Who owed Illinois tax when a company leased computer and audiovisual equipment and then re-leased it to customers?

Plain-English summary

A company leased laptops and audiovisual equipment from a vendor for seven days or less, then re-leased the equipment to customers for business meetings. It asked whether it owed tax on its lease from the vendor and whether it had to collect tax on the re-lease.

IDOR distinguished a conditional sale from a true lease. A lease with a nominal purchase option—or another guarantee that the property would be sold—was a conditional sale, making all receipts subject to Retailers' Occupation Tax.

A true lease generally had no buyout provision, or only a fair-market-value buyout. For a true lease, the original lessor was the end user and owed Use Tax on its cost of the property used in Illinois. Illinois imposed no tax on rental receipts, so lessees incurred no tax liability. A lessee that re-leased the property could make a private agreement to reimburse tax, but the legal incidence remained on the original lessor.

The letter excluded automobiles rented for one year or less from this general rule because they were governed by a separate tax.

What this means for you

Do not assume Illinois taxes the monthly or short-term rental payment. First determine whether the agreement is a true lease or a conditional sale. For a true equipment lease, the tax obligation described in this GIL rested on the original lessor's acquisition cost, not on downstream rental receipts.

Common questions

Did the re-leasing company owe tax merely because it re-leased the equipment? Not under the true-lease rules described in the letter.

Were the customer's rental payments taxed? IDOR said Illinois imposed no tax on true-lease rental receipts.

Could tax paid to another state reduce Illinois Use Tax? Yes, to the extent the other-state tax was properly due and paid.

Citations and references

• 86 Ill. Adm. Code 130.2010.
• 86 Ill. Adm. Code 150.310(a)(3).
• 35 ILCS 155/1 et seq.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2016.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2016/st-16-0003-gil.pdf

Original ruling text

ST 16-0003-GIL 01/07/2016 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.)

January 7, 2016

Dear Xxxxx:
This letter is in response to your letter dated November 4, 2015, 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:
As we discussed, this letter is to request a written ruling from your department
regarding the Illinois Retailers Occupation Tax associated with the facts and
circumstances described below:
FACTS:
Taxpayer ("Company T") leases computer equipment (e.g., laptops) and audio
visual equipment on a short term basis (i.e., typically seven days or less) from a vendor
("Vendor") and subsequently re-leases the equipment to it's customers ("Customers")
also on a short term basis of seven days or less. Company T leases the equipment to
it's Customers as part of a service to provide Customers with equipment for various
business meetings such as marketing events. Company T does not purchase the
equipment from it's Vendor.

ISSUES:
Does Company T owe sales/and or use tax when it leases the equipment from
it's Vendor? Also, is the re-lease by Company T to it's Customers subject to sales tax?
Analysis:
Illinois Administrative Code 86 Section 130.2010 provides that lessors who rent
or lease tangible personal property under bona fide agreements, are not in the business
of selling tangible personal property and are therefore not subject to sales tax.
However, the lessor is considered to be a user of the property and is subject to the
Illinois use tax when purchasing tangible personal property that they lease or rent to
others. Thus, Vendor may be subject to Illinois use tax if it purchases the equipment
from it's supplier. Company T would not be subject to Illinois use tax since it does not
purchase the equipment from it's Vendor but instead leases the equipment for re-lease
to Customers. The use tax does not apply when Company T leases the equipment to
it's Customers. In addition, the lease from Company T to Customers is not considered a
taxable service subject to Illinois sales tax.
Based on the above facts and circumstances and analysis, please provide
written verification that our conclusions regarding the appropriate sales and use tax (i.e.,
the Retailer Occupation Tax) treatment is correct and that Company T does not owe
sales and use tax when it leases equipment from Vendor, nor does it need to collect
sales tax on it's re-leases to Customers.
If you have any questions or require further information, please contact me at
(XXX) XXX-XXXX. Your attention to this matter is greatly appreciated.
DEPARTMENT’S RESPONSE:
Please note that 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 lessors are 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, thus making all
receipts 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. 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. See 86 Ill. Adm. Code 130.2010. However, lessors and
lessees may make private contractual arrangements for a reimbursement of the tax to be paid by the
lessees. If a lessee re-leases property, he may make similar contractual arrangements with another
party, but as a technical matter, the true incidence of the tax in Illinois leasing transactions is placed
on the original lessor.

The above guidelines are applicable to all true leases of tangible personal property in Illinois
except for automobiles leased under terms of one year or less, which are subject to the Automobile
Renting Occupation and Use Tax found at 35 ILCS 155/1 et seq.
As stated above, in the case of a true lease, the lessors of the property being used in Illinois
are the parties with Use Tax obligations. The lessors should either pay their suppliers, if their
suppliers are registered to collect Use Tax, or self-assess and remit the tax to the Department. If the
lessors have already paid tax in another state with respect to the acquisition of the tangible personal
property, they are exempt from Use Tax to the extent of the amount of such tax properly due and paid
in such other state. See 86 Ill. Adm. Code 150.310(a)(3).
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,

Cara Bishop
Associate Counsel
CB:bkl