How did Illinois tax a vehicle lessor leasing vehicles to the U.S. government, and what exempt-entity rule could apply?

Plain-English summary

For a true vehicle lease, Illinois generally taxed the lessor's acquisition cost rather than the rental receipts, even when the U.S. government was the lessee. The requester would own, title, and register the vehicles while leasing them to the federal government.

The Department distinguished two lease types:

• A conditional sale—often shown by a nominal or one-dollar purchase option, or a guaranteed sale at the end—was treated as a retail sale. The lessor-retailer's receipts were subject to Retailers' Occupation Tax.
• A true lease generally had no buyout, or only a fair-market-value buyout. The lessor was treated as the end user and owed Use Tax on its cost price. Illinois imposed no tax on true-lease rental receipts, so the lessee incurred no sales-tax liability.

The exempt status of a lessee generally did not change the lessor's liability. But Illinois recognized two limited exemptions for a lessor's purchase of property leased to an entity with an active Illinois E number: one for exempt hospitals under Regulation 130.2011 and one for governmental bodies under Regulation 130.2012.

What this means for you

A vehicle lessor first needed to classify the agreement as a true lease or conditional sale. For a true lease to a governmental body, the lessor could then examine Regulation 130.2012, including the requirement that the governmental lessee have an active Illinois E number. The GIL did not decide whether the requester's proposed purchase-order and payment documentation satisfied that regulation.

Common questions

Q: Was tax imposed on true-lease rental receipts?
A: No. The letter says Illinois imposed no tax on rental receipts; the true-lease lessor generally owed Use Tax on its cost instead.

Q: Did federal-government status automatically remove the lessor's tax?
A: No. The lessee's exempt status generally did not affect the lessor, subject to the limited active-E-number governmental-body exemption.

Q: What if the lease had a nominal purchase option?
A: That generally indicated a conditional sale, making the lessor-retailer's receipts subject to Retailers' Occupation Tax.

Subject

Leasing

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-11-0044.pdf

Original ruling text

ST 11-0044-GIL 05/31/2011 LEASING
This letter references the limited exemptions for leasing tangible personal property to certain
exempt entities. See 86 Ill. Adm. Code 130.2011 and 130.2012. (This is a GIL.)

May 31, 2011

Dear Xxxxx:
This letter is in response to your letter dated May 19, 2011, 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:
ABC is in the process of leasing vehicles to the U.S. Government. The vehicles will be
owned, titled & registered in our name as Lessor. The U.S. Government will be listed
as the Lessee.
The U.S. Government does not provide exemption certificates but does provide a
Purchase Order and will be remitting payment via ACH or wire.
What is your state’s policy regarding the U.S. Government’s status? What type of
documentation do we need from the U.S. Government to be assured that they will be
allowed their exemption for a vehicle that they do not own......but are leasing?
Thank you for your assistance in this matter.

DEPARTMENT’S RESPONSE:
The State of Illinois taxes leases differently for Retailers’ Occupation Tax and Use Tax
purposes than the majority of other states. For Illinois sales tax purposes, there are two types of
leasing situations: conditional sales and true leases.

A conditional sale is usually characterized by a nominal or one dollar purchase option at the
close of the lease term. Stated otherwise, if 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.
Generally, the tax exempt status of lessees does not affect the tax liability of lessors. However,
please note that Illinois does have two exemptions for leases to entities that have active Illinois
exemption (E-numbers). The first exemption is for certain purchases of tangible personal property
by persons who are leasing that property to exempt hospitals that have an active E-number issued
by the Department. See the Department’s regulation at 86 Ill. Adm. Code 130.2011 for the
requirements regarding that exemption. The second exemption is for purchases of tangible personal
property by persons who are leasing that property to a governmental body that has an active Enumber issued by the Department. See the Department’s regulation at 86 Ill. Adm. Code 130.2012
for the requirements regarding that exemption.
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,

Terry D. Charlton
Senior Counsel, Sales & Excise Taxes

TDC:msk