Does Illinois sales tax apply to lease payments or fees charged to a lessee, such as a vehicle lease disposition fee?

Plain-English summary

This Illinois Department of Revenue General Information Letter explains how Illinois taxes leases of tangible personal property — and it responds to a taxpayer who was charged a 7% "Disposition Fee" at the end of a vehicle lease and wanted to dispute it as an improper sales tax.

Illinois handles leases differently than most states. Instead of taxing the lease payments a lessee makes, Illinois treats the lessor as the end user of the property under a true lease. That means the lessor owes Illinois Use Tax on its own cost price when it buys the property to lease out. Because the tax is collected from the lessor up front on the purchase, Illinois imposes no additional tax on the lease receipts themselves, and the lessee incurs no Illinois tax liability on the lease payments.

Applying that rule to the taxpayer's situation, the Department noted that the 7% tax on the disposition fee appeared to be an Indiana sales tax, not an Illinois one. Because Illinois law doesn't create the tax the taxpayer was disputing, and the Department has no authority over Indiana's tax rules, it directed the taxpayer to contact the Indiana Department of Revenue instead.

As a GIL, this letter simply points the taxpayer to the governing regulation (86 Ill. Adm. Code 130.220) and general sales/use tax provisions — it is not a binding statement of Illinois Department of Revenue policy and doesn't resolve disputes about another state's tax.

What this means for you

Lessors of tangible personal property in Illinois

If you lease out tangible personal property (including vehicles) under a true lease in Illinois, you are treated as the end user of that property. You owe Illinois Use Tax on your cost price when you acquire the property, not on the rental payments you later collect from your lessees.

Lessees making lease payments

If you lease property in Illinois, your lease payments — and related fees such as a lease-end disposition fee — should not carry an Illinois sales or use tax charge, because Illinois does not tax lease receipts. If you see a sales tax charge on an Illinois lease bill, check whether it is actually being assessed under another state's law (as happened here with an Indiana rate) rather than Illinois's.

Accountants and tax professionals

This GIL is a useful pointer to 86 Ill. Adm. Code 130.220 for confirming Illinois's "lessor as end user" approach to true leases, distinguishing it from states that tax lease streams directly. Note that the Department expressly declined to opine on another state's tax (Indiana's), underscoring that GILs only address Illinois tax questions.

Common questions

Q: Does Illinois charge sales tax on my vehicle lease payments?
A: No. Illinois does not impose tax on lease receipts. Instead, the lessor pays Illinois Use Tax on its cost price when it purchases the property that it then leases out.

Q: Why was I charged a 7% tax on my lease disposition fee?
A: In the situation described in this letter, the Department found that the tax being applied appeared to be Indiana's sales tax rate, not an Illinois tax. The Illinois Department of Revenue could not address the applicability of Indiana tax law and directed the taxpayer to the Indiana Department of Revenue.

Q: Who owes tax on leased property in Illinois — the lessor or the lessee?
A: The lessor. Under 86 Ill. Adm. Code 130.220, lessors of tangible personal property under true leases in Illinois are deemed end users of that property and owe Use Tax on their cost price. Lessees do not incur Illinois tax liability on the lease.

Q: Is this letter binding on the Illinois Department of Revenue?
A: No. This is a General Information Letter (GIL), issued under 2 Ill. Adm. Code 1200.120. It merely directs the taxpayer to relevant regulations and is not a statement of Department policy or binding on the Department. A binding Private Letter Ruling (PLR) requires following the separate procedures in 2 Ill. Adm. Code 1200.110.

Q: Does this apply to all types of leases?
A: The letter addresses "true leases" of tangible personal property, citing 86 Ill. Adm. Code 130.220. Other lease structures (such as leases that are really installment sales) may be treated differently under Illinois regulations.

Citations and references

• 86 Ill. Adm. Code 130.220 (leases of tangible personal property; lessor deemed end user)
• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax Act imposition of tax)
• 86 Ill. Adm. Code 150.101 (Use Tax imposition)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedures)
• 2 Ill. Adm. Code 1200.120 (General Information Letters)

Subject

Leases

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2020.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2020/st20-0034-gil.pdf

Original ruling text

ST 20-0034-GIL 11/16/2020

LEASES

The State of Illinois taxes leases differently for Retailers’ Occupation Tax and Use Tax
purposes than the majority of other states. 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 lease receipts. Consequently, lessees incur no tax
liability. See 86 Ill. Adm. Code 130.220. (This is a GIL.)

November 16, 2020

Dear Xxxx:
This letter is in response to your letter dated January 24, 2019, in which you requested
information. We apologize for the delay in responding. 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:
RE: 7% Sales tax on Fees
Please see attached bill from VEHICLE MANUFACTURER FINANICAL SERVICES. In
accordance with my lease, I was charged a “Disposition Fee” on the 20XX VEHICLE
that was turned into DEF at the end of our lease.
After speaking with a representative from your CITY office, I was encouraged to write
this letter to dispute the 7% Sales Tax that is being charged on a “fee”, which is a nontaxable item in the State of Illinois as well as the State of STATE.
I appreciate your review and consideration, and look forward to your response.

DEPARTMENT’S RESPONSE:

ST 20-0034-GIL
Page 2
The 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. 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.
Please note the State of Illinois taxes leases differently for Retailers’ Occupation Tax and Use
Tax purposes than the majority of other states. 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 personal property located in Illinois, lessors owe Use Tax
on their cost price of such property. The State of Illinois imposes no tax on lease receipts.
Consequently, lessees incur no tax liability.
It appears, however, that the tax rate being applied is the Indiana Sales tax rate of 7%. The
Illinois Department of Revenue is unable to provide guidance on the applicability of Indiana’s sales
tax to the payment of a disposition fee at the termination of a motor vehicle lease. Please contact the
Indiana Department of Revenue on this matter.
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,

Samuel J Moore
Associate Counsel

SJM:rkn