How are leases of tangible personal property taxed in Illinois?
Illinois taxes tangible personal property leases differently than most states. Illinois has two types of leasing situations, “true lease” and “conditional sale”.
- Generally, a true lease has no buy out provision. If a buy out provision does exist, it must be a fair market value buy out option to remain a true lease. For tax purposes, in a true lease, the lessor is the end user and must pay use tax on their cost price of the tangible personal property. (Lessees do not have a tax liability under a true lease.) See Illinois Administrative Code, Section 130.2010 and 130.2013.
- A conditional sale usually has a nominal or one dollar purchase option at the close of the lease term. The transaction is a conditional sale and all receipts are subject to sales tax if the lessor is guaranteed at the time of the lease that the leased property will be sold. See Illinois Administrative Code, Section 130.2010.
