Maria Gordon

CPA | Tax Supervisor -SALT

Beginning January 1, 2025, Illinois legislation requires lessors of tangible personal property (TPP) to charge Illinois sales tax on rental charges. Previously, TPP acquired for leasing purposes in Illinois was taxed to the purchaser, and leases of TPP were not taxed to the rental customer. Under the new law, lessors must apply Illinois sales tax to rental charges based on the sourcing rules outlined in the Illinois Retailer’s Occupation Tax (ROT).

Determining the Appropriate Tax Rate

For leases requiring recurring periodic payments for TPP delivered by the lessor to the customer, each periodic payment is sourced to the primary property location as provided by the lessee. For all other leases, including leases that do not require regular periodic payments, and any lease in which the customer takes possession at the lessor’s place of business, the sales tax rate is determined as provided under the Retailers’ Occupation Tax Act for sales at retail (86 Ill. Adm. Code 270.115). For additional details, see Illinois Informational Bulletin FY 2025-15 (FY 2025-15, Illinois Sales and Use Tax Applies to Leased or Rented Tangible Personal Property).

Exceptions to the New Law

Several exceptions to this legislation remain unchanged :

• Automobile Rentals: Short-term rentals of automobiles and light trucks already subject to the Automobile Renting Occupation Tax.
• Long-term Automobile Leases: Rentals exceeding one year.
• Titled Property Leases: Leases for boats, aircraft, and large trucks, except for certain titled trailers.
• Rent-to-Own Transactions
• Computer Software:  While categorized as TPP under ROT (except certain custom software), Illinois regulations do not recognize rentals of computer software. This is because software is “licensed” to a user not “rented.” (See City of Chicago below)

City of Chicago Exception

The City of Chicago already imposes its own local tax on non-titled use of TPP – the Personal Property Lease Transaction Tax, which increased from 9% to 11% as of January 1, 2025. To prevent double taxation, the state has excluded the City of Chicago from the ROT on leases of TPP. Notably:

• TPP acquired for lease within the City of Chicago is exempt from ROT on acquisition costs.
• No state sales tax will apply to leases in the city.  
• The city will maintain a local 1% use tax on TPP purchased for lease in Chicago.

Sales Tax Impact on TPP Purchases

Effective January 1, 2025:

• Purchases of TPP for Lease: Exempt from Illinois sales tax, as the lessor will be charging sales tax on rental charges.  To document this exemption, lessors must provide  an Illinois resale certificate.
• Property Acquired Before  January 1, 2025: Leases of TPP purchased prior to the change are also subject to the lease tax, even though the lessor paid sales tax on the acquisition. Lessors may claim a credit when the TPP is no longer used and is sold, offsetting any sales tax collected during the resale process.

Need Assistance

Navigating the complexities of sales and use tax can be challenging. Cray Kaiser is here to help. If you have any questions or need guidance, please contact us or call us at 630-953-4900.