In a true operating lease of a utility trailer registered in Illinois, is sales/use tax based on the price the lessor paid the dealer, or on the total lease payments the lessor expects to collect from the lessee?

Plain-English summary

An equipment-leasing company asked the Illinois Department of Revenue how sales tax should apply when it buys a utility trailer from an Illinois dealer and leases it to an Illinois customer under a true operating lease (a lease with a fair-market-value buyout option, not a nominal $1 buyout). The company wanted to know whether tax should be based on the roughly $7,500 it paid the dealer for the trailer, or on the roughly $9,000+ in total lease payments (plus a $1,000 fair-market-value buyout) it expected to collect from the customer over the 3-year lease term.

The Department confirmed the company's own read of its guidance: sales/use tax is based on the lessor's actual cost to acquire the trailer, not on the total expected lease payments. Illinois treats a true lease differently from most other states. Because the lease has no guaranteed sale built in at the outset (the buyout, if any, must be at fair market value), the lessor — not the lessee — is treated as the "end user" of the trailer for tax purposes. The lessor owes Use Tax on its own cost price to acquire the trailer, and Illinois imposes no Retailers' Occupation Tax or Use Tax at all on the lease/rental receipts. That means the lessee incurs no state sales/use tax liability on the lease payments, buyout, or related charges (late fees, disposition fees, termination fees, service fees, legal fees).

This differs from a "conditional sale" lease — typically one with a nominal or one-dollar buyout — which Illinois treats as a sale at the outset, making the full purchase price subject to Retailers' Occupation Tax. It also differs from short-term automobile rentals, which fall under a separate Automobile Renting Occupation and Use Tax rather than these general leasing rules.

What this means for you

Equipment lessors and leasing companies

If you structure your Illinois leases as true leases (fair-market-value buyout, not a nominal one), you are the party responsible for Illinois Use Tax, and it is computed on what you paid your supplier for the equipment — not on the stream of payments you'll collect from your lessee. If you already paid tax on the same property in another state, you may get credit against Illinois Use Tax to the extent of tax properly paid there.

Businesses drafting lease agreements

Illinois law does not let a lessor legally "pass through" its Use Tax obligation to the lessee as a tax. A lease can still contractually require the lessee to reimburse the lessor for that cost, but that reimbursement is a private contract term, not a tax the lessee owes to the state — a distinction worth getting right in your lease language and invoicing.

Accountants and tax professionals

Watch the true-lease vs. conditional-sale line carefully, since it flips who owes tax and on what base. A nominal/one-dollar buyout at lease-end signals a conditional sale (tax on the full sale price up front); a genuine fair-market-value buyout preserves true-lease treatment (tax on the lessor's cost only, none on rental receipts). Also remember the carve-out for automobiles leased one year or less, which falls under the separate Automobile Renting Occupation and Use Tax Act (35 ILCS 155/1 et seq.) rather than these rules.

Common questions

Q: Do we charge sales tax on the trailer's purchase price or on the total lease payments we'll collect?
A: Neither is charged to the lessee. As the lessor under a true lease, you owe Use Tax yourself, computed on the price you paid the dealer for the trailer — not on the total payments you expect to receive from the lessee.

Q: Does the lessee owe any Illinois sales or use tax on the lease?
A: No. Illinois imposes no Retailers' Occupation Tax or Use Tax on lease/rental receipts under a true lease, so the lessee incurs no state tax liability on the periodic payments, the fair-market-value buyout, or related charges like late fees or termination fees.

Q: What turns a lease into a "conditional sale" instead of a true lease?
A: A nominal or one-dollar purchase option at the end of the lease term. If the lessor is effectively guaranteed the property will be sold, Illinois treats the transaction as a sale from the outset, and the full receipts become subject to Retailers' Occupation Tax.

Q: Can we pass our Use Tax obligation on to the lessee as a tax?
A: Not under Illinois tax law — lessors may not pass through their tax obligation as a tax. A lease can still require the lessee to reimburse the lessor for that cost, but that's a private contractual duty, not a state tax owed by the lessee.

Q: Does this apply to short-term car rentals too?
A: No. Automobiles leased for one year or less are instead subject to the separate Automobile Renting Occupation and Use Tax (35 ILCS 155/1 et seq.), not the general leasing rules discussed in this letter.

Citations and references

Regulations and statutes:

• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax on sales of tangible personal property)
• 86 Ill. Adm. Code 130.220 (sales tax liabilities in a lease transaction)
• 86 Ill. Adm. Code 130.2010, including 130.2010(b) (true lease vs. conditional sale; lessor as end user)
• 86 Ill. Adm. Code 150.101 (Use Tax on the privilege of using property purchased at retail)
• 86 Ill. Adm. Code 150.310(a)(3) (credit for tax already paid to another state)
• 35 ILCS 155/1 et seq. (Automobile Renting Occupation and Use Tax Act, for autos leased ≤1 year)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedures)
• 2 Ill. Adm. Code 1200.120 (General Information Letters; non-binding on the Department)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2023.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2023/ST-23-0001-GIL.pdf

Original ruling text

ST-23-0001-GIL 02/01/2023 LEASING
Information regarding sales tax liabilities involved in a lease transaction may be
found at 86 Ill. Adm. Code 130.220 and 86 Ill. Adm. Code 130.2010. (This is a
GIL.)
February 1, 2023

NAME/COMPANY/ADDRESS
Dear Mr. XXX:
This letter is in response to your letter dated December 05, 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:

We are requesting an Advisory Opinion regarding Illinois sales tax.
How should sales tax be applied assuming a true operating lease of a
utility trailer that is being licensed and registered in Illinois? Should sales
tax be charged on the amount COMPANY pays the trailer dealer for the
trailer at the time COMPANY purchases the trailer? Or should sales tax
be paid at the time of registration on the total payments that COMPANY
expects to receive over the life of the lease from the lessee? Or should
some other method be used?
Based on our review of publication ST-9-LSE A Guide for Reporting Sales
Using Form ST-556-LSE we conclude that sales tax in this example
should be based on the actual cost paid to the dealer rather than the total
of expected payments received from the lessee because a trailer does not
meet the definition of First Division Motor Vehicles described on page 16
of that publication.
Circumstances

COMPANY/NAME
Page 2
February 1, 2023
COMPANY is domiciled in STATE and we are an equipment leasing
company. We have true operating leases in most states including Illinois
and we register trailers in Illinois regularly. This is how our transactions
usually happen:
Individuals that live in Illinois arrive at various trailer dealers in Illinois.
Rather than the customer purchasing the trailer outright, COMPANY has
an arrangement with dealers that allows their customers to lease trailers
from COMPANY. COMPANY purchases the trailer from the dealer and
then leases it to their customer as one transaction. The term of the lease
is typically 3 years. At the conclusion of the lease the customer may
purchase the trailer from COMPANY for what we consider a fair market
value, say $ 1,000 in this example.
The cost of the utility trailer is typically around $ 5,000 to $ 15,000. In
order to license and register the trailer in Illinois, COMPANY pays sales
tax and other registration fees. Assuming a true operating lease, should
the sales tax that COMPANY pays to Illinois be based on the actual price
of the tailer [sic] paid to the dealer, say $ 7,500 in this example... or should
the tax be based on the total of lease expected payments received from
the lease, say $9,000 plus $1,000 ( $ 250 x 36 months plus $ 1,000)

DEPARTMENT’S RESPONSE:
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 86 Ill. Adm. Code 130.101. The Use Tax Act imposes a tax upon
the privilege of using in this State tangible personal property purchased at retail from a
retailer. See 86 Ill. Adm. Code 150.101. If no tangible personal property is being
transferred to the customers, then no Illinois Retailers’ Occupation Tax or Use Tax
would apply.
The State of Illinois taxes leases differently for Retailers’ Occupation Tax and
Use Tax purposes than the majority of other states do. For Illinois sales tax purposes,
there are two types of leases: 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 otherwise, if the lessor is 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 buy
out provision does exist, it must be a fair market value buy out option in order to
maintain the character of a true lease. 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 130.2010(b). As end users of tangible personal property personal property

COMPANY/NAME
Page 3
February 1, 2023
located in Illinois, lessors owe Use Tax on their cost price of such property. The State
of Illinois imposes no tax on rental receipts. Consequently, lessees incur no tax liability.
The above guidelines are applicable to all true leases of tangible personal
property in Illinois except for automobiles leased for 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.
As mentioned, in the case of a true lease, the lessors of the property being used
in Illinois would be the parties with Use Tax obligations. The lessors would either pay
their suppliers, if their suppliers were registered to collect Use Tax, or would self-assess
and remit the tax to the Department. If the lessors already paid taxes in another state
with respect to the acquisition of the tangible personal property, they would be exempt
from Use Tax to the extent of the amount of such tax properly due and paid in such
other state. See 86 Ill. Adm. Code 150.310(a)(3).
Under Illinois law, lessors may not “pass through” their tax obligation to the
lessees as taxes. However, it is typical of true leases to contain contractual provisions
stating that the lessees will reimburse the lessors for their tax costs. This is not a matter
of Illinois tax law but private agreement between lessors and lessees. If the lessees
agreed to such provisions, they are bound to satisfy that duty because of a contractual
agreement, not because of Illinois tax law.
As stated above, the State of Illinois imposes no Retailers’ Occupation Tax or
Use Tax on rental receipts. Moreover, since a lessee under a true lease incurs no tax
liability on the lease of tangible personal property, the lessee generally incurs no such
tax liability on any related lease charges such as late payment fees, disposition fees,
lease termination fees, service fees, or legal fees.
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,

Kimberly Rossini
Associate Counsel
KAR:dlb