When an out-of-state business leases identification signs (tangible personal property) to Illinois car dealers under a true lease, who owes Illinois sales/use tax, and does it matter whether the signs are treated as real property or as tangible personal property?

Plain-English summary

An out-of-state business supplies branded identification signs to Illinois car dealers and leases the signs to them (the business keeps ownership and also handles servicing and repairs). It asked the Illinois Department of Revenue how sales/use tax applies -- both if the signs count as tangible personal property, and if they count as real property once affixed to the dealer's building or set in a concrete base.

The Department explained that Illinois taxes leases differently depending on whether the arrangement is a true lease or a conditional sale (a lease with a nominal, e.g. one-dollar, buyout that is really a disguised sale). Based on the facts described, the Department treated this as a true lease.

For a true lease of tangible personal property, Illinois does not tax the lease payments themselves. Instead, the lessor is treated as the "end user" of the property it leases out, and the lessor owes Use Tax on its own cost price of the signs (what it paid to acquire or make them) -- not on the rent it charges the dealer. The lessor cannot bill this as a "tax" to the lessee, but it may build a "reimbursement" of that cost into the lease terms.

If the signs are instead treated as being incorporated into real property (for example, permanently affixed to a building or concrete base by a construction contractor), the contractor -- not the dealer who ends up owning the building improvement -- is deemed the end user of the materials and owes Use Tax on their cost price, self-assessing it directly to the Department if it was not already paid to a supplier. A contractor who already paid tax on the same property to another state can get a credit against the Illinois Use Tax liability.

What this means for you

Out-of-state lessors of signage or other equipment

If you lease tangible personal property into Illinois under a true lease (no bargain buyout), you -- not your Illinois lessee -- are the one who owes Illinois Use Tax, calculated on your cost price for the property. You cannot pass this along as a line-item "sales tax," but you can structure the lease so the lessee reimburses you for that cost as a separate charge.

Car dealers and other lessees of branded signage

Under a true lease, you generally do not incur Use Tax on the leased signs yourselves -- that liability sits with the lessor. However, your lease agreement may require you to reimburse the lessor for the tax the lessor owes, so expect that cost to show up in your lease terms even though it isn't billed to you as "sales tax."

Construction contractors who install or affix signage

If you are a contractor who permanently affixes signs (or other tangible personal property) to real estate, you are treated as the end user of that property and owe Use Tax on your cost price, regardless of who ultimately owns the building. If you didn't pay the tax to your supplier, you must self-assess and remit it to the Department. If you already paid a proper tax to another state on the same property, you can claim a credit against your Illinois liability.

Accountants and tax professionals

The threshold question is always true lease vs. conditional sale: a nominal/one-dollar buyout at lease-end signals a conditional sale taxed under Retailers' Occupation Tax on the full purchase price, while a true lease (no buyout, or only a fair-market-value buyout) shifts Use Tax liability to the lessor based on cost price. A separate, independent question is whether the property is tangible personal property or has become part of real estate through a construction contract -- if the latter, the contractor's Use Tax liability under 86 Ill. Adm. Code 130.1940 governs instead of the lessor rules.

Common questions

Q: Who pays Illinois tax on a true lease of tangible personal property -- the lessor or the lessee?
A: The lessor. Illinois deems lessors under true leases to be end users of the property they lease out, so the lessor owes Use Tax on its cost price for that property, not on the rental payments it charges.

Q: Can the lessor charge the lessee "sales tax" on the lease payments?
A: No. The lessor cannot bill the lessee a "tax," but the lease agreement may require the lessee to "reimburse" the lessor for the Use Tax the lessor incurs on the property.

Q: How do you tell a true lease from a conditional sale?
A: A conditional sale typically has a nominal or one-dollar purchase option at the end of the term, meaning a sale was effectively guaranteed from the outset -- that makes all receipts subject to Retailers' Occupation Tax. A true lease has no buyout, or only a fair-market-value buyout, and is taxed under the lessor Use Tax rules described above.

Q: What happens if the signs are permanently attached to the dealer's building instead of just leased as movable property?
A: Then a construction contractor who affixes the signs to real estate is treated as the end user of the sign materials and owes Use Tax on the cost price, separate from the leasing analysis. The contractor must self-assess and pay the tax if it wasn't already paid to its supplier, and can get credit for tax already properly paid to another state.

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 sources of information. It is not a statement of Department policy and is not binding on the Department. A binding ruling requires a Private Letter Ruling request under 2 Ill. Adm. Code 1200.110.

Citations and references

• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax imposed on retail sales of tangible personal property)
• 86 Ill. Adm. Code 150.101 (Use Tax imposed on the privilege of using tangible personal property in Illinois)
• 86 Ill. Adm. Code 130.2010(b); 150.201; 150.305(e) (lessors under true leases owe Use Tax on cost price as end users)
• 86 Ill. Adm. Code 130.2155 (tax treatment of conditional sales leases)
• 86 Ill. Adm. Code 130.1940(a), (c) (construction contractors as end users of property incorporated into real estate)
• 86 Ill. Adm. Code 130.2155(d) (liability of contractors who install signs)
• 86 Ill. Adm. Code 150.310 (credit for tax properly paid to another state)
• 2 Ill. Adm. Code 1200.120 (GILs are not binding on the Department)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedures)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2022.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2022/st22-0002-gil.pdf

Original ruling text

ST-22-0002 02/15/2022 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.)
February 15, 2022
Dear NAME:
This letter is in response to your letter dated September 16, 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:
To whom it may concern;
Could you please forward me a Private Letter Rulings on whether
leasing a signs [sic] would be considered Real Property of [sic]
Tangible Personal Property and clarification of how taxes are to
applied [sic].
Factual Background
BUSINESS is an out of State vendor suppling [sic] Identification
signage to the clients (car dealers) in Illinois. These signs are car
dealer branding and have no value to others.
Signs are affix [sic] directly to the building or installed on concrete
base on anchor bolts.
Contracts between BUSINESS and customers are that BUSINESS
retains ownership of all signs and leases them to the dealers.

BUSINESS/NAME
Page 2
February 15, 2022
Included in the lease to the dealers BUSINESS is responsible for all
servicing and maintenance which may include repairs to broken or
damaged parts, replacement of burned out bulbs, neon repair,
ballasts or transformer replacements, cleaning/washing, or painting.
BUSINESS provides the labor and parts necessary to repair the sign
and bills the customer accordingly.
Issues
1.
What are the Illinois State and Local sales tax consequences of
the lease of the signs that qualifies as tangible personal property to
BUSINESS and its customers?
2.
What are the Illinois State and Local sales tax consequences of
the lease of the signs that qualifies as Real Estate to BUSINESS and
its customers?
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.
Based on the limited information provided, this response will address situations in
which a true lease is in effect. In the event a taxpayer’s transactions involving tangible
personal property would be considered conditional sales, refer to 86 Adm. Code
130.2155 for more information on tax treatment.
In Illinois, persons who rent or lease tangible personal property under true leases
are considered the users of the property which they rent or lease to others. Therefore,

BUSINESS/NAME
Page 3
February 15, 2022
the lessor incurs Use Tax on the cost price of the tangible personal property which is
rented. See 86 Ill. Adm. Code 130.2010(b); 150.201; and 150.305(e). 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.
Tangible personal property that construction contractors purchase to
permanently affix or incorporate into real property in this State will also be subject to
Use Tax. See 86 Ill. Adm. Code 130.1940(c). The liability of construction contractors
who install signs is discussed at 86 Ill. Adm. Code 130.2155(d). The term construction
contractor includes general contractors, subcontractors, and specialized contractors
such as landscape contractors. The term contractor means any person or persons who
are engaged in the occupation of entering into and performing construction contracts for
owners. A construction contract is a contract to construct a structure or to otherwise
incorporate tangible personal property into real estate. See 86 Ill. Adm. Code
130.1940(a). In Illinois, construction contractors are deemed end users of tangible
personal property purchased for incorporation into real property. As end users of such
tangible personal property, contractors incur Use Tax liability for such purchases based
upon the cost price of the tangible personal property. See 86 Ill. Adm. Code
130.1940(c). If contractors did not pay the Use Tax liability to their suppliers,
contractors must self-assess their Use Tax liability and pay it directly to the Department.
If the contractors have already paid a tax in another state regarding the purchase or use
of such property, they will be entitled to a credit against their Illinois Use Tax liability to
the extent that they have paid tax that was properly due to another state. See 86 Ill.
Adm. Code 150.310.
It is important to note that since construction contractors are the end users of the
materials that they permanently affix to real estate, their customers incur no Use Tax
liability and the construction contractors have no legal authority to collect the Use Tax
from their customers. However, many construction contractors pass on the amount of
their Use Tax liabilities to customers in the form of higher prices or by including
provisions in their contracts that require customers to “reimburse” the construction
contractor for his or her tax liability. Please note that this reimbursement cannot be
billed to a customer as “sales tax,” but can be listed on a bill as a reimbursement of tax.
The choice of whether a construction contractor requires a tax reimbursement from the
customer or merely raises his or her price is a business decision on the construction
contractor’s part.
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

BUSINESS/NAME
Page 4
February 15, 2022
Associate Counsel
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