insight magazine

Tax Decoded | Fall 2024

Hashing Out Illinois’ New Sales Tax on Leases

Following years of negotiations, changes to the sales tax on leases of tangible personal property will go into effect on Jan. 1, 2025.
Keith Staats, JD Executive Director, Illinois Chamber Tax Institute


In the closing days of the spring legislative session, the Illinois General Assembly passed sweeping changes related to the sales tax on leases of tangible personal property (TPP). The leasing tax legislation is a portion of the end-of-session tax omnibus bill (Public Act 103-0592), which was signed into law on June 7 and goes into effect on Jan. 1, 2025.

The legislation resulted from years of discussions. I authored earlier drafts of the legislation (introduced as Senate Bill 2180 in 2021, and most recently as Senate Bill 2201 in 2023), but the final version was redrafted by IDOR to incorporate changes they required as a condition of their support.

Here’s an overview of these changes and what we can expect to see with the rollout in the coming months. For reference, I’ll sometimes be referring generically to “sales tax” throughout this column when I refer to the combination of the Illinois Retailers’ Occupation Tax (ROT), Use Tax (UT), and locally imposed ROTs.

AN OVERVIEW ON CURRENT LAW

Illinois taxes leases of TPP differently than all other states, with the exception of Maine at the time of writing. Illinois imposes tax on the cost of items of TPP acquired for leasing purposes but doesn’t charge tax on the charges to the rental customer, with some exceptions. Unlike Illinois and Maine, all other states with a sales tax don’t impose tax on the cost of TPP purchased for lease purposes. Rather, tax is charged on the charges to the rental customer. For example, today if a local rental business in Illinois purchases a chainsaw that it plans to rent to customers, the business pays sales tax on the acquisition cost of the chainsaw. If I go to the business to rent the chainsaw, no sales tax is imposed on the daily charge I pay for renting the chainsaw. If the same transaction occurs in Indiana, the Indiana rental business doesn’t pay sales tax on the purchase price of the chainsaw but would charge tax on the rental charge when I rent the chainsaw in Indiana.

WHAT’S CHANGING?

Effective Jan. 1, 2025, lessors of TPP (e.g., the local rental business in my example above) will no longer pay sales taxes on the acquisition cost of items of TPP purchased for lease purposes. The tax-free purchase for rental purposes will be documented by presenting a modified version of the current Illinois resale exemption certificate to the seller.

Additionally, when an item of TPP is rented, the lessor will charge tax to the lessee. For purposes of determining the proper tax rate (the combination of state and locally imposed ROTs), the lessor will use the same sourcing rules under the ROT that are used for sales of TPP. So, if I go to a rental business in Westmont, Ill. to rent a chainsaw, the business will charge the 8.75% combined state and local ROT rate that’s in effect in Westmont. However, if I rent the chainsaw from a rental business in Springfield, Ill., the business will charge 9.75%. In other words, the business will use the same “origin sourcing” that’s used for over-the-counter sales of TPP.

EXCEPTIONS TO THE NEW LAW

Of course, this is Illinois, so there are a number of exceptions to the general rule established by the legislation. The legislation doesn’t change the current taxation of:

  • Short-term rentals of automobiles and light trucks since they’re currently subject to the Automobile Renting Occupation Tax (i.e., these transactions are already subject to tax on the lease stream).
  • Long-term rentals of automobiles (greater than one year).
  • Leases of other types of titled property (e.g., boats, aircraft, and large trucks), except for certain titled trailers.
  • Rent-to-own transactions since they’re currently taxed on the lease stream under their own statute.
  • Computer software. Other than certain custom software, computer software is characterized as TPP under the ROT and UT. However, Illinois regulations have never recognized “rentals” of computer software. In regulations I helped draft in 1990, software is “licensed” to a user not “rented,” and certain classes of licenses aren’t subject to sales taxation. In fact, the computer software rule has been incorporated into the statutes.

THE CHICAGO CARVE OUT

Under the new legislation, rentals of TPP in the City of Chicago are treated differently than the rest of the state. That’s because the city has its own locally imposed and administered non-titled personal property lease transaction tax imposed at a 9% rate on various types of leases, including those of TPP. Chicago also imposes and administers a local 1% home rule UT on purchases of TPP, which includes TPP acquired for lease purposes.

Chicago was carved out of the state and local ROTs that’ll be imposed on leases of TPP. The combined state and local ROT in the City of Chicago is currently 10.25%. Absent the carve out, the total tax on a lease transaction in Chicago would’ve become 19.25% between the state and local taxes, which wasn’t viable. Also, because of the amount of revenue collected from this tax, the city was adamantly opposed to phasing out the Chicago tax.

From an administrative standpoint, leaving the current structure in place for the City of Chicago wasn’t viable for both taxpayers and IDOR. As a result, TPP acquired for lease in the city will no longer be subject to sales tax on the acquisition cost of the items (even though it won’t be replaced with the state sales tax on the rental charges). However, there’s one exception—the City of Chicago insisted that they be allowed to continue to locally impose and administer a 1% home rule UT on TPP purchased for lease purposes in the city.

ANY TRANSITIONAL CHALLENGES?

Now, you may be thinking: If a business pays tax on the acquisition cost of all of its rental inventory purchased through Dec. 31, 2024, but then is required to charge tax on the lease charges on those same items after Jan. 1, 2025, shouldn’t there be some sort of mechanism to make sure tax isn’t paid twice on that equipment?

Interestingly, this was one of the many issues hashed out during the legislative drafting process. In one version of the legislation that I drafted, I included a one-time credit to handle such situations—lessors could calculate the tax they paid on acquisition costs, report that amount to IDOR, and then take a credit against the taxes they would collect from customers after Jan. 1, 2025, until the credit was used up. However, IDOR didn’t agree to the one-time credit (likely because of the fiscal impact of the one-time credit). In the final version of the legislation drafted by IDOR, taxpayers are authorized to use an existing credit.

Since 1986, lessors of TPP have been allowed to take a credit up to the amount of tax they paid on the property that was acquired for lease purposes when they stop using it and sell the property and collect sales tax from the purchasers. Lessors will continue to be able to claim that credit when they sell off their rental inventory, which they paid tax on at acquisition.

All in all, much like the process of getting here from the negotiating table, you can expect to see some bumps along the way as the new legislation takes effect. Now’s a good time to prepare yourself and/or your clients for the changes ahead.

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