Illinois has enacted legislation that will transform the way the state imposes Retailer’s Occupation Tax (ROT) and Use Tax to leases of tangible personal property (TPP). Historically, Illinois has imposed tax on lessors according to the value of the property for lease at either the time of acquisition or at the commencement of the lease. Under the new law, lessors are required to collect ROT tax on lease payments received on or after January 1, 2025. Lessors may also purchase lease inventory tax-free for resale or re-lease after this date. The same exemptions that apply to TPP sales will also apply to leases.

The exemption does not change the way some leases are currently taxed. Those include:

• Leases of most titled property, including short-term rentals of automobiles which are already subject to the automobile renting occupation tax
• Long-term leases (greater than one year) of automobiles
• Leases of property subject to a rental-purchase agreement (i.e., rent to own)

Additionally, the new law exempts leases of property subject to the Chicago lease transaction tax from the state tax. The state will continue to treat software licenses that meet the five-part test as non-taxable computer software licenses. Note that these licenses may remain subject to the City of Chicago’s Lease Transaction Tax.

Lessors who paid tax upon acquisition of leased property prior to January 1, 2025, are still required to collect and remit tax on all lease payments received after January 1, 2025. When TPP which comes off lease is sold at retail, subject to ROT, the lessor/retailer may take a credit against the ROT remitted, up to the tax paid when the property was originally acquired.

Taxpayers who lease property to customers in Illinois should reach out to our State and Local Tax professionals at RubinBrown to address the future impact of this new law on their business. We are available to provide you with a detailed consultation regarding the lease tax -- including ongoing compliance -- and assist in preparing any required filings.

Published: 11/19/2024

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