Does a capital financing lease of qualified data center equipment, treated as a conditional sale, qualify for Illinois' sales-tax data center exemption, and does the answer change depending on when the data center itself became qualified?

Plain-English summary

A taxpayer asked the Illinois Department of Revenue about a data center's equipment that was acquired through a capital financing lease structured as a "conditional sale" rather than a "true lease," and whether that equipment could qualify for Illinois' sales-tax exemption for data center property under 86 Ill. Adm. Code 130.1957. The taxpayer's facts involved two scenarios where the data center's certificate of exemption from the Department of Commerce and Economic Opportunity ("DCEO") became effective either before or after the lease payments began.

Because a GIL cannot rule on specific facts, the Department did not answer the exact tax-due questions posed. Instead it laid out the general framework:

• Conditional sale leases are treated as sales for tax purposes. If a lease is guaranteed to end in a transfer of ownership (typically signaled by a nominal, e.g. one-dollar, buyout option), the entire lease payment stream is subject to Retailers' Occupation Tax from the outset, just as if the property had been sold outright.
• True leases (no buyout, or only a fair-market-value buyout) are not taxed to the lessee at all. Instead, the lessor is treated as the end user of the property and owes Use Tax on its own cost of the property; the lease receipts themselves are not subject to Retailers' Occupation Tax.
• The data center exemption (86 Ill. Adm. Code 130.1957), effective January 1, 2020, exempts qualified tangible personal property used to build or run a data center — regardless of whether it's purchased by the owner, operator, tenant, or their contractor/subcontractor — once the data center has obtained a DCEO certificate of exemption.

The Department noted that without reviewing the actual lease agreement, it could not determine which category the taxpayer's lease fell into or resolve the specific tax-due periods asked about.

What this means for you

Data center owners, operators, and tenants

If your data center's equipment is financed through a lease, the tax outcome depends heavily on whether that lease is legally a "conditional sale" or a "true lease." A conditional sale (nominal buyout) makes the whole payment stream taxable as a sale; a true lease (no buyout, or fair-market-value buyout) shifts the Use Tax burden to the lessor instead of the lessee. Getting this classification right — before assuming the data center exemption applies — is essential.

Businesses seeking the data center sales tax exemption

The 86 Ill. Adm. Code 130.1957 exemption for construction/operation equipment only applies once the data center holds an active DCEO certificate of exemption. Timing matters: equipment purchased or leased before certification is qualified may not be covered, while equipment purchased afterward, including by a contractor or subcontractor, can be exempt. Data centers that would have qualified before the January 1, 2020 effective date (had Public Act 101-0031 been in effect) may still apply for exemption on subsequent equipment purchases.

Accountants and tax professionals structuring lease financing

When advising on data center financing structures, review the lease's substantive terms (buyout price, obligation to purchase, guarantee of eventual sale) rather than its label. The Department's three-factor description of a true lease — no obligation to purchase, ability to walk away at the end of any term without further payment, and no guaranteed sale at inception — is a useful checklist, but note the Department expressly said it cannot rule on specific facts in a GIL and that a full lease agreement review is needed to reach a firm conclusion.

Common questions

Q: Does a capital financing lease treated as a "conditional sale" qualify for the data center tax exemption?
A: The Department did not give a yes/no answer in this GIL because it cannot rule on specific facts outside a Private Letter Ruling. It explained instead that a conditional sale is taxed as a sale from the outset (full Retailers' Occupation Tax applies to the entire lease stream), which is a different question from whether the underlying property separately qualifies for the data center exemption under 86 Ill. Adm. Code 130.1957.

Q: What is the difference between a "conditional sale" and a "true lease" for Illinois tax purposes?
A: A conditional sale is typically identified by a nominal (e.g., one-dollar) purchase option guaranteeing the property will be sold at the end of the lease term, making the full payment stream subject to Retailers' Occupation Tax. A true lease has no buyout provision, or only a fair-market-value buyout, and the lessor (not the lessee) owes Use Tax on its own cost of the property; lease receipts under a true lease are not subject to Retailers' Occupation Tax. See 86 Ill. Adm. Code 130.2010 and 130.2013(g).

Q: When does the data center exemption in 86 Ill. Adm. Code 130.1957 apply?
A: Effective January 1, 2020, qualified tangible personal property used in constructing or operating a data center is exempt from sales and use tax once the data center has been granted a DCEO certificate of exemption under 20 ILCS 605/605-1025 — whether the property is purchased by the owner, operator, tenant, or a contractor/subcontractor of any of them.

Q: Are there exceptions to the true-lease rules described here?
A: Yes. The general true-lease/conditional-sale guidelines don't apply to automobiles leased for one year or less (governed instead by the Automobile Renting Occupation and Use Tax Act, 35 ILCS 155/1 et seq.) or to household goods rented under rent-to-own agreements (governed by the Rental Purchase Agreement Occupation and Use Tax Act, 35 ILCS 180/1 et seq.).

Q: Can I rely on this letter for my own data center lease?
A: No. This is a General Information Letter (GIL), which only directs taxpayers to relevant regulations and is not binding on the Department. The Department explicitly stated it could not determine the tax obligations of the lessor or lessee here without reviewing the actual lease agreement. A binding answer requires a Private Letter Ruling request under 2 Ill. Adm. Code 1200.110.

Citations and references

• 35 ILCS 130/2-5(44) — statutory data center exemption from the Retailers' Occupation Tax Act
• 86 Ill. Adm. Code 130.1957 — regulation on tangible personal property used in construction/operation of data centers, including the DCEO certificate requirement and the January 1, 2020 effective date
• 86 Ill. Adm. Code 130.2010 — conditional sales contracts vs. true leases
• 86 Ill. Adm. Code 130.2013(g) — true lease receipts not subject to Retailers' Occupation Tax
• 20 ILCS 605/605-1025 — DCEO certificate of exemption for data centers
• 35 ILCS 155/1 et seq. — Automobile Renting Occupation and Use Tax Act (exception for short-term auto leases)
• 35 ILCS 180/1 et seq. — Rental Purchase Agreement Occupation and Use Tax Act (exception for household rent-to-own)
• 2 Ill. Adm. Code 1200.110 — Private Letter Ruling procedures
• 2 Ill. Adm. Code 1200.120 — General Information Letter procedures (GILs not binding on the Department)

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/st22-0006-gil.pdf

Original ruling text

ST-22-0006 04/12/2022 RETAILERS’ OCCUPATION TAX
Effective January 1, 2020, qualified tangible personal property used in the
construction or operation of a data center that has been granted a certificate of
exemption by the Department of Commerce and Economic Opportunity, whether
that tangible personal property is purchased by the owner, operator, or tenant of
the data center or by a contractor or subcontractor of the owner, operator, or
tenant is exempt from sales and use taxes. 35 ILCS 130/2-5(44); 86 Ill. Adm.
Code 130.1957 (This is a GIL.)
April 12, 2022
Dear NAME:
This letter is in response to your e-mail dated February 17, 2022, 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:
Facts:
1)

Tangible personal property is purchased through a capital
financing lease that meets the definition of “Qualified Tangible
Personal Property” under Regulation, Illinois, 86 Ill. Adm. Code
130.1957 (attached).
Questions:

1)

Does a capital financing lease that is deemed a “conditional
sale” (and not a “true lease”) qualify for the data center
exemption under Regulation, Illinois, 86 Ill. Adm. Code
130.1957?

a.

In this scenario the IL Department of Commerce and Economic

COMPANY/NAME
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April 12, 2022
Opportunity (“DCEO”) has qualified the data center with an
effective date of January 1, 2020.
b.

The capital financing lease agreement was entered into on
February 1, 2020 with payments of $$$$$ due each month for
the next thirty-six (36) months.

c.

Is tax due in the capital financing lease stream of the
“conditional sale” for the period February 1, 2020 through
January 1, 2023?

2)

Does a capital financing lease that is deemed a “conditional
sale” (and not a “true lease”) qualify for the data center
exemption under Regulation, Illinois, 86 Ill. Adm. Code
130.1957?

a.

In this scenario the IL Department of Commerce and Economic
Opportunity (“DCEO”) has qualified the data center with an
effective date of June 1, 2021.

b.

The capital financing lease agreement was entered into on January
1, 2020 with payments of $$$$$ due each month for the next
thirty-six (36) months.

c.

Is tax due in the capital financing lease stream of the “conditional
sale”?
i)

For the period January 1, 2020 through May 1, 2021 prior to
DCEO qualifying the data center?

ii)

For the period June 1, 2021 through December 1, 2022 after
DCEO qualified the data center?

Thank you for your assistance. If you have any questions or need
additional information, please contact me [ ].
DEPARTMENT’S RESPONSE:
LEASES
For Illinois Retailers’ Occupation Tax and Use 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

COMPANY/NAME
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April 12, 2022
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 buyout 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. 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 130.2010.
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 and merchandise rented for personal, family, or household purposes that is
subject to tax under the Rental Purchase Agreement Occupation and Use Tax Act
found at 35 ICLS 180/1 et seq.. While we cannot rule specifically in the context of a
General Information Letter, a lease contract meeting the following conditions would
generally be considered to be a true lease rather than a conditional sale: (1) a customer
who has otherwise met the requirements of the agreement can cease making payments
and return the property at the end of any lease term without further payment obligation,
(2) the customer is never under any obligation to purchase the property, and (3) the
agreement does not guarantee a sale of the tangible personal property at the inception
of the contract. Because, under this type of lease agreement, the lessee is free to walk
away from the lease at the end of each lease term and therefore a sale of the property
is not guaranteed at the time the lease is entered into, it is the Department’s opinion that
such an agreement would be a true lease. A lessor engaging in this type of lease
should pay Use Tax to his supplier for all items that he purchases to lease. Receipts
from the rental of tangible personal property under a true lease are not subject to
Retailers’ Occupation Tax liability. See 86 Ill. Adm. Code 130.2013(g). Without
reviewing the actual lease agreement, the Department cannot determine the tax
obligation of the lessor or the lessee.
DATA CENTERS
Effective January 1, 2020, qualified tangible personal property used in the
construction or operation of a data center that has been granted a certificate of
exemption by the Department of Commerce and Economic Opportunity, whether that
tangible personal property is purchased by the owner, operator, or tenant of the data
center or by a contractor or subcontractor of the owner, operator, or tenant is exempt
from sales and use taxes. 86 Ill. Adm. Code 130.1957. Data centers that would have
qualified for a certificate of exemption prior to January 1, 2020, had Public Act 101-0031
been in effect, may apply for and obtain an exemption for subsequent purchases of

COMPANY/NAME
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April 12, 2022
computer equipment or enabling software purchased or leased to upgrade, supplement,
or replace computer equipment or enabling software purchased or leased in the original
investment that would have qualified. 86 Ill. Adm. Code 1957(d). “Data center” means
a building or a series of buildings rehabilitated or constructed to house working servers
in one physical location or multiple sites within the State of Illinois. 35 ILCS 130/25(44). See FY 2020-04-A (Sept. 2019); 86 Ill. Adm. Code 130.1957 Tangible Personal
Property Used in the Construction or Operation of Data Centers. To receive the
exemption, the data center must obtain a certificate of exemption from the Department
of Commerce and Economic Opportunity. See 20 ILCS 605/605-1025. Each owner,
operator, or tenant of a data center, or a contractor or subcontractor of the owner,
operator or tenant, must provide an active certificate of exemption before it can make
tax exempt purchases of qualified tangible personal property. 86 Ill. Adm. Code
130.1957(c).
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,
Richard S. Wolters
Associate Counsel
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