How does Illinois sales/use tax apply to a company that leases equipment (like traffic control trailers) to customers, when the equipment is bought and shipped from state to state?

Plain-English summary

This 2021 General Information Letter answers questions from the controller of a company that rents traffic control equipment — like changeable message sign trailers seen at highway work zones — to customers across the country, including in Illinois. The company had recently opened a warehouse and hired staff in Illinois, and equipment was moving in and out of the state frequently between rental jobs.

Under the rules in place at the time (this ruling pre-dates Illinois's 2025 overhaul that made lease payments themselves taxable), Illinois taxed leases very differently from most other states. The Department explained there are two categories:

• Conditional sales — leases with a nominal (often one-dollar) buyout at the end. These are treated as a sale from the start, so the lessor must collect Retailers' Occupation Tax on the full stream of lease receipts.
• True leases — leases with no buyout, or only a fair-market-value buyout option. Here, the lessor — not the lessee — is treated as the "end user" of the property. The lessor owes Use Tax on its own cost price when it buys the equipment, and does not charge its customers sales tax on the rental payments. There's no mechanism to get that Use Tax refunded later, even if the equipment eventually leaves Illinois.

This Use Tax liability applies even when the equipment is rented to a customer that is otherwise tax-exempt (such as a government agency), unless a specific carve-out applies — for example, sales to a lessor who will lease long-term (one year or more) to a governmental body with an active exemption number are not subject to Retailers' Occupation Tax at all. The Department also noted that if the lessor already paid sales tax to another state on the same equipment, it can claim a credit against its Illinois Use Tax liability for that tax (though not for any interest or penalties paid elsewhere).

What this means for you

Equipment rental and leasing businesses

If you lease tangible personal property under a true lease and have any Illinois nexus (like the requester's new warehouse and employee), you generally owe Illinois Use Tax based on what you paid for the equipment — not sales tax collected from your renters. This is true even if your lease agreements ask the lessee to "reimburse" you for that tax as part of the rent; that reimbursement is a contract term between you and the lessee, not a tax you're collecting on the state's behalf. Track where equipment is purchased, delivered, and used, since these facts drive whether Illinois Use Tax attaches.

Businesses renting to government or exempt customers

Just having a tax-exempt customer doesn't automatically eliminate your Use Tax liability as the lessor. The letter identifies two narrow exemptions (leases to exempt hospitals and to governmental bodies), and the governmental-body exemption only removes Retailers' Occupation Tax on your purchase of the property if the lease is executed before or at the time of purchase, runs a year or longer, and the government lessee holds an active exemption number.

Accountants and tax professionals advising multi-state lessors

Because Illinois taxes the lessor's cost price rather than the lease stream, watch for double taxation when equipment is purchased in one state and then shipped into Illinois for rental. The Department pointed to the credit at 86 Ill. Adm. Code 150.310(a)(3) for sales tax properly paid to another state — useful when structuring purchase and delivery logistics for equipment that moves across state lines.

Common questions

Q: Do I need to charge my Illinois customers sales tax on rental payments for equipment under a true lease?
A: No. Under a true lease, the lessor (not the lessee) is treated as the end user and owes Use Tax on its own cost price of the property; sales tax isn't charged on the rental payments themselves.

Q: What if the lease has a one-dollar buyout at the end?
A: That typically makes it a conditional sale rather than a true lease, which means Retailers' Occupation Tax applies to the full lease receipts instead of Use Tax applying to the lessor's cost price.

Q: Can I get a refund of the Use Tax I paid if the equipment later leaves Illinois?
A: No. The letter states there are no refund provisions to claim at the end of a lease.

Q: Does renting to a tax-exempt customer (like a government agency) eliminate my Use Tax liability?
A: Not automatically. Lessors generally still incur Use Tax even when leasing to an exempt entity, except where a specific exemption applies — such as long-term (one year or more) leases to a governmental body holding an active exemption identification number, or leases to exempt hospitals.

Q: What if I already paid sales tax on the equipment to another state?
A: Illinois allows a credit against Illinois Use Tax liability for sales tax properly paid to another state, though the credit doesn't extend to any interest or penalties paid there.

Q: Is this letter binding on the Department?
A: No. This is a General Information Letter, which only directs the taxpayer to relevant regulations and other information sources. It is not a statement of Department policy and is not binding on the Department.

Citations and references

Statutes and rules:

• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax imposed on retail sales)
• 86 Ill. Adm. Code 150.101 (Use Tax imposed on the privilege of using property in Illinois)
• 86 Ill. Adm. Code 150.101(c) (no Use Tax where a Retailers' Occupation Tax exemption would apply)
• 86 Ill. Adm. Code 130.2010(b) (lessors under true leases owe Use Tax on cost price of leased property)
• 86 Ill. Adm. Code 130.2011 (exemption for leases to exempt hospitals)
• 86 Ill. Adm. Code 130.2012 (exemption for qualifying leases to governmental bodies)
• 86 Ill. Adm. Code 150.310(a)(3) (credit against Illinois Use Tax for tax properly paid to another state)

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/st21-0031-gil.pdf

Original ruling text

ST-21-0031 08/24/2021 LEASING
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. See 86 Ill. Adm. Code 130.2010. (This is a GIL.)

August 24, 2021
Dear NAME:
This letter is in response to your letter dated June 9, 2021, 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:
My name is NAME. I am the controller for BUSINESS. I am writing to you
for assistance in determining our company's sale/use tax liability.
BUSINESS’S primary business is the rental of traffic control equipment
primarily to our customers in the traffic control industry. An example of
the equipment we rent is a changeable message sign trailer that would
be seen on the side of the freeway in a road work zone. Until recently,
we had one employee living and working in Illinois. We recently signed
a lease for warehouse space and now have a physical location in Illinois.
Our equipment is typically purchased and delivered to our STATE office
and then shipped to various customers across the county [sic] including
Illinois. The equipment is then used by our customers, possibly stored
while not being used and then shipped to the next customer for use
(possibly outside of Illinois). That being said, our equipment is being
shipped from state to state frequently. I have spoken to the Illinois
Department of Revenue and confirmed that our equipment rentals are
not taxable. The question that recently came up was how to handle
sales tax on our equipment when purchased. We do not pay sales tax on
equipment when it is purchased as it is purchased for rental (type of

BUSINESS
Page 2
August 24, 2021
resale) to our customers. This treatment is appropriate according to the
states where the equipment is delivered.
I am seeking assistance for the following:

1. What tax liability does the company incur when equipment is
   shipped into Illinois for rental to our customers and sales tax was
   not paid on the equipment when purchased and delivered in
   another state?
2. If equipment is directly delivered by the manufacturer to Illinois
   for rental, what is the sales/use tax liability?
3. If there is a sales/use tax liability when equipment is delivered
   directly to Illinois for rental, is there any tax refund when the
   equipment is moved out of Illinois?
4. Several of our customers are sales tax exempt and they are
   working on government projects with various departments of
   transportation. If equipment is sent directly or indirectly to Illinois,
   does this negate any tax liability on the equipment when it is rented
   by tax exempt customers for whom we have a valid sales tax
   exemption certificate?
   DEPARTMENT’S RESPONSE:
   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.
   The State of Illinois taxes leases differently for Retailers’ Occupation Tax and
   Use Tax purposes than most 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 differently, 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.
   A true lease generally has no buy out provision at the close of the lease. If a buyout
   provision does exist, it must be a fair market value buyout option in order to maintain the
   character of the true lease.

BUSINESS
Page 3
August 24, 2021
In Illinois, persons who rent or lease the use of tangible personal property under
true leases owe Use Tax on the cost price of the tangible personal property which is
rented. See 86 Ill. Adm. Code 130.2010(b). The lessor cannot charge the lessee a
"tax", but many times lessors will require, in the lease agreement, that the lessee
"reimburse" the lessor for the taxes which the lessor incurs on the leased tangible
personal property. There are no refund provisions to claim at the end of a lease.
Except as to sales to persons who lease tangible personal property to exempt hospitals
(Section 130.2011) and to governmental bodies (Section 130.2012), such lessors incur
Use Tax even if the tangible personal property is leased to an exempt entity that has
been issued an exemption identification number. 86 Ill. Adm. Code 130.2010(b).
Sales of tangible personal property to a lessor who leases that property to a
governmental body are not subject to Retailers' Occupation Tax if (1) the tangible
personal property is purchased for lease to a governmental body under a lease that has
been executed or is in effect at the time of purchase; (2) the lease is for a period of one
year or longer; and (3) the lease is to a governmental body that has an active tax
exemption identification number issued by the Department. 86 Ill. Adm. Code
130.2012. If a seller of tangible personal property for use would not be taxable under
the Retailers' Occupation Tax Act despite all elements of the sale occurring in Illinois,
then the tax imposed by the Use Tax Act shall not apply to the use of such tangible
personal property in this State. 86 Ill. Adm. Code 150.101(c).
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. 86 Ill. Adm. Code 150.310(a)(3). 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,
Alexis K. Overstreet
Associate Counsel
AKO:rkn