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How does Illinois tax leases of tangible personal property?
Illinois has two types of leases of tangible personal property: true leases and conditional sales agreements.
Generally, a true lease has no buyout provision. If the lease agreement contains a buyout provision, this provision must be a buyout option based on fair market value for Illinois law to consider the agreement a true lease. For tax purposes, in a true lease, the lessor is the end user and must pay use tax on its cost price of the tangible personal property. Lessees do not have a tax liability under a true lease.
A conditional sales agreement usually has a nominal or “one dollar” purchase option at the close of the lease term. If the lessor is guaranteed when entering into the lease agreement that the leased property will be sold, Illinois law considers the transaction to be a conditional sale, and the lessor to be a retailer making a sale of tangible property, that subjects all receipts to sales tax. As a retailer, the lessor must collect tax on each periodic payment the lessee makes under the conditional sales agreement.
When lessors lease vehicles for a term longer than one year, they owe use tax up front on the selling price of the vehicle. The lessor is the owner of the vehicle and is liable for the tax. Most lessors generally reimburse themselves for the tax they paid by increasing the lessee's lease payments. If the lessee chooses to purchase the vehicle at the end of the lease term, the lessee then becomes the owner and must pay tax on the purchase price at that time. See 86 Ill. Adm. Code 130.2010.