Illinois imposes sales tax on tangible personal property leases

A change to Illinois law requires lessors that rent tangible personal property in the regular course of business to collect sales tax on rental receipts. The change applies to any amounts received under a lease or rental contract on or after Jan. 1, 2025, including amounts received pursuant to contracts that were in place prior to that date.

Lessors are now required to collect sales tax

At the most fundamental level, the new law modified the definition of “retailer” under the Illinois sales and use tax law to include enterprises that rent or lease tangible personal property in the ordinary course of business. Prior to the law change, lessors paid sales tax upfront to Illinois when they purchased the items that they would rent and they weren’t required to pay sales tax on the equipment rental payments that they received from lessees. The law does not provide credits against the rental stream for sales tax paid by lessors on rental equipment purchased before the effective date, but lessors can still utilize credits for sales tax paid at the time of purchase on rental equipment that’s subsequently sold.

On or after the Jan. 1, 2025 effective date, lessors are required to register as retailers with the Illinois Department of Revenue (IDOR), collect sales tax on lease payments that they receive from lessees, and remit the sales tax collected to the state. Lessors will no longer pay sales tax to their vendors when they purchase property that will be leased. They will provide a Form CRT-61, Certificate for Resale, to their vendor to claim an exemption from sales and use tax on purchases of merchandise that will be leased or rented. Additionally, lessees who rent property subject to the new rules may also be required to self-assess and pay use tax to the state if they’re leasing from a business that hasn’t started charging sales tax.

Not all leases are subject to sales tax

The new rules also allow several exemptions based on different criteria such as geography, type of property, and intended use. Rental transactions that do not trigger the sales tax collection obligation on the lessor include:

• Motor vehicle leases (e.g., short-term automobile and light truck rentals, long-term automobile leases, or semitrailers) and leases of boats and aircraft that are required to be registered with an Illinois agency. The new lease tax also doesn’t apply to rent-to-own transactions. (These categories continue to be taxed under existing rules and regulations like the Automobile Renting Occupation Tax).
• Leases that are subject to Chicago’s nontitled personal property lease transaction tax, which is currently imposed at 11% on leases of property in Chicago and for which a separate filing is required.
• Rentals of property that qualify for a manufacturing exemption.
• Leases entered into as a security agreement that don’t involve a transfer of possession or control from the lessor to the lessee.
• Rentals where the lessee is an “exempt organization” under Illinois sales tax law.
• Rentals where the item will be re-leased by the lessee under the resale exemption.

Leases and rentals of computer software are subject to the tax; however, there’s an exemption if the software transferred is subject to a license that meets certain requirements.

What tax rate applies on lease income?

Sales tax rates can vary based on jurisdictions within the state, and that variability can add complexity to the sales tax calculation for lease payments. The law sets forth several rules that address different circumstances, including:

• Application of a local tax rate based on the lessee’s good-faith address when the lease requires “recurring periodic payments” and the lessor delivers the property to the lessee. (The Illinois Department of Revenue has been asked to define “recurring periodic payments” as part of a regulation the Department is currently drafting.)
• If the lessee picks up the property from the lessor or the lease doesn’t require recurring periodic payments, the tax rate is based on the location of the lessor where the property was picked up.
• If the lessee doesn’t pick up the property, the local sales tax rate depends on various factors if the lessor has multiple locations. (Illinois has primary and, if needed, secondary rules used to determine the local sales tax rate when property is delivered and not picked up. These rules can be particularly complex to apply when the lessor has multiple locations.)

Adjusting to a new requirement

Any change like this requires careful review of the impact of the new rules on the operations of a business. In this case, some aspects of the new law are still in the process of being clarified by regulations that are being drafted by IDOR.

Businesses that rent or lease tangible personal property in the regular course of their operations should consult with their tax advisors to review and, if needed, create or modify the internal processes necessary to track these revenues and accurately report them to the Illinois authorities.