Written By: Ashley Trabaris, CPA, MST, Manager
As of January 1, 2025, the Illinois Department of Revenue (IDOR) has changed how sales tax applies to leases and rentals of tangible personal property (TPP) in Illinois. Under the new law, most leases or rentals are now treated as taxable for retail sales, meaning tax is collected on each lease payment rather than on the original purchase. This guide explains the shift, who is affected, what is exempt, and what businesses must do to comply.
Under the prior administration, lessors paid sales or use tax when they initially purchased items they planned to lease; lease payments from customers were generally tax-free.
Effective January 1, 2025, a lease or rental of TPP is now defined as a sale at retail. Lessors including equipment rental companies, office-furnishing lessors, and any business renting personal property must register as retailers with IDOR and collect sales tax on each payment received.
To avoid double taxation, lessors may now purchase rental inventory tax-free by issuing a resale or lease-purchase exemption certificate (Form CRT-61) at the time of purchase.
Any business that leases or rents tangible personal property (TPP) as part of its regular operations from equipment rental, furniture leasing, business-equipment rental, tooling, office equipment, etc.
Lease or rental payments received on or after January 1, 2025 even under contracts signed before that date are subject to sales tax. Leases of titled or registered property motor vehicles, watercraft, aircraft, semitrailers remain under prior tax regimes and generally are excluded from the new lease-stream tax.
Properties subject to existing local lease-tax regimes may be carved out in those locales the local law may continue to apply instead of the state lease tax. Some software leases may be exempt under longstanding Illinois rules (depending on the license agreement and whether the software qualifies under the statutory “software license” exemption).
Register with IDOR as a retailer if you lease or rent TPP in the ordinary course of business. Use a resale or lease-purchase exemption certificate (Form CRT-61) when acquiring equipment, you plan to lease to avoid paying sales tax upfront.Collect sales tax on each lease or rental payment you receive after January 1, 2025, and remit via the standard sales use-tax return (e.g., Form ST-1).
Source tax based on the property’s location state and applicable local sales tax depending on where the property is physically located.Update billing and accounting systems to reflect the change including line-iteming tax on leases, differentiating taxable vs. exempt leases, and tracking lease receipts on basis for reporting.
Cash-flow shift: Lessors benefit from not paying large up-front tax on purchased equipment. Instead, tax collection is spread over the life of the lease as part of each payment, which may improve cash flow and balance sheet management. Pricing adjustments: Lessors may need to adjust lease pricing to incorporate sales tax compliance costs, making transparency on lessee invoices important.
Equipment in-service prior to 2025: Even equipment purchased pre-2025 remains subject to the new tax on future lease receipts meaning prior tax paid at purchase does not exempt future lease payments. Local tax and jurisdiction caveats: In certain places local lease-tax regimes may remain lessors need to check whether state lease tax or local lease tax applies to each contract.
With the passing of Public Act 103-592 and effective Jan 1, 2025, Illinois overhauled its treatment of leases of tangible personal property. The shift to tax on the lease stream brings the state in line with how most other states' tax rentals promote a more uniform, revenue-based tax system for leasing businesses.
For lessors, the changes simplify the upfront cost of acquiring rental inventory and align tax obligations more directly with revenue from leasing. For compliance, though, it means new registrations, reporting, and system updates.
If you have any questions on your requirements in regards to these changes, please contact a member of your Porte Brown advisory team.
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