Effective January 1, 2025, Illinois implemented changes to its Sales and Use Tax laws. If a business is engaged in leasing or renting tangible personal property in the ordinary course of business, they will be considered a retailer subject to Sales and Use Tax. These businesses must register with the Illinois Department of Revenue (IDOR) and pay tax on their lease or rental receipts.
Defining a Lease
A lease is defined as any transfer of the possession or control but not title to tangible personal property for a fixed or indeterminate term in exchange for consideration. Most rental agreements will fall under this classification, which will be taxable retail sales.
A lease does not include a lease entered into as a security agreement that does not include the transfer of possession or control.
Exemptions from Updated Regulations
The changes made by this legislation do not apply to the leases of motor vehicles, watercraft, aircraft, and semitrailers that are required to be titled/registered with the State of Illinois except for trailers other than semitrailers.
Leases and rentals of computer software that satisfy the criteria of an exempt license of software are exempt, however generally leases of computer software are taxable.
Complying with the New Regulations
A business that participates in the leasing or renting of tangible personal property must register as a retailer with IDOR (Sole proprietorships can only register for new tax accounts by using Form Reg-1).
Once registered receipts for leases or rentals (received on or after January 1, 2025) must be reported on Form ST-1, Sales and Use Tax and E911 Surcharge Return. Form ST-1 is due by the 20th day of the month following the end of your reporting period. Companies with multiple locations are required to file Form ST-2, detailing the receipts of each site.
A credit is available to all lessors who incur Retailers’ Occupation Tax liability on off-lease sales. These are sales that occur when previously leased items are sold after the expiration of their leases if Illinois tax was paid when the lessor purchased the item being sold.
Taxation and Reporting Guidelines
The tax rate is determined by the primary location of the leased property as specified by the lessee. Using the Tax Rate Finder on MyTax Illinois can help businesses in their tax rate calculations as a variety of tools are offered on the website to assist in the process.
Taxes are assessed on payments received on or after January 1, 2025, including those from contracts executed prior to this date. For periodic leases, the tax takes effect at the start of the billing cycle following the implementation date.
Tangible personal property subject to a local lease transaction tax such as the City of Chicago’s Personal Property Lease Transaction Tax (which increased from 9% to 11% in 2025) are exempt from the State and Local Retailers’ Occupation Tax.
Contact Us
If you have questions about the information outlined above or need assistance with a tax matter, Selden Fox can help. For additional information call 630.954.1400 or click here to contact us. We look forward to speaking with you soon.
