If a company leases computers to a sublessor who in turn leases them to a government agency, and the computers pass in and out of Illinois warehouses for provisioning and reshipping, when is Illinois Use Tax owed?

Plain-English summary

A company ("COMPANY1") leased laptop computers to an affiliate ("COMPANY2"), which in turn subleased the same laptops to a government agency under a multi-year "Device as a Service" contract. Devices moved back and forth between Illinois and other states as COMPANY2 provisioned them (wiped and reloaded software, packaged them with accessories, tracked and shipped them) before and after each deployment to the agency. COMPANY1 and COMPANY2 jointly asked the Illinois Department of Revenue to rule on how Use Tax applied to this shuffling of devices, under two different exemptions.

On the government lease exemption: the Department rejected it. Illinois's exemption for property leased to a governmental body (35 ILCS 105/3-5(23)) only protects a lessor who purchases property and leases it directly to a governmental body with an active exemption number. Here, COMPANY1 leased to COMPANY2, and it was COMPANY2 -- not COMPANY1 -- that subleased to the government agency. Because COMPANY1 was one contractual step removed from the government, it could not claim the exemption.

On the temporary storage exemption (35 ILCS 105/3-55(e)): the Department separated the devices into four fact groups based on their travel history and ruled differently on each:

• Group 1 (delivered to Illinois, provisioned, then shipped to the agency outside Illinois, never returning) qualified for the exemption -- no Use Tax was due.
• Group 2 (delivered to Illinois, shipped out, then returned to Illinois for reprovisioning and reshipped out again) did NOT qualify, because the devices came back to Illinois a second time. Use Tax was owed on their depreciated value as of the date they returned.
• Group 3 (delivered to Illinois, shipped out, then returned to Illinois where COMPANY2 purchased and quickly resold them to a third party) also did NOT qualify. The Department held that storage in Illinois is a taxable use regardless of the purpose of the storage or what happens to the property afterward, so Use Tax was owed on the depreciated value at the time of return.
• Group 4 (delivered to COMPANY2 outside Illinois, shipped to the agency outside Illinois, then routed through Illinois just once for reprovisioning before reshipping outside Illinois again, never returning) DID qualify, because that single pass through Illinois was the only Illinois storage in the device's history.

The dividing line the Department drew: temporary storage in Illinois is exempt only if it is a single, one-time stopover before the property is used solely outside Illinois for good. A second trip back to Illinois -- even briefly, even for the same kind of reprocessing -- uses up the exemption and triggers Use Tax on the property's depreciated value at that point.

What this means for you

Equipment lessors and leasing companies

If you buy or manufacture equipment outside Illinois and route it through an Illinois warehouse for processing (provisioning, kitting, relabeling, repackaging) before shipping it out for use solely outside the state, that one-time stopover can qualify for the temporary storage exemption -- so no Use Tax is due. But if the equipment later comes back to Illinois for any reason (returned by the end user, brought back for reprocessing, or held pending resale), that second Illinois stay is not exempt. Use Tax becomes due at that point, calculated on the property's depreciated value, not its original cost.

Companies leasing to government agencies through a sublessor structure

The Use Tax exemption for property leased to a governmental body only protects the party that purchases the property AND leases it directly to the government entity holding an active Illinois exemption number. If you lease equipment to an intermediate company that then subleases it to the government, you are not the direct lessor to the government and cannot claim this exemption -- even if the equipment's ultimate destination and use is a government contract.

Accountants and tax professionals advising on multi-state equipment logistics

This ruling is a practical guide to applying Shared Imaging, LLC v. Hamer to complex, high-volume leasing operations with devices crisscrossing state lines. The key test: count how many times the property is stored in Illinois. One qualifying pass-through is exempt; any subsequent return to Illinois is a new taxable event valued at depreciated fair market value as of the return date. Track each unit's individual movement history, because the same batch of devices split into subgroups can have different tax outcomes depending on whether and how many times each unit came back to Illinois.

Common questions

Q: Does leasing equipment to a company that then leases it to a government agency qualify for Illinois's government lease exemption?
A: No. The exemption in 35 ILCS 105/3-5(23) requires the lessor claiming it to be the one who purchases the property and leases it directly to the governmental body. A sublessor arrangement -- where the taxpayer leases to an intermediate company that in turn subleases to the government -- does not qualify, even though the property is ultimately used by the government.

Q: If I temporarily store out-of-state equipment in Illinois before shipping it out for use elsewhere, do I owe Use Tax?
A: Not if that Illinois stopover is the property's only time in Illinois and it is then used solely outside the state (including being processed, packaged, or altered while here). That is the classic case for the temporary storage exemption under 35 ILCS 105/3-55(e).

Q: What happens if the equipment later comes back to Illinois?
A: A second return to Illinois is not covered by the temporary storage exemption, even if it's brief and for the same kind of reprocessing as before. Use Tax becomes due at that point, based on the property's depreciated value (using straight-line depreciation for the time it was outside Illinois), not its original purchase price.

Q: Does it matter if the equipment comes back to Illinois to be sold rather than used?
A: No. The Department held that storage itself is a taxable use, regardless of why the property is being stored or what ultimately happens to it. Devices brought back to Illinois pending resale to a third party were still subject to Use Tax on their depreciated value, the same as devices brought back for reprocessing.

Q: Can I rely on this ruling for my own leasing arrangement?
A: No. This is a Private Letter Ruling binding on the Department only as to the taxpayer who requested it, and only to the extent the facts described were correct and complete. It illustrates how the Department applies the government lease exemption and the temporary storage exemption to multi-state leasing logistics, but a different fact pattern could produce a different result.

Citations and references

Statutes and regulations:

• 35 ILCS 105/3-5(23) (Use Tax exemption for property leased to a governmental body)
• 35 ILCS 105/3-55(e) (Use Tax temporary storage exemption)
• 35 ILCS 120/2-5(37) (parallel Retailers' Occupation Tax exemption for leases to exempt governmental bodies)
• 86 Ill. Adm. Code 130.2010(b), 150.305(e) (lessor's Use Tax liability on property purchased for lease)
• 86 Ill. Adm. Code 150.310(a)(4), (c) (temporary storage exemption regulation)
• 86 Ill. Adm. Code 130.2012, 150.332 (regulations implementing the government lease exemption)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedures)

Cases and prior rulings:

• Shared Imaging, LLC v. Hamer, 2017 IL App (1st) 152817, 84 N.E.3d 398 (temporary storage exemption is limited to a single Illinois exempt use; a later return to Illinois triggers Use Tax on depreciated value)
• Nutrition Headquarters, Inc. v. Department of Revenue, 106 Ill. 2d 58 (1985) (altering/processing property in Illinois before shipping it solely outside Illinois can still qualify for temporary storage exemption)
• Continental Illinois Leasing Corp. v. Department of Revenue, 108 Ill. App. 3d 583 (1st Dist. 1982) (a lessee's exempt status does not shift Use Tax liability away from the lessor)
• PLR ST-15-0016 (Nov. 13, 2015) (prior Department ruling that provisioning/kitting-type processing in an Illinois warehouse can qualify as temporary storage)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2021.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2021/st21-0003-plr.pdf

Original ruling text

ST 21-0003 04/08/2021 USE TAX
This letter discusses leases to governmental bodies and the temporary storage
exemption. See 35 ILCS 105/3-5(23) and 3-55(e). (This is a PLR.)
April 8, 2021
Dear NAME:
This letter is in response to your letter dated December 14, 2020, 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.
Review of your request disclosed that all the information described in paragraphs
1 through 8 of Section 1200.110 appears to be contained in your request. This Private
Letter Ruling will bind the Department only with respect to COMPANY1, for the issue or
issues presented in this ruling, and is subject to the provisions of subsection (e) of
Section 1200.110 governing expiration of Private Letter Rulings. A private letter ruling
on behalf of multiple taxpayers will not be issued with two exceptions, neither of which
apply. 2 Ill. Adm. Code 1200.110(a)(3)(A). Issuance of this ruling is conditioned upon
the understanding that neither COMPANY1, nor a related taxpayer is currently under
audit or involved in litigation concerning the issues that are the subject of this ruling
request. In your letter you have stated and made inquiry as follows:
The purpose of this letter (“Letter”) is to request a private letting ruling
under 86 Ill. Admin. Code § 1200.110 on behalf of COMPANY1
(“COMPANY1”) and COMPANY2 (“COMPANY2”) on which COMPANY1
and COMPANY2 (collectively, the “Parties”) may rely. Specifically, the
parties request a ruling that the lease by COMPANY1 of certain laptop
computers to COMPANY2 that COMPANY2 in turn leased to a
GOVERNMENT AGENCY (“the AGENCY”) under a Device as a Service
agreement was exempt from Illinois Use Tax by reason of either or both of
the temporary storage exemption or the exemption for lease to a
government.
Neither COMPANY1 nor COMPANY2 has pending any sales or use tax
audits or litigation with the Illinois Department of Revenue (the
“Department”) for the pertinent periods.

COMPANY1
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April 8, 2021

Powers of attorney authorizing the undersigned to represent each of
COMPANY1 and COMPANY2 are attached. This request pertains only to
the periods September 20XX – Current.
FACTS
The COMPANY1 / COMPANY2 Agreement
On September 26, 20XX, COMPANY3 as lessor and COMPANY2 as
lessee entered into a Master Lease Agreement (the “MLA”, a redacted
copy of which is attached as Exhibit 1) for the lease of laptop computers
that COMPANY2 in turn leased to the AGENCY under the terms of a
preexisting agreement with AGENCY as described below.
Before
performing on the lease, COMPANY3 assigned the lease to its affiliate,
COMPANY1. The laptops are referred to as “Products” in the MLA and as
“Devices” in the AGENCY Agreement (as defined below). We will use the
term Product when referring to the MLA and Devices when referring to the
AGENCY Agreement. In all events, those terms refer to the same items.
COMPANY1 leased the Products to COMPANY2 under the MLA pursuant
to a schedule in the form attached hereto as Exhibit 2 (the “Schedule”).
The Schedule provides for a primary lease term of 12 months, at the end
of which COMPANY2 could purchase the Product at fair market value (at
a flat specified price per unit), renew the lease term on a month-to-month
basis at a flat specified price per month, or return the Product to
COMPANY1 no later than the end of the twelfth month. Each Schedule
specifies, “Lessee represents and warrants that the Products are being
used by the lessee in fulfillment of its obligations as the Prime Contractor
on a contract (“Prime Contract”) with the GOVERNMENT.
COMPANY1 delivered approximately 60 percent of the Product to
COMPANY2 at a warehouse in Illinois and delivered the balance to
COMPANY2 at a warehouse in STATE1.
The AGENCY / COMPANY2 Agreement
On June 28, 20YY, COMPANY2 and AGENCY entered into an
agreement, styled a Device as a Service (“dDaaS”) Agreement (the
“AGENCY Agreement”), pursuant to which COMPANY2 leased laptop
computers and mobile Devices and provided the services described below
to AGENCY for purposes of a project. The initial term of the Agreement
was June 28, 20YY through June 30, 20XX. Subsequent to the initial
contract award, COMPANY2 and AGENCY modified the AGENCY

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Agreement approximately 21 times (including, most recently, on July 31,
20ZZ), extending the term through October 31, 20ZZ. Redacted copies of
the AGENCY Agreement and the amendments thereto are attached as
Exhibits 3-26.
The AGENCY agreement requires COMPANY2 to perform six separate
tasks, each of which is separately invoiced and the charge for each of
which is computed in a different manner (a sample invoice is attached as
Exhibit 27). The six tasks are as follows:
Task 1: Device Provisioning and Kitting
Task 2: Cellular Network Services
Task 3: Logistics
Task 4: Mobile Device Management
Task 5: Planning and Management
Task 6: Ongoing Support
Task 1: Device Provisioning and Kitting. “Provisioning” consists of the
acquisition of computers, smartphones, and tablets that meet prescribed
technical specifications, wiping preexisting software from those Devices,
loading software provided by AGENCY (including Mobile Device
Management (“MDM”) software that allows for the Devices to be tracked
and for software updates to be downloaded), installing and activating SIM
cards in all smartphones and charging all smartphones. “Kitting” consists
of placing into a kit box the device, wall adapter and power cable, car
charger, earbuds, case, additional accessories upon request, and enduser documentation and placing a printed label on the box. In addition,
Kitting requires that each Device be fitted with a physical tracking device.
Finally, upon AGENCY’S return of the Device, COMPANY2 is required to
perform a device sanitization and factory reset.
Task 2: Cellular Network Services. COMPANY2 is required to arrange for
nationwide cellular services with one or more carriers to provide service to
the Devices.
Task 3: Logistics. COMPANY2 is required to ship all Devices to locations
specified by AGENCY, including AGENCY Headquarters, Regional
Centers, Area Offices, Data Capture Centers, the CENTER, and select
employee homes. COMPANY2 is also required to implement an asset
management plan that includes end-to-end location and status tracking of
all mobile Devices, provide a project dashboard for AGENCY, perform
troubleshooting, track and report on inventories, and ensure secure
storage and handling of Devices. COMPANY2 is also required to provide
for return shipping at the end of the usage period.

COMPANY1
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April 8, 2021

Task 4: Mobile Device Management. COMPANY2 is required to supply
an MDM solution that can support up to approximately 500,000 Devices,
operate and maintain the MDM solution, pushing updates when directed
by AGENCY, and develop and maintain a Mobile Device Management
plan.
Task 5: Planning and Management. COMPANY2 is required to develop a
project management plan consistent with best practices, including status
reports, subcontractor management, risk management, quality
management, and program management reviews.
Task 6: Ongoing Support. Ongoing support includes holding a kick-off
meeting, providing a project dashboard, compliance with technical
directives, risk management, change control, integration support, quality
management, technology refresh, shipping analysis and support, logistics
planning and support, provision of an optional secure messaging system,
and help desk support.
Payments to COMPANY2
COMPANY2 charges a separate fixed price per unit for each of Tasks 1 –
4 (there is an upfront per unit charge for Tasks 1 and 3 and monthly per
unit charges for Tasks 2 and 4). COMPANY2 charges a flat monthly fee
for Task 5 and charges for Task 6 on a time and materials basis. The
charges for each task are separately stated on each invoice. COMPANY2
records the payments for the Devices as leasing revenue, the kits and
accessories as sales revenue, and all other payments as service revenue.
The lease revenue constitutes the vast majority of the total revenue under
the Agreement.
Delivery and Use of Devices
In Q4 20XX and Q1 20ZZ, COMPANY2 took delivery of 56,379 Devices
from COMPANY1. 1 The particular Devices were all laptop computers.
COMPANY1 delivered 36,162 2 of the Devices to COMPANY2 in Illinois
and the balance to COMPANY2 in STATE1.
COMPANY2, after
provisioning and kitting the Devices it received in Illinois, shipped
approximately 95.5% of them to AGENCY outside Illinois. COMPANY2
Substantially all of the Devices were delivered in Q1 20ZZ.
41 of these devices never left COMPANY2’s warehouse. No ruling is requested with respect to these 41 devices.
In addition, 143 of the Devices were received prior to execution of the DFS MLA in September 20XX. No ruling is
requested with respect to those 143 Devices. In addition, 1,596 Devices were shipped by COMPANY2 to
AGENCY at Illinois locations.
1
2

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April 8, 2021
shipped the devices out to AGENCY on a rolling basis, with approximately
93% of the Devices leaving COMPANY2’s warehouse within
approximately 6 months of the date COMPANY2 received the Devices
from COMPANY1.
In Q4 20ZZ AGENCY returned the Devices to COMPANY2 at a third party
facility in STATE2 where they were sanitized. COMPANY2 then exercised
its option under the COMPANY1 MLA to purchase 2l,354 of the Devices,
and, in December 20ZZ while those 21,354 Devices were still outside
Illinois, COMPANY2 sold them to a third-party reseller. In addition,
COMPANY2 brought 2,400 devices from STATE2 back to Illinois (1,411 of
which it had initially received in Illinois and 989 of which it had initially
received in STATE1) with the intent to exercise its purchase option and
resell those Devices to a third-party reseller, which in fact COMPANY2 did
shortly after those Devices returned to Illinois. COMPANY2 brought an
additional 1,200 devices from STATE2 to STATE1 where it exercised its
purchase right and then resold the devices to a third-party reseller.
The remaining 31,425 Devices were returned to COMPANY2 facilities in
Illinois and STATE1 in Q4 20ZZ – with 18,838 Devices returned to Illinois
and the balance of 12,587 going to STATE1 – to be reimaged,
reprovisioned, and rekitted to AGENCY specifications. COMPANY2
reshipped those Devices to AGENCY at various locations inside and
outside Illinois in Q1 20WW. Because of the term of use of the Devices
re-shipped to AGENCY would exceed the initial 12-month lease term
under the MLA with COMPANY1, COMPANY2 renegotiated the
COMPANY1 lease to extend the term with COMPANY1 by 7 months
rather than pay the monthly amount specified in the MLA for exceeding
the initial 12-month lease term. A redacted copy of the renegotiated
agreement is attached hereto as Exhibit 28.
Of the 18,838 Devices that were returned to COMPANY2 in Illinois for
reprovisioning and rekitting, COMPANY2 originally had received 12,769 3
from COMPANY1 in Illinois and 6,069 from COMPANY1 in STATE1. 4
COMPANY2 is able to track the depreciation on each device. Please see
the chart attached as Appendix A summarizing the locations of the
Devices at COMPANY2 facilities.
Of these 12,769 Devices, 6 had been previously shipped by COMPANY2 to AGENCY in Illinois.
Of the 6,069 Devices that COMPANY1 originally delivered in STATE1 and that came back to Illinois for
AGENCY reuse, 43 were then shipped by COMPANY2 to AGENCY in Illinois. Of the devices that COMPANY1
first delivered to COMPANY2 in Illinois and that came back to STATE1 for AGENCY reuse, 71 were then shipped
by COMPANY2 to AGENCY in Illinois (1 of the 71 had been shipped by COMPANY2 to AGENCY in Illinois in
first use). Of the Devices that were first delivered by COMPANY1 to COMPANY2 in STATE1 and that came back
to STATE1 for AGENCY reuse, COMPANY2 shipped 45 to AGENCY in Illinois.
3
4

COMPANY1
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April 8, 2021
COMPANY2 expects to purchase from COMPANY1 for resale the Devices
reshipped to AGENCY in Q3 20WW. The Devices will be shipped to
COMPANY2 in STATE1. The Devices will then be sanitized and sold to a
third party reseller.
Use Tax Payments
COMPANY1 self-assessed and remitted Illinois use tax on its returns for
January, April, June, July, and August 20ZZ for all Devices it delivered to
COMPANY2 in Illinois.
COMPANY2 believes COMPANY1 did so
improperly and that Use Tax is owed, if at all, only as described below.
EXPLANATION OF GROUNDS TO SUPPORT REQUEST
Legal Authorities
Generally, for purposes of the Retailers’ Occupation Tax Act (the “ROT
Act,” 35 ILCS 120/1, et seq.) and the Use Tax Act (35 ILCS 105/1, et
seq.), a lessor is subject to Use Tax when purchasing tangible personal
property for rent or lease to others. 86 Ill. Adm. Code (“Reg”) §§
130.2010(b) and 150.305(e). 35 ILCS 120/2-5(37) exempts from ROT
“personal property sold to a lessor who leases the property, under a lease
of one year or longer executed or in effect at the time of the purchase, to a
governmental body that has been issued an active tax exemption
identification number by the Department under Section 1g of this Act.”
Similarly, 35 ILCS 105/3-5(23) exempts from Use Tax –
[p]ersonal property purchased by a lessor who leases the property,
under a lease of one year or longer executed or in effect at the time
the lessor would otherwise be subject to the tax imposed by this
Act, to a governmental body that has been issued an active sales
tax exemption identification number by the Department under
Section 1g of the Retailers’ Occupation Tax Act. If the property is
leased in a manner that does not qualify for this exemption or used
in any other non-exempt manner, the lessor shall be liable for the
tax imposed under this Act or the Service Use Tax Act, as the case
may be, based on the fair market value of the property at the time
the non-qualifying use occurs.”
Section 3-55(e) of the Use Tax Act exempts –
the temporary storage, in this State, of tangible personal property
that is acquired outside this State and that, after being brought into
this State and stored here temporarily, is used solely outside this

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State or is physically attached to or incorporated into other tangible
personal property that is used solely outside this State, or is altered
by converting, fabricating, manufacturing, printing, processing, or
shaping, and, as altered, is used solely outside this State.
See also Reg. 150.310(a)(4) (same) (referred to as the Temporary
Storage Exemption”). The regulations further provide that the exemption
applies only if the property is acquired in a manner that would not subject
the property to ROT on the part of the seller. Reg. 150.310(c).
If property is brought back into Illinois after use outside Illinois, Use Tax is
due at the time the property is returned to Illinois, with depreciation
allowable against the Use Tax base on a straight-line basis for the period
the property was outside Illinois. Shared Imaging, LLC v. Hamer, 2017 Ill.
App. (1st) 152817, 84 N.E. 3d 398 (2017).
In Shared Imaging, the Appellate Court held that three items of medical
device equipment that the taxpayer (i) acquired outside Illinois, (ii), stored
in Illinois for 18, 28, and 47 days, respectively, (iii) leased to customers
outside Illinois, and (iv) brought it back to Illinois for storage upon
completion of the respective lease terms did not qualify for the temporary
storage exemption because the property was later returned to Illinois, but
that the tax applied on the depreciated value of the property at the time it
was returned to Illinois.
Nutrition Headquarters, Inc. v. Department of Revenue, 106 Ill. 2d 58
(1985), held that catalogs that were printed and stamped outside Illinois,
and brought into Illinois to have mailing labels affixed to be sorted, and to
be mailed outside Illinois qualified for the temporary storage exemption.
The Court distinguished the holding on similar facts in Time, Inc. v.
Department of Revenue, 11 Ill.App.2d 282 (1973) on the ground that after
that decision the General Assembly added the following language to the
temporary storage exemption: “or is altered by converting, fabricating,
manufacturing, printing, processing or shaping, and, as altered, is used
solely outside this state. The court reasoned that the affixing of mailing
labels, sorting, and mailing, fell within the exceptions for adding to, altering
or processing the property that would then be used solely outside Illinois.
In PLR ST-15-0016 (November 13, 2015) (“PLR 15-16”), the Department
addressed facts similar to those presented here. In that ruling, the
taxpayer, ABC, a systems integrator and supply chains solutions provider,
was headquartered outside Illinois and had two warehouses in Illinois. As
is pertinent here, the taxpayer, in what is described as Scenario 4 in the
ruling, acquired computer equipment for customers outside Illinois and
had the equipment delivered to the taxpayer’s Illinois warehouse for

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further alteration or processing consisting of one or more of asset tagging,
imaging, and “rack and stack.”
“Asset tagging” consisted of the placement of a serial number on the
computer equipment per the customer’s instructions. “Imaging” consisted
of the placement of different software and operating systems on laptops or
servers per the customer’s instructions (the software or operating systems
could be customer-owned or sold to the customer by the taxpayer). “Rack
and stack” consisted of racking and stacking of various servers and server
components into single cabinets together with the labelling and
organization of all wiring, per the customer’s instructions. The equipment
was then stored at the taxpayer’s warehouse pending shipping
instructions from the customer. Title to the equipment was transferred,
and invoices issued, to the customer upon the taxpayer’s receipt from the
OEM of the equipment at the taxpayer’s Illinois warehouse.
The Department ruled:
Based upon the representations in your letter and subsequent
email, it is our understanding that in Scenario 4 the equipment is
acquired outside of Illinois and is shipped to ABC’s Illinois
warehouse where it is temporarily stored while ABC performs one
of three services on the equipment. Your letter states that the
product is stored in the Illinois warehouse until the customer
provides ABC with shipping instructions.
Based on our
understanding of Scenario 4 as described in your letter and
subsequent email, it is our opinion that the temporary storage
exemption applies to Scenario 4.
Application of Law to Facts
At issue is the proper taxation of Devices that COMPANY1 manufactured
or acquired outside Illinois and leased to COMPANY2 for sublease to the
AGENCY that—
(i)

COMPANY1 initially delivered to COMPANY2 in Illinois, that
COMPANY2 provisioned, kitted and shipped to AGENCY
outside Illinois, and that never returned to Illinois (Group1);

(ii)

COMPANY1 initially delivered to COMPANY2 in Illinois, that
COMPANY2 provisioned, kitted and shipped to AGENCY
outside Illinois, and that AGENCY later returned temporarily
to COMPANY2 in Illinois for reprovisioning, rekitting, and
reshipping to AGENCY outside Illinois (Group 2);

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(iii)

COMPANY1 initially delivered to COMPANY2 in Illinois, that
COMPANY2 provisioned, kitted and shipped to AGENCY
outside Illinois, and that AGENCY later returned temporarily
to COMPANY2 in Illinois that COMPANY2 intended to, and
did, shortly thereafter purchase and resell to an unrelated
third party (Group 3); and

(iv)

COMPANY1 initially delivered to COMPANY2 in STATE1,
that COMPANY2 provisioned, kitted and shipped to
AGENCY outside Illinois, that AGENCY returned to
COMPANY2 in Illinois for reprovisioning, rekitting and
reshipping to AGENCY outside Illinois, and that never
returned to Illinois (Group 4).

Federal Exemption. As noted above, the lease between COMPANY1 and
COMPANY2 was for a period of 12 months and expressly stated, “Lessee
represents and warrants that the Products are being used by the lessee in
fulfillment of its obligations as the Prime Contractor on a contract (‘Prime
Contract’) with the GOVERNMENT. As such, all of the Devices were
exempt under ROT Act § 2-5(37) and Use Tax Act § 3-5(23). 5
To the extent the Devices are not exempt from tax under ROT Act § 25(37) and Use Tax § 3-5(23), they are exempt under the Temporary
Storage Exemption in Use Tax Act § 3-55(e) in the manner set forth
below.
Group 1. Under Illinois law, absent an applicable exemption, a lessor of
property is subject to use tax when it delivers property from outside Illinois
to a lessee in Illinois. 86 Ill. Adm. Code (“Reg.”) §§ 130.2010(b) and
150.305(e). However, Illinois provides an exemption from use tax for
property stored temporarily in Illinois and then used solely outside Illinois.
Section 3-55(e) of the Use Tax Act; Reg. 150.310(a)(4). Property also
qualifies for the temporary storage exemption that is altered in Illinois by
converting, fabricating, and manufacturing, printing, processing, or
shaping, and as altered, is used solely outside Illinois. Id. The Devices fit
squarely within this exemption as they were acquired or manufactured by
COMPANY1 outside Illinois and delivered to COMPANY2 in Illinois where
(i) prior software was removed and new software installed, (ii) they were
Although the lease term with the AGENCY exceeded 12 months, we note that (i) 939 Devices were delivered to
COMPANY2 in Illinois and returned to COMPANY2 within 12 months and (ii) 76 Devices were delivered to
COMPANY2 outside Illinois but returned to COMPANY2 in Illinois within 12 months and in either case not
reshipped to the AGENCY. If such Devices were subject to Use Tax upon their return to Illinois, even though the
literal requirements of the exemption were met since the term of the agreement exceeded 12 months, such Devices
would be subject to tax under the Use Tax Act on their fair market value at the time they were returned to
COMPANY2. Use Tax Act § 3-5(23)

5

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packaged with accessories, and (iii) they were then shipped outside
Illinois. COMPANY2’s activities are in fact substantially identical to those
described in Scenario 4 in PLR 15-16, which the Department held
qualified for the temporary storage exemption. Therefore, no use tax was
due with respect to those Devices described in Group 1. 6 There are
20,202 Devices in Group 1.
Group 2. The facts for the Devices in Group 2 are the same as those in
Group 1, except that the Devices described in Group 2 subsequently
returned temporarily to Illinois to be reprovisioned, rekitted and reshipped
to AGENCY. Of the 12,769 Devices returned to Illinois in Group 2, 11,830
were reshipped to AGENCY outside Illinois and 128 were reshipped to
AGENCY at locations in Illinois. Although the Devices returned only
temporarily to Illinois, under Shared Imaging the temporary return to
Illinois causes the Devices to be subject to use tax at the time of their
return at their depreciated value. Thus, Use Tax is due on the Devices that
returned to Illinois upon their return at their depreciated value.
Group 3. The facts for the Devices in Group 3 are the same as for those
in Group 1, except that the Devices described in Group 3 subsequently
returned temporarily to Illinois for the purpose of being purchased by
COMPANY2 and resold and the Devices were in fact purchased and
resold. Thus, when the Devices were returned to Illinois they were being
held for sale and were not being used in Illinois. There are 1,411 Devices
in Group 3.
Group 4. The Devices in Group 4 were initially shipped to STATE1 where
they were provisioned, kitted, and shipped to AGENCY outside Illinois.
After the initial period of use by AGENCY, 6,069 Devices were sent
temporarily to COMPANY2 in Illinois where they were reprovisioned,
rekitted, and 5,993 Devices were reshipped to AGENCY outside Illinois.
Because the Devices in Group 4 were stored temporarily in Illinois for
reprovisioning, rekitting and reshipment outside Illinois, and were
temporarily stored in Illinois only once, no use tax is due with respect to
5,993 Devices in Group 3. 7

Of the Devices COMPANY1 initially shipped to COMPANY2 in Illinois, approximately 4.5% of the Devices were
shipped to AGENCY in Illinois. It is understood that if the federal exemption is unavailable Use Tax is due on
those devices at the time COMPANY1 delivered them to COMPANY2, and no ruling is then requested with respect
to those devices.
7
As noted in fn 2, above, some of the Devices initially delivered by COMPANY1 in STATE1 and then returned to
Illinois for reprovisioning, rekitting, and shipment back to AGENCY either had been delivered initially by
COMPANY2 to AGENCY in Illinois or reshipped to AGENCY in Illinois. Assuming the federal exemption does
not apply, it is understood that under the temporary storage exemption, Use Tax is due on those devices at the time
they were shipped to AGENCY in Illinois.
6

COMPANY1
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April 8, 2021
The authorities described above all support COMPANY1’s position that
the temporary storage exemption applies as described in the foregoing
scenarios. 8
RULINGS REQUESTED
The Parties request that the Department rule that:

1. COMPANY1 is exempt from Use Tax on all of the Devices
   under Use Tax Act § 3-5(23) because COMPANY2 subleases
   the Devices to the AGENCY under an agreement the term of
   which exceeded 12 months.
2. To the extent it is determined that Devices COMPANY2
   subleased to AGENCY did not meet the 12 month requirement
   because those Devices were returned to COMPANY2 in Illinois
   within 12 months and not shipped back out to AGENCY, even
   though the term of the Agreement with AGENCY exceeded 12
   months, COMPANY1 would be subject to Use Tax on such
   Devices under Use Tax Act on the fair market value of the
   devices at the time they were returned to COMPANY2.
   To the extent it is determined that the exemption for lease to the
   federal government does not apply, the following rulings are
   requested under the Temporary Storage Exemption:
3. COMPANY1 is exempt from Use Tax on the Devices in Group 1
   under the Temporary Storage Exemption
4. COMPANY1 is subject to Use Tax on the Devices in Group 2
   only upon their return to Illinois on their depreciated value.
5. COMPANY1 is exempt from Use Tax on the Devices in Group 3
   under the Temporary Storage Exemption.
6. COMPANY1 is exempt from Use Tax on the Devices in Group 4
   under the Temporary Storage Exemption.
   The only potentially contrary authority is an old administrative hearings decision (UT 96-6 (Jan. 1, 1995), in which
   the administrative law judge (the “ALJ”) held leased property stored by the lessee in Illinois and then removed by
   the lessee after extensive periods of storage did not qualify in Illinois for the temporary storage exemption. The ALJ
   relied in part on the lengthy period the leased property remained in Illinois (often over a year), and in part on the
   proposition that leasing is a use and as a result of the property could not be used solely outside Illinois. Of course,
   storage itself is a use and therefore use can never be solely outside Illinois if it is ever stored in Illinois, and thus, the
   ALJ’s reasoning would render the statute moot. Moreover, the ALJ’s reasoning is flatly contrary to the statute’s
   purpose of encouraging the use and growth of Illinois distribution facilities. Administrative Hearing decisions are
   not precedential, and given the age of this ruling and its improper reasoning, it should be afforded no weight.
   8

COMPANY1
Page 12
April 8, 2021

Thank you for your consideration of this request. Please do not hesitate to
contact me if you have any questions, or would like any additional
information. We respectfully request a conference in the event you
tentatively conclude that an adverse ruling would be warranted.
DEPARTMENT’S RESPONSE:
Private letter rulings 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. Private letter rulings are binding on the Department only as to the taxpayer
who is the subject of the request for ruling. A private letter ruling on behalf of multiple
taxpayers will not be issued with two exceptions. 2 Ill. Adm. Code 1200.110(a)(3).
Neither one of the exceptions appear to apply to the instant request. This private letter
ruling is issued to COMPANY1.
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 35 ILCS 120/2; 86 Ill. Adm. Code 130.101. 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 purchases occur outside Illinois, purchasers must self-assess their
Use Tax liability and remit it directly to the Department.
Generally, the tax-exempt status of lessees does not affect the tax liability of
lessors. The Use Tax burden remains on the lessor notwithstanding the status of the
lessee. See Continental Illinois Leasing Corp. v. Department of Revenue, 108 Ill.
App.3d 583 (First Dist., 1982). 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. 35 ILCS 120/2-5(37). See the Department’s regulation at 86 Ill. Adm.
Code 130.2011 for the requirements regarding this 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 E number issued by the Department. See the
Department’s regulation at 86 Ill. Adm. Code 130.2012 for the requirements regarding
that exemption.

COMPANY1
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April 8, 2021
Government Lease Exemption
The Use Tax provides an exemption for tangible personal property leased to the
federal government.
Personal property purchased by a lessor who leases the property, under a
lease of one year or longer executed or in effect at the time the lessor
would otherwise be subject to the tax imposed by this Act, to a
governmental body that has been issued an active sales tax exemption
identification number by the Department under Section 1g of the Retailers'
Occupation Tax Act. If the property is leased in a manner that does not
qualify for this exemption or used in any other non-exempt manner, the
lessor shall be liable for the tax imposed under this Act or the Service Use
Tax Act, as the case may be, based on the fair market value of the
property at the time the non-qualifying use occurs.
35 ILCS 105/3-5(23). See also 86 Ill. Adm. Code 150.332 & 130.2012.
A sublessee leasing tangible personal property to a governmental body does not
qualify for the exemption contained in Section 3-5(23) and the corresponding rules. The
exemption is limited to a lessor purchasing the property from the retailer and leasing the
property to the governmental body. In this case, COMPANY1 is the party that
purchased the property and COMPANY2 is the party that leased the property to the
governmental body. COMPANY1 cannot claim the exemption contained in Section 35(23) of the Use Tax Act.
Temporary Storage Exemption.
The Use Tax Act does not apply to the use of tangible personal property in this
State under the following circumstance:
The temporary storage, in this State, of tangible personal property that is
acquired outside this State and that, after being brought into this State and
stored here
temporarily, is used solely outside this State or is physically attached to or
incorporated into other tangible personal property that is used solely
outside this State, or is altered by converting, fabricating, manufacturing,
printing, processing, or shaping, and, as altered, is used solely outside this
State.
35 ILCS 105/3-55(e); 86 Ill. Adm. Code 150.310(a)(4). “Because the temporary storage
exemption is allowed for property used solely outside of the State, the taxpayer is
limited to a single Illinois exempt use. Shared Imaging, LLC, 2017 IL App. (1st) 152817,
¶¶ 42-44. If, after the initial qualifying temporary storage in Illinois, the property is

COMPANY1
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April 8, 2021
returned here again and stored temporarily it is subject to use tax. Id.” Safety-Kleen
Systems, Inc. v. Illinois Department of Revenue, Illinois Independent Tax Tribunal, 16
TT 167 (Sept. 16, 2018).
COMPANY1 has requested a ruling on whether the temporary storage exemption
applies or not in 4 situations.
1.

COMPANY1 initially delivered devices to COMPANY2 in Illinois;
COMPANY2 provisioned, kitted and shipped the devices to
AGENCY outside Illinois, and the devices never returned to Illinois
(Group1);

2.

COMPANY1 initially delivered devices to COMPANY2 in Illinois;
COMPANY2 provisioned, kitted and shipped the devices to
AGENCY outside Illinois; and AGENCY later returned the devices
temporarily to COMPANY2 in Illinois for reprovisioning, rekitting,
and reshipping to AGENCY outside Illinois (Group 2);

3.

COMPANY1 initially delivered the devices to COMPANY2 in Illinois;
COMPANY2 provisioned, kitted and shipped devices to AGENCY
outside Illinois; and AGENCY later returned devices temporarily to
COMPANY2 in Illinois that COMPANY2 intended to, and did,
shortly thereafter purchase and resell to an unrelated third party
(Group 3); and

4.

COMPANY1 initially delivered devices to COMPANY2 in STATE1;
COMPANY2 provisioned, kitted and shipped the devices to
AGENCY outside Illinois; AGENCY returned the devices to
COMPANY2 in Illinois for reprovisioning, rekitting and reshipping to
AGENCY outside Illinois; and the devices never returned to Illinois
(Group 4).

The devices in Group 1 qualify for the temporary storage exemption. The
devices in Group 2 do not qualify for the temporary storage exemption because
the devices were returned to Illinois. See Safety-Kleen Systems, Inc. at 7.
COMPANY1 agrees Use Tax is due on the devices in Group 2. The devices in
Group 3 also do not qualify for the temporary storage exemption because the
devices were returned to Illinois. COMPANY1 claims the items were stored in
Illinois prior to their subsequent sale and therefore are exempt. Storage is
considered a taxable use, regardless of the purpose for which the devices are
being stored or their subsequent disposition. Use Tax is owed on the devices in
Groups 2 and 3 on the depreciated value of the devices at the time they were
returned to Illinois. The devices in Group 4 qualify for the temporary storage
exemption.

COMPANY1
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April 8, 2021
The factual representations upon which this ruling is based are subject to review
by the Department during the course of any audit, investigation, or hearing and this
ruling shall bind the Department only if the factual representations recited in this ruling
are correct and complete. This Private Letter Ruling is revoked and will cease to bind
the Department 10 years after the date of this letter under the provisions of 2 Ill. Adm.
Code 1200.110(e) or earlier if there is a pertinent change in statutory law, case law,
rules or in the factual representations recited in this ruling.
I hope this information is helpful. If you have further questions concerning this
Private Letter Ruling, you may contact me at (217) 782-2844. If you have further
questions related to the Illinois sales tax laws, please visit our website at
www.tax.illinois.gov or contact the Department’s Taxpayer Information Division at (217)
782-3336.
Very truly yours,

Richard S. Wolters
Chairman, Private Letter Ruling Committee
RSW:rkn