ADMINISTRATIVE CODE TITLE 86: REVENUE CHAPTER I: DEPARTMENT OF REVENUE PART 130 RETAILERS' OCCUPATION TAX SECTION 130.102 TAX IMPOSED ON LEASES OF TANGIBLE PERSONAL PROPERTY ON AND AFTER JANUARY 1, 2025
Section 130.102 Tax Imposed on Leases of Tangible Personal Property on and after January 1, 2025
a) Pursuant to changes made by Article 75 of Public Act 103-592, beginning January 1, 2025, the tax imposed under the Retailers' Occupation Tax Act ("the Act"), except as otherwise provided in the Act, applies to persons engaged in the business of leasing at retail tangible personal property (other than motor vehicles, watercraft, aircraft, and semitrailers, as defined in Section 1-187 of the Illinois Vehicle Code, that are required to be registered with an agency of this State). The tax applies with respect to leases in effect, entered into, or renewed on or after January 1, 2025. [35 ILCS 120/1.05; 35 ILCS 120/2] Two decision points that frequently arise in determining the taxability of a transaction that includes the transfer of tangible personal property by lease (i.e., a transfer of the possession or control of, the right to possess or control, or a license to use, but not title to, tangible personal property for a fixed or indeterminate term for consideration), are whether or not the transaction is a service transaction, and, if not, whether service charges included with the lease are subject to retailers' occupation tax. To aid in those determinations, the following analysis should be applied:
1) True Object Test. If it is determined that a transaction includes a taxable lease of tangible personal property, it must be determined whether the transaction is a retail lease transaction or a transfer by lease of tangible personal property incident to a sale of service. To make this determination, the lessor must determine the true object or substance of the transaction. "If the article sold has no value to the purchaser except as a result of services rendered by the vendor and the transfer of the article to the purchaser is an actual and necessary part of the service rendered, then the vendor is engaged in the business of rendering service and not in the business of selling at retail. If the article sold is the substance of the transaction and the service rendered is merely incidental to and an inseparable part of the transfer to the purchaser of the article sold, then the vendor is engaged in the business of selling at retail." Spagat v. Mahin, 50 Ill. 2d 183 (1971); Velten & Pulver, Inc. v. Department of Revenue, 29 Ill. 2d 524, 529 (1963); Dow Chemical Co. v. Department of Revenue, 26 Ill. 2d 283, 285 (1962); Kellogg Switchboard & Supply Corp. v. Department of Revenue, 14 Ill. 2d 434, 437 (1958). If the tangible personal property leased or rented would have value even without the services a company provides, the substance of the transaction is the tangible personal property.
2) Sale of Service. If it is determined that the true object of the transaction is the service and that the tangible personal property is transferred by lease incident to a sale of service, tax on the transfer of the tangible personal property by lease is calculated under the Service Occupation Tax Act. See 86 Ill. Adm. Code 140.101 et seq.
3) Sale at Retail − Inseparable Link Between Sale and Service Charges. If the true object of the transaction is the lease or rental of tangible personal property, any service charges, if inseparably linked to the lease or rental of the tangible personal property, are part of the lessor's costs of doing business and are includable in the lessor's taxable gross receipts. This is true even if the service charges are separately stated on the agreement or bill between the lessor and its customers.
A) When an "inseparable link" exists between the lease of tangible personal property and related service charges, including delivery charges, the related service charges are part of the gross receipts subject to the Retailers' Occupation Tax. See, for example, Section 130.415(b)(1)(B)(i). An inseparable link exists when (a) the service charges are not separately identified to the lessee on the contract or invoice or (b) the service charges are separately identified to the lessee on the contract or invoice, but the lessor does not offer the lessee the option to lease the property without the payment of service charges added to the lease or rental price of an item (e.g., the lessor does not offer the lessee the option to lease the tangible personal property separately from the related service, or the lessor does not offer, or the lessee does not qualify for, a free service option). Section 130.415(b)(1)(B)(ii). In contrast, if the lessee can rent or lease the tangible personal property without payment of service charges to the lessor, then an inseparable link does not exist, and the service charges should not be included in the lease or rental price of the tangible personal property. Section 130.415(b)(1)(B)(ii)-(iii).
B) EXAMPLE: A business offers guided kayak tours that include the rental of a kayak for the one-hour tour duration. Renters are encouraged to participate in the tour but are allowed to venture off on their own. The business requires tour participants to use the provided rented kayaks. The business does not offer rentals of kayaks independent of purchasing the tour. The kayak rental is the true object of the transaction since the tour could not be done without the kayak, but the kayak rental would still have value without the tour. The charge for the tour is inseparably linked to the rental charges for the kayak, regardless of if they are separately stated, as you cannot rent the kayak without the tour charge. As such, the entirety of the proceeds of the transaction is includable in the business' gross receipts and subject to tax. However, if the business were to offer independent kayak rentals in addition to kayak tours, the charge for the tour would not be inseparably linked to the rental charges for the kayak. In this instance, if the business separately states the charge for kayak rental from the charge for the tour on the business' invoice, the charges for the tour would not be includable in the business' gross receipts for retailers' occupation tax purposes and would be a nontaxable service charge.
4) Sale at Retail – Space/Amusement. When tangible personal property is transferred as part of the rental of space or as part of providing an amusement, tax is due. The tax owed and the method to calculate the tax depend on two factors: (i) whether the tangible personal property is the true object of the transaction; and (ii) how the tangible personal property is invoiced in the transaction. The following paragraphs address these issues.
A) Regarding the rental of banquet and conference rooms, the Department has previously determined that if the true object of the transaction is the rental of the room and if food or beverages are provided incidentally to the rental of the room, no tax is incurred on the charges for the rental of the room. If no separate charge is made under the contract for the incidental amount of food or beverages provided, the rentor is considered the user of the food or beverages and incurs use tax on its cost price of the food or beverages transferred incidentally to the rental of the room. If a separate charge is made for any food and beverages transferred incidentally to the rental of the room, the rentor incurs retailers' occupation tax on the selling price of the food or beverages. See 86 Ill. Adm. Code 130.2145(e). However, if the true object of the transaction is the sale of food or beverages, any room rental charges are part of the seller's costs of doing business and are includable in the seller's taxable gross receipts even if the charges for the room rental are separately stated on the agreement or bill between the seller and its customers. In the context of a room rental, the providing of any food other than snacks is the true object of the transaction and not the rental of the room. If alcoholic beverages are either provided or sold by the rentor to the persons attending the event for which the room is rented, the true object of the transaction will always be deemed the sale of food or beverages and not the rental of the room. The rental of the room in these circumstances is considered an inseparable link in the sale of the food and beverages to the customer and is not merely incidental to the seller's business of selling food or beverages. Therefore, charges for room rental are includable in the seller's taxable gross receipts. See 86 Ill. Adm. Code 130.2145(e).
B) This same test applies to rentals of tangible personal property incident to a rental of space or providing an amusement, e.g., batting cages, mini golf courses, bowling alleys, skating rinks, and golf courses. If the true object of the transaction is the rental of space or providing an amusement, no tax is incurred on the charges for the space or the amusement. If no separate charge is made under the agreement for the incidental amount of tangible personal property provided, the rentor is considered the user of the tangible personal property and incurs use tax on its cost price of the tangible personal property transferred incidentally to the purchaser of space or an amusement and used in the course of using that space or partaking in that amusement. If a separate charge is made for any tangible personal property transferred by rental or lease incidentally to the rental of space or providing an amusement, the rentor incurs retailers' occupation tax on the rental or lease price of the tangible personal property.
C) Space/Amusement Example. If a bowling alley charges a fee for bowling, provides bowling balls for no charge as part of the amusement, and charges a rental fee for bowling shoes, tax applies as follows. The true object of the transaction is bowling and not the transfer of bowling balls or bowling shoes. Since no charge is made for customers' use of the bowling balls, upon purchasing the bowling balls the bowling alley will pay a one-time Use Tax for the bowling balls to its supplier, if registered to collect Use Tax, or directly to the Department, if not. Since the bowling alley charges a rental fee for the bowling shoes, the bowling alley will purchase the bowling shoes tax-free for resale and remit Retailer's Occupation Tax on the gross receipts received from each rental of the bowling shoes.
b) For purposes of the taxation of leases, the following relevant definitional changes were made to the Act:
"Sale at retail" means any transfer of the ownership of, the title to, the possession or control of, the right to possess or control, or a license to use tangible personal property to a purchaser, for the purpose of use or consumption, and not for the purpose of resale in any form as tangible personal property to the extent not first subjected to a use for which it was purchased, for a valuable consideration. [35 ILCS 120/1]
"Lease" means a transfer of the possession or control of, the right to possess or control, or a license to use, but not title to, tangible personal property for a fixed or indeterminate term for consideration, regardless of the name by which the transaction is called. "Lease" does not include a lease entered into merely as a security agreement that does not involve a transfer of possession or control from the lessor to the lessee. [35 ILCS 120/1]
On and after January 1, 2025, the term "sale", when used in the Act, includes a lease. [35 ILCS 120/1]
"Purchaser" means anyone who, through a sale at retail, acquires the ownership of, the title to, the possession or control of, the right to possess or control, or a license to use tangible personal property for a valuable consideration. [35 ILCS 120/1]
c) Most titled and registered property excluded. The inclusion of leases in the tax imposed under the Act by Public Act 103-592 does not, however, extend to motor vehicles, watercraft, aircraft, and semitrailers, as defined in Section 1-187 of the Illinois Vehicle Code, that are required to be registered with an agency of this State. The taxation of these items shall continue in effect as prior to the effective date of the changes made by Public Act 103-592 (i.e., dealers owe retailers' occupation tax, lessors owe use tax, and lessees are not subject to retailers' occupation or use tax). See, however, Section 130.454 regarding the definition of "selling price" when certain motor vehicles are purchased for lease. The only items of registered property subject to the lease tax under Public Act 103-592 are trailers (excluding semitrailers as defined in Section 1-187 of the Illinois Vehicle Code). [35 ILCS 120/2] In addition, items that are required to be titled with an agency of this State but not required to be registered with an agency of this State, such as all-terrain vehicles (ATVs), are subject to the lease tax under Public Act 103-592. See Section 130.103 regarding leases of these titled or registered items.
d) Tax imposed on gross receipts as received. In the case of leases, except as otherwise provided in the Act, the lessor must remit, for each tax return period, only the tax applicable to that part of the selling price [i.e., the lease payment] actually received during such tax return period. [35 ILCS 120/2] To determine the effective rate and the effective date of new taxes for leases with recurring periodic payments, see subsections (b) and (d), respectively, of Section 130.101.
e) Exemptions. The exemptions from tax under the Act apply to leases of tangible personal property in the same manner as the exemptions apply to other sales under the Act. See Section 130.120. The following two exemptions apply with respect to gross receipts from the lease of the following tangible personal property:
1) until January 1, 2030, computer software transferred subject to a license that meets the following requirements:
A) it is evidenced by a written agreement signed by the licensor and the customer;
i) an electronic agreement in which the customer accepts the license by means of an electronic signature that is verifiable and can be authenticated and is attached to or made part of the license will comply with this requirement;
ii) a license agreement in which the customer electronically accepts the terms by clicking "I agree" does not comply with this requirement;
B) it restricts the customer's duplication and use of the software;
C) it prohibits the customer from licensing, sublicensing, or transferring the software to a third party (except to a related party) without the permission and continued control of the licensor;
D) the licensor has a policy of providing another copy at minimal or no charge if the customer loses or damages the software, or of permitting the licensee to make and keep an archival copy, and such policy is either stated in the license agreement, supported by the licensor's books and records, or supported by a notarized statement made under penalties of perjury by the licensor; and
E) the customer must destroy or return all copies of the software to the licensor at the end of the license period; this provision is deemed to be met, in the case of a perpetual license, without being set forth in the license agreement; and
2) until January 1, 2030, property that is subject to a tax on lease receipts imposed by a home rule unit of local government if the ordinance imposing that tax was adopted prior to January 1, 2023. [35 ILCS 120/2-5(49)]
f) In all respects lessors of tangible personal property subject to tax on lease receipts under Public Act 103-592 shall be treated as retailers under the Act, and all provisions of this Part apply to lessors unless otherwise provided in the Act. This includes, but is not limited to, the following:
1) Lessors of tangible personal property must register as retailers. See Subpart G. [35 ILCS 120/2a]
2) Lessors may make purchases of tangible personal property for lease tax-free as purchases for resale. See Section 130.210. [35 ILCS 120/2c]
3) Lessors shall calculate tax upon their business of leasing or renting tangible personal property to purchasers for use or consumption measured by the lessor's gross receipts from such leases or rentals made in the course of such business. See this Subpart A. Lessors shall file returns and pay tax on gross receipts received during the reporting period from the lease of tangible personal property in accordance with Subpart E, shall keep books and records in accordance with Subpart H, and are subject to penalties and interest in accordance with Subpart I.
4) Lessors are subject to tax on transportation and delivery charges for leased property in the same manner as transportation and delivery charges are taxed for sales other than leases of property. That is, transportation and delivery charges are part of the gross receipts subject to Retailers' Occupation Tax when there is an inseparable link between the lease of tangible personal property and the outgoing transportation and delivery of the property. (See Section 130.415 and Kean v. Wal-Mart Stores, Inc., 235 Ill. 2d 351(2009)).
5) Lessors of equipment leased to construction contractors, which equipment is used by the construction contractor and is not incorporated into real estate, are subject to tax on the equipment in the same manner as equipment that is sold to a construction contractor for its own use. See Section 130.101. This is true even in cases where the construction contractor is engaging in a construction contract with a customer who holds a tax exemption identification number (e.g., religious, educational, or governmental entity).
g) Leases or rentals taxed under other Acts. The provisions of Article 75 of Public Act 103-592 that apply the Retailers' Occupation Tax to persons engaged in the business of leasing tangible personal property at retail do not apply to (i) items subject to tax under the Rental Purchase Agreement Occupation and Use Tax Act [35 ILCS 180] and (ii) motor vehicles subject to tax under the Automobile Renting Occupation and Use Tax Act [35 ILCS 155]. These items continue to be exempt from tax under the Retailers' Occupation Tax Act and subject to tax under the respective Tax Acts.
h) No credit against tax on lease receipts for Use Tax paid. The legislation applying the retailers' occupation tax to persons engaged in the business of leasing tangible personal property at retail makes no provision for a credit for Use Tax paid prior to January 1, 2025 by lessors when they acquired property for leasing purposes. Lessors may not reduce the Retailers' Occupation Tax owed on their gross receipts from leasing by any Use Tax they paid for leased property acquired prior to January 1, 2025. A lessor who incurs a Retailers' Occupation Tax liability on the sale of an item coming off lease, however, may take a credit against that liability for any Use Tax and any local retailers' occupation tax reimbursement the lessor paid to a supplier registered to collect Illinois tax when the lessor purchased that particular item. See Section 130.2013(h).
i) No impact on Software as a Service. The lease tax provisions of Article 75 of Public Act 103-592 extend to the lease, license, or rental of computer software, but exempt gross receipts from the lease of computer software transferred incident to a license meeting certain criteria. However, computer software provided through a cloud-based delivery system – a system in which computer software is never downloaded onto a client's computer and is only accessed remotely – is not subject to tax. For more on leases of computer software, see subsection (e)(1).
j) Repair and replacement parts. A lessor's purchase of repair or replacement parts for the purpose of being attached to tangible personal property used solely for leasing or renting as a part thereof, which property is subject to the tax on leases under Public Act 103-592, is exempt as a purchase for resale. However, if the same property is purchased by a lessee, the purchase is taxable. In addition, if the repair or replacement parts are provided by the lessor as part of an optional service contract separate and distinct from the lease or rental agreement for the tangible personal property to which they will be attached, tax on the transfer of the repair or replacement parts incident to the separate service contract is determined under the Service Occupation Tax Act.
(Source: Added at 50 Ill. Reg. 1119, effective January 8, 2026) |