Written By: Ashley Trabaris, CPA, MST, State & Local Tax Manager
The Illinois Department of Revenue recently released additional guidance on the new law going into effect January 1, 2025 in regards to sales tax on leases/rentals of tangible personal property (TPP).
Under the new law, lessors will no longer pay sales tax on the acquisition cost of TPP. Instead, they will charge sales tax on the rental charges, using the sales tax rate for where the customer takes possession of the property or uses the property. If picking up at a brick and mortar store, it would be based on the store location. If being shipped within the state, destination based sourcing (the primary location where the property is being shipped/used) is required. Department guidance provides that in general, the primary property location shall be as indicated by the lessee unless that is in bad faith.
For an example, if you rent a piece of equipment, such as a copier, under the old law you didn’t pay any sales tax on the rental of that copier. Instead, the company renting out the copier would pay the tax when they purchased it. With the new law, you will be paying sales tax on each rental payment for the copier and the company renting out the copier would have purchased it tax free using a resale certificate.
However, there are exceptions to the new rules. Items of tangible personal property that are subject to a local lease transaction tax (such as the City of Chicago’s Personal Property Lease Transaction Tax) are exempt from this new sales tax. Short-term and long-term rentals of automobiles, leases of titled property like boats and aircraft, and rent-to-own transactions will continue to be taxed under existing statutes.
From the lessor perspective, there is no provision allowing taxpayers who are subject to the tax on lease receipts to now claim a credit for tax paid on tangible personal property purchased prior to 1/1/2025 for the purpose of leasing to the business’s customers.
Refer to the bulletin IDOR published in regards to these changes: Tax.illinois.gov/research/publications/bulletins/fy-2025-15.html
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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