature of your inquiry and the information you have provided require that we respond with
a GIL. In your letter you have stated and made inquiry as follows:
We have been referred to your Department by a taxpayer services representative that
we reached by calling the taxpayer services phone number on the State website.
We are researching the sales tax implications of a wholesaler that either rents or leases
(via a financing lease) tax exempt manufacturing equipment to customers in Illinois.
This wholesaler is a Virginia based company that sells food packaging manufacturing
equipment directly to manufacturers in your state. Please advise regarding how renting
or leasing of this equipment may impact the tax exempt status. Please provide a copy
of the State Regulation that supports your advice or kindly direct us to a web-based
source for this information.

DEPARTMENT’S RESPONSE:
Although we cannot give you a specific answer in the form of a General Information Letter, we
hope you find the following helpful. 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 a lessor is 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. Persons who purchase items for resale under conditional sales contracts can avoid

paying tax to suppliers by providing certificates of resale that contain all the information set forth in 86
Ill. Adm. Code 130.1405. All receipts received by a lessor/retailer under a conditional sales contract
are subject to Retailers’ Occupation Tax. See 86 Ill. Adm. Code 130.2010.
A true lease generally has no buy out provision at the close of the lease. If a buy-out provision
does exist, it must be a fair market value buy-out option in order to maintain the character of the true
lease. Lessors of tangible personal property under true leases in Illinois are deemed end users of the
property to be leased. See 86 Ill. Adm. Code 130.220. 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. As stated above, in the case of a true lease, the lessors of the property being used in Illinois
would be the parties with Use Tax obligations. The lessors would either pay their suppliers, if their
suppliers were registered to collect Use Tax, or would self-assess and remit the tax to the
Department. If the lessors already paid taxes in another state with respect to the acquisition of the
tangible personal property, they would be exempt from Use Tax to the extent of the amount of such
tax properly due and paid in such other state. See subsection (a)(3) of 86 Ill. Adm. Code 150.310.
Under Illinois law, lessors may not “pass through” their tax obligation to the lessees as taxes.
However, lessors and lessees may make private contractual arrangements for a reimbursement of
the tax to be paid by the lessees. If lessors and lessees have made private agreements where the
lessees agree to reimburse the lessors for the amount of the tax paid, then the lessees are obligated
to fulfill the terms of the private contractual agreements.
Under the Retailers’ Occupation Tax Act and the Use Tax Act, machinery and equipment that
will be used primarily in the process of manufacturing or assembling tangible personal property for
wholesale or retail sale or lease is exempt from tax. 35 ILCS 120/2-10(14); 105 ILCS 3-5(1). For this
exemption to apply, the purchaser need not itself employ the exempt machinery or equipment in
manufacturing. If the purchaser leases that machinery or equipment to a lessee-manufacturer who
uses it in an exempt manner, the sale to the purchaser-lessor will be exempt from tax. A supplier
may exclude these sales from its taxable gross receipts provided the purchaser-lessor provides to the
supplier a properly completed exemption certificate. For the requirements for an exemption
certificate, see 86 Ill. Adm. Code at 130.330(g) and the Department’s Form ST-587. An exemption
certificate is sufficient as long as the information required by the rule is contained in the certificate.
Note, however, should the purchaser-lessor lease the machinery or equipment to a lessee who does
not use it in a manner that would qualify directly for the exemption, the purchaser-lessor will become
liable for the tax from which he was previously exempted. 86 Ill. Adm. Code 130.330(f).
You can find further information on the Department’s website listed below along with copies of
prior letter rulings and administrative rules.
I hope this information is helpful. If you require additional information, please visit our website
at www.tax.illinois.gov or contact the Department’s Taxpayer Information Division at (217) 782-3336.
Very truly yours,

Debra M. Boggess
Associate Counsel
DMB:msk