Illinois – Taxability of Leasing Transactions

SALT Report 2370 – The Illinois Department of Revenue issued a general information letter discussing the application of sales and use tax to leases of tangible personal property. The Taxpayer in this case is a technology solutions provider who entered into a 24-month agreement to lease computer servers. At the end of the lease the Taxpayer has the option to purchase the servers for one dollar.

The Taxpayer does not use the computer servers personally; instead the Taxpayer rents the servers to its own customers for the same 24 month period. At the end of the rental agreement the Taxpayer’s customers also have the option to purchase the servers. The Taxpayer requested a ruling regarding whether the leasing company should charge sales tax to the Taxpayer, or, if the Taxpayer should charge sales tax to its customer.

In Illinois, the taxability of a lease transaction is determined by whether it is a conditional sale or a true lease. A conditional sale is characterized by the fact that there is a nominal, or one dollar, purchase option at the end of the lease. For example, if the lessor is guaranteed at the time of the lease that the leased property will be sold to the lessee, that transaction is considered a conditional sale at the outset of the transaction.

All receipts received under a conditional sales contract are subject to Retailers’ Occupation Tax. Generally, the lessor is liable for the sales tax on payments made under a conditional sales contract. However, lessors who purchase items for resale under a conditional sales contract can avoid paying tax by providing their supplier with a certificate of resale.

In the case of a true lease, which does not typically have a buyout provision at the end of the contract, the lessor is deemed the end user of the leased property. As end users of tangible personal property, the lessors will owe use tax on the cost price of the property. In most cases, the lessor will either pay their supplier direct, if their supplier is registered to collect Use Tax. Or, they would self-assess and remit the tax to the Department.

For Further Information

Illinois Department of Revenue- General Information Letter #ST 13-0008-GIL