How did Illinois tax equipment placed in a rental fleet, property bought for resale, and vehicles brought into Illinois?

Plain-English summary

Illinois generally taxed a true-lease lessor on the equipment's cost rather than on rental receipts. A true lease had no buyout or only a fair-market-value option. The lessor was the end user and owed Use Tax on cost price, while Illinois imposed no sales tax on the rental receipts. The lessor could not pass its liability through as "tax," although the parties could agree that the lessee would reimburse it.

A conditional sale—often shown by a nominal purchase option or a guaranteed end-of-term sale—was treated as a retail sale from the outset. The lessor-retailer's receipts were subject to Retailers' Occupation Tax.

For property actually bought for resale, a correct Certificate of Resale could support the exempt purchase, and the later retail sale was taxable. The certificate needed the regulatory seller, purchaser, item, signature, date, and number or out-of-state certification information.

Vehicles and trailers followed another rule. Titling or registering them in Illinois exercised taxable use. Illinois allowed credit against Use Tax for sales tax properly due and paid to another state, but not for interest or penalties. Short-term motor-vehicle rentals also fell under the separate Automobile Renting Occupation and Use Tax Act described in the letter.

What this means for you

Classify each arrangement before deciding who pays tax: true lease, conditional sale, or resale. Maintain resale certificates for inventory, purchase records for rental-fleet assets, and proof of tax properly paid to another state for vehicles transferred into Illinois. This GIL did not resolve every replacement-part, lubricant, rerental, or oil-and-gas-industry question in the request.

Common questions

Q: Was sales tax imposed on true-lease rental receipts?
A: No. The lessor generally owed Use Tax on its cost price instead.

Q: What if the lease guaranteed a sale or used a nominal buyout?
A: That generally indicated a conditional sale, making the receipts taxable to the lessor-retailer.

Q: Did prior tax paid to another state eliminate Illinois Use Tax?
A: Illinois allowed credit only to the extent of sales tax properly due and paid to the other state.

Subject

Miscellaneous

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2011.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2011/st-11-0022.pdf

Original ruling text

ST 11-0022-GIL 04/01/2011 MISCELLANEOUS
This letter discusses sales tax liabilities in lease situations and other issues. See 86 Ill. Adm.
Code 130.220 and 130.2010. (This is a GIL.)

April 1, 2011

Dear Xxxxx:
This letter is in response to your letter dated February 24, 2011, 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:
Our company has a branch in your state where we rent and sale [sic] tangible personal
property, such as pumps and compressors. Below is a list of specific question [sic] we
would like answered regarding whether we pay sales and use tax on the rent for rerents or purchase of some specific items as it relates to our business. Please reference
the ruling with the answer provided for us to refer to.
Do we pay sales tax on equipment we put into our rental fleet?
Do we pay sales tax on equipment we purchase for resale?
Do we pay sales tax on equipment that we rent for re-rent? Is there an
exemption that may apply to the oil and gas industry that we rent
equipment to?
Do we pay sales tax on replacement parts for repairs or service, such as
oil filters, air filters, and batteries, we purchase to put in our inventory and
take out when we service our equipment?
Do we pay sales tax on the parts we purchase to put on our equipment for
resale?

Do we pay sales tax on oil and lubricants that we purchase to service our
equipment when it comes off of rent or is it considered a ‘part’?
Do we pay sales tax on a new vehicle purchase?
Do we pay sales tax on registration of an auto or trailer?
Do we pay sales tax on registration of our fleet equipment?
Do we pay sales tax if we transfer an automobile from another state we
already paid sales tax to?
Please do not hesitate to call me if you have any questions or need further explanation.

DEPARTMENT’S RESPONSE:
Although we are unable to respond in the format requested, we hope the following general
information will be useful in making a determination on the appropriate tax liability for your company.
Retailers’ Occupation Tax and Use Tax
The Retailers’ Occupation Tax is what is commonly referred to in other locales as “sales” tax.
However, the Retailers’ Occupation Tax is not a sales tax, but rather an occupation tax. The
Retailers’ Occupation Tax is imposed on persons engaged in the business of selling tangible personal
property at retail. The complement of the Retailers’ Occupation Tax is the Use Tax, which is
essentially a privilege tax imposed upon the privilege of using, in Illinois, tangible personal property
purchased anywhere at retail. The current tax rate is 6.25% plus any local taxes if applicable.
In computing Retailers’ Occupation Tax liability, no deductions shall be made by a taxpayer
from gross receipts or selling prices on account of the cost of property sold, the cost of materials
used, labor or service costs, idle time charges, incoming freight or transportation costs, overhead
costs, processing charges, clerk hire or salesmen’s commissions, interest paid by the seller, or any
other expenses whatsoever. Costs of doing business are an element of the retailer’s gross receipts
subject to tax, even if separately stated on the bill to the customer. See 86 Ill. Adm. Code 130.410.
Rentals and Leases
The renting of a motor vehicle for a period of one year or less is subject to the Automobile
Renting Occupation and Use Tax Act at the rate of 5%. See 35 ILCS 155/1 et seq. If a person rents
motor vehicles of the second division that are of the van configuration designed for the transportation
of not less than 7 nor more than 16 passengers, as defined in Section 1-146 of the Illinois Vehicle
Code, then that person is subject to the Automobile Renting Occupation and Use Tax Act.
With respect to the rental of items other than motor vehicles for any period of time and the
rental of motor vehicles for a period greater than one year, 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.
Sale for Resale
When a person purchases items of tangible personal property with the intention of reselling
them to purchasers for use or consumption, that person engages in making retail sales of tangible
personal property. This makes the initial purchase a purchase for resale, and the subsequent sale is
a taxable sale at retail subject to Illinois Retailers' Occupation and Use Tax liabilities. See 86 Ill. Adm.
Code 130.201 and 130.210.
The Illinois Retailers’ Occupation Tax Act imposes a tax upon persons engaged in this State in
the business of selling tangible personal property to purchasers for use or consumption. See 86 Ill.
Adm. Code 130.101. The tax is measured by the seller's gross receipts from retail sales made in the
course of such business. "Gross receipts" means the total selling price or the amount of such sales.
The retailer must pay Retailers' Occupation Tax to the Department based upon its gross receipts, or
actual amount received, from the sale of the tangible personal property.
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 35 ILCS 105/3; 86 Ill. Adm.
Code 150.101. These taxes comprise what is commonly known as "sales" tax in Illinois. If the
purchases occur in Illinois, the purchasers must pay the Use Tax to the retailer at the time of
purchase. The retailers are then allowed to retain the amount of Use Tax paid to reimburse
themselves for their Retailers' Occupation Tax liability incurred on those sales. If the retailer does not
collect the Use Tax from the purchaser for remittance to the Department, the purchaser is responsible
for remitting the Use Tax directly to the Department. See 86 Ill. Adm. Code 150.130.
The resale exemption is applicable when making sales to a purchaser who will in turn sell the
tangible personal property. For general information regarding resale certificates, the Department’s
regulation for resale certificates, “Seller's Responsibility to Obtain Certificates of Resale and

Requirements for Certificates of Resale,” is found at 86 Ill. Adm. Code 130.1405. A Certificate of
Resale is a statement signed by the purchaser that the property purchased by him is purchased for
purposes of resale. Provided that this statement is correct, the Department will accept Certificates of
Resale as prima facie proof that sales covered thereby were made for resale.
In addition to the statement, a Certificate of Resale must contain:
1)
2)
3)
4)
5)

the seller's name and address;
the purchaser's name and address;
a description of the items being purchased for resale;
purchaser's signature, or the signature of an authorized employee or agent of the
purchaser, and date of signing;
Registration Number, Resale Number, or Certification of Resale to out-of-State
purchaser.

The obligations of a seller with respect to accepting a Certificate of Resale were addressed in
Rock Island Tobacco and Specialty Company v. Illinois Department of Revenue, 87 Ill.App.3d 476,
409 N.E.2d 136, 42 Ill. Dec. 641 (3rd Dist. 1980). The Rock Island court held that when a retailer
obtains a proper Certificate of Resale that contains a registration or resale number that is valid on the
date it is given, the retailer’s liability is at an end. If the purchaser uses that item himself or herself
(i.e., it was not purchased for resale), the Department will proceed against the purchaser, not the
retailer, provided the above stated conditions are met. The purchaser’s registration or reseller number
can be verified at the Department’s website by clicking on the “Tax registration inquiry” box.
Failure to present an active registration number or resale number and a certification to the
seller that a sale is for resale creates a presumption that a sale is not for resale. This presumption
may be rebutted by other evidence that all of the seller’s sales are sales for resale, or that a particular
sale is a sale for resale. For example, other evidence that might be used to document a sale for
resale, when a registration number or resale number and certification to the seller are not provided,
could include an invoice from the purchaser to his customer showing that the item was actually
resold, along with a statement from the purchaser explaining why it had not obtained a resale number
and certifying that the purchase was a purchase for resale in Illinois. The risk run by companies in
accepting such a certification and the risk run by purchasers in providing such a certification is that an
Illinois auditor is more likely to require that more information be provided as evidence that the
particular sale was, in fact, a sale for resale.
Vehicle Use Tax
Please be advised that when a person registers or titles a vehicle in Illinois, Illinois Use Tax is
due. The Use Tax is imposed on the privilege of using in this State tangible personal property
purchased anywhere at retail from a retailer, 35 ILCS 105/3. By registering a trailer in Illinois, a
person exercises a power over it in Illinois that constitutes a “use” under the provisions of the Use Tax
Act, 35 ILCS 105/1 et seq., and Illinois Use Tax is properly due.
Illinois allows a credit to taxpayers against their Illinois Use Tax liability when they have
already paid sales tax on tangible personal property that was properly due to another State. This
credit is only allowed for tax and cannot apply to any interest or penalty paid to another State.
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