Guidance on New Rental Use Tax Amendment
A new law went into effect on January 1, 2025, that amended the state's Use Tax Act (Act) regarding taxation of leases of personal property. This post explains how this Act may affect units of local government.
The major change to the Act is a new provision that requires
the taxation of leases between a retailer and consumer. "Lease" is now defined in
the Act as:
a transfer of the possession or control of, the right to possess or control, or a license to use, but not title to, tangible personal property for a fixed or indeterminate term for consideration, regardless of the name by which the transaction is called.
Prior to this legislative change, Illinois did not impose a tax on leases of personal property. Instead, the State would tax the retailer for
their initial purchase of tangible personal property (TPP), and then the
retailer could lease the TPP tax-free. The amendment to the Act flips this
scenario. Now, a retailer does not need to pay tax on the initial purchase of
TPP but will have to pay use tax on the lease of that TPP.
For example, it used to be that a retailer would purchase a
set of golf clubs and pay sales tax on that purchase. Then, when the retailer rented
those golf clubs out to consumers, that rental transaction was not taxed. As of
January 1st, that same retailer will not pay sales tax on the purchase of those
golf clubs they intend to lease but will pay a use tax each time they lease
those clubs.
The amendments to the Act have raised some questions which are addressed below:
Are units of local government subject to the Act?
Yes. The Act applies to all persons (including public
corporations) who engage in the business of retail leases, and that would include units of local
government that lease out personal property to others.
What is TPP?
TPP is not explicitly defined by the Act. However, Illinois
courts have defined TPP to mean things that are seen, weighed, measured, and
that are capable of being possessed. Examples of TPP include objects that
consumers possess and/or use such as paddle boards, rackets, balls, shovels, lawnmowers, chairs, bicycles, scooters, iPads, and other
physical items. The Department of Revenue has also provided some examples on its website here.
Does the Act apply to leases of real estate?
No, the Act applies to leases of personal property, not real property or real estate. The Illinois Department of Revenue has published guidance stating that real estate is not TPP for the purpose of the Retailers Occupation Tax. Also see DOR website. Based on how courts have interpreted TPP in applying similar taxes, the use tax would not apply to real estate, only personal property. Therefore, the rental of a pool, cabin, cabana, course, court, banquet space, office, meeting room, or other physical space should not be subject to the Act. The Department of Revenue may issue guidance to clarify this issue as this has been a frequent question since the Act took effect.
Are there other exceptions to what is considered TPP?
Yes. The definition of TPP under the Act expressly exempts motor vehicles and watercraft. For the purposes of the Act, motor vehicles and watercrafts mean a machine that is required to be registered with an agency of Illinois.
You can read the Department of Revenue's bulletin on this new law here. If the Department of Revenue does issue additional guidance on this legislative amendment, we will update Municipal Minute.
Post Authored by Daniel Lev & Julie Tappendorf, Ancel Glink
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