Illinois Lessor Beware – Dealing with Leases / Traps within the State

The treatment of leases in Illinois is an anomaly compared to almost any other jurisdiction.[1] While most jurisdictions impose sales tax on lease receipts collected from the lessee, who is the user of the device, Illinois differs in that it treats the lessor as the user of the device. As such, the lessor is subject to Illinois usage tax. 86 Fig. Admin. 130.2010; GIL 16-0067 (December 27, 2016). Unique treatment in Illinois presents landlords with many challenges. First and foremost, Illinois levies a tax on the company that does not have day-to-day control of the equipment. This is particularly challenging in the context of mobile ownership. In addition, in connection with exceptions, the question is often asked whether the exemption of a lessee “flows through” to the lessor. This post provides an overview of the retailer’s professional tax (i.e. sales tax) and the tax ramifications of leasing equipment in Illinois.

What is a lease?

Under Illinois law, “real leases” and “conditional sales,” often referred to as “$ 1 outs,” have different tax treatment. GIL 16-0067 (December 27, 2016). A conditional sale is traditionally characterized by a nominal or dollar purchase option at the end of the term. Conditional sales are essentially financial or “credit” transactions disguised as “sales”. This financial product is subject to Illinois retailer professional tax (ie sales tax). Conversely, for a “real leasing” there is no automatic buy-out at the end of the term, and if there is one, the buy-out must take place at fair market value. Under Illinois law, lessors are the end users of the property being rented and are subject to the Illinois Use Tax on the cost of the property. 86 Fig.Admin code 130.220.

However, the general rule that lessors are subject to a use tax on the purchase of real estate they wish to lease is not without exception. For example, automobiles that are rented for less than a year are subject to the Automotive Renting Occupation and Use Tax (“AROT”).[2]Certain leased passenger cars are subject to different rules and compliance requirements, including paying taxes on post-lease fees, which I wrote about here [3]and Consumer Rent-to-Own Devices are examples of scenarios that do not conform to Illinois’ general treatment of device leases as outlined in this post.[4] The following analysis therefore applies to the general rule that lessors impose a use tax on properties acquired for rental.

Effects of Landlord’s Usage Tax in Illinois

Landlords should not provide a resale certificate to the seller.

In countries where the tax is imposed on the lessee, the lessor should usually provide the seller of the equipment being leased with a certificate of resale. This is because most jurisdictions impose taxes on the renter and grant a “resale exemption” on properties acquired for the purpose of leasing or renting to an end user. Conversely, in Illinois a landlord should never Provide the seller or manufacturer with a certificate of resale in a real rental agreement. 86 Fig.Admin code 130.220. Rather, the lessor should pay the usage fee charged by the seller. If the seller does not otherwise levy taxes, the lessor must assess and remit the property tax on his / her return in Illinois. I would.

Is the landlord’s use tax as the lessor just a business expense that I cannot reimburse?

No. Despite Illinois’ imposition of a use tax on the lessor and the fact that lessees are not taxed on rental income, a lessor can amortize its tax costs through private reimbursement with its lessee. 86 Fig. Admin. Code 150.305 (d); ST 15-0018 GIL (March 18, 2015). Often, lessors achieve this by developing a tax refund policy in the rental agreement. As long as there is an agreement, the tenants are obliged to comply with the terms of the private contract.

What if my tenant claims their corporate status qualifies for an exemption?

The short answer is that a lessee’s exception status doesn’t always flow through to the lessor and clear the lease transaction. In my previous experience with a large leasing company, this was one of the most common problems that created friction between the lessor and its lessees. Often times, nonprofit and religious organizations, which are generally exempt from their purchases and leases in most countries, unexpectedly find a “refund of use tax paid” on their bill. See decision on private letters ST 92-0688 (December 21, 1992). These companies often try to rely on the rule that lease income is not taxable. However, if they do not understand their lease with the lessor, they will have to reimburse the lessor for its tax obligations to use. When lessors attempt to collect this reimbursement from their lessee, a specific “reimbursement language” should be used.

However, the status of some companies is passed on to the lessor and exempts the leasing transaction. For example, certain purchases of tangible personal property by individuals leasing property to qualified persons who have been issued an “E” number by the Illinois Department of Treasury are exempt from usage tax. See 35 ILCS 105 / 3-5 (22), (23), (31). These individuals are restricted to government agencies and exempt hospitals. 86 Fig. Admin. Code 130.2011 & 130.2012. With regard to hospitals, only certain purchases are eligible – namely, computers and communications equipment used for hospital purposes and equipment used to diagnose, analyze, or treat hospital patients. I would.; See also General Information Letter Ruling ST 15-0018 IL (03/18/2015).

Vehicles: a common exception that “flows through”[5]

Another common exemption that the lessor benefits when purchasing equipment is the exemption for vehicles. The term “rolling stock” includes all types of interstate company transport vehicles that can be rented (railroad, bus, airline, truck, etc.). As of August 24, 2017, the motor vehicle or trailer must be used to transport people or property for rent. The buyer must certify that the motor vehicle or trailer is being rented by an interstate freight forwarder who has an active USDOT number with the carrier identified as “interstate” and the operational classification as “approved for rental”, “exempted for rental” or both, and for motor vehicles, the gross vehicle weight rating must exceed 16,000 pounds. PA 100-321 (valid from August 24, 2017). Prior to this change, the rental company was required to certify that the vehicles were being used for more than 50% of their miles or trips outside of Illinois. See 35 ILCS 115 / 2d.

In particular, this exemption cannot be invoked for hire by a purely domestic carrier. However, a rental company may invoke this exemption if the vehicle is being used for rental by an interstate carrier, even if the persons or objects carried are only between points in Illinois and end or end outside of Illinois with other carriers during transportation or rental . 86 Fig.Admin.Code 130.340 (d).

With this exception, the lessor has to certify the status of the lessee, which puts the lessor in an uncomfortable position. Specifically, the Illinois form applying for this exemption requires the lessor to sign and certify the lessee’s interstate carrier status. Fortunately, the recent legislative change has reduced that burden by eliminating actual mileage / drive usage. In addition, there are ways a lessor can verify a lessee’s transportation status by visiting the US Department of Transportation, the Federal Motor Carrier Safety Administration’s Safety and Fitness Electronic Records (SAFER) system.

Conclusion

An Illinois equipment rental lease must be aware of Illinois’ unique treatment of leases or it will undoubtedly have an unforeseen tax liability. In addition, lessors who lease real estate within the city of Chicago must also be aware of the personal real estate rental transaction. My colleague Samantha K. Breslow recently wrote about this tax. Unlike the treatment of leases in Illinois, the lease transaction tax is a tax on lease income. Therefore, Chicago lessees are subject to Chicago lease transaction tax andmost likely reimbursement of the landlord’s usage tax.

[1]See California for Mobile Transportation Devices and Maine in general for other jurisdictions that treat rental agreements similar to Illinois. Cal. Code Regs. 18 § 1661; MRS 36 § 1811, Maine Instructional Bulletin No. 20

[2]See 35 ILCS 155/1 ff. (“AROT”)

[3]See 35 ILCS 105/2 for vehicles that are subject to an Alternative “Sale Price” under the Illinois Use Tax

[4]See PA 100-437, valid from January 1, 2018

[5] Although not discussed in this article, two other common exceptions that affect the lessor’s purchase of leased equipment are the graphic arts machinery and equipment and manufacturing machinery and equipment exceptions. See 86 fig.Admin code. 130.325, 86 Ill.Admin Code 130.330

© Horwood Marcus & Berk Chartered 2021. All rights reserved.National Law Review, Volume VIII, Number 142

Comments are closed.