January 31, 2025

Illinois Adopts New Sales Tax Rules for Leased Equipment

Starting January 1, 2025, Illinois changed how sales tax applies to leased tangible personal property (TPP). Instead of taxing the purchase of leased equipment, the state now requires sales tax to be collected on lease payments. This update, part of Public Act 103-0592, revises the Retailers’ Occupation Tax to bring Illinois in line with how most other states tax leases. While the new system simplifies tax collection for the state, it introduces new compliance requirements for businesses that lease equipment. Lessors will need to adjust how they collect and report sales tax, and lessees should be aware of how rental costs will change. These updates apply to in-state companies, but also those out of state businesses that meet certain thresholds. To help clients, prospects, and others, Wilson Lewis has summarized the key details below.

How Illinois Previously Taxed Leased Equipment

Before 2025, Illinois had an unusual approach to taxing leased equipment:

• Lessors paid sales tax upfront when purchasing equipment for lease.
• Customers were not charged tax on lease payments.

For example, if a rental company purchased scaffolding to lease to contractors, it paid sales tax on the purchase price but did not collect tax on rental charges.

Most states handle lease taxation differently. In Indiana, for example:

• Lessors don’t pay tax upfront when buying leased property.
• Instead, customers pay sales tax on each lease payment.

Illinois has now adopted this model, shifting the tax burden from the lessor’s purchase to the lessee’s payments.

Key Changes Effective January 1, 2025

• Sales tax is now applied to lease payments instead of the lessor’s purchase.
• Lessors no longer pay sales tax upfront when acquiring rental inventory.
• Businesses that lease equipment, furniture, or other tangible property must collect and remit sales tax from their customers on lease payments.
• Out-of-state lessors leasing to Illinois customers must comply with Illinois’ tax collection rules if they meet economic nexus thresholds.
• For in-person rentals, sales tax is based on the rental business’s location (origin-based tax).
• For rentals that are delivered, sales tax is based on the customer’s location (destination-based tax).

Who Is Affected?

This change impacts businesses that lease tangible personal property, including:

• Construction equipment (scaffolding, cranes, generators).
• Medical & office equipment (imaging machines, commercial printers).
• Retail & hospitality equipment (point-of-sale systems, refrigeration units).
• Consumer rentals (event furniture, power tools, recreational gear).

It also applies to retailers selling or leasing goods to Illinois customers, including out-of-state businesses that meet Illinois’ sales thresholds.

What Stays Exempt?

Some transactions remain exempt from the new lease tax rules:

• Titled property (motor vehicles, watercraft, aircraft, semi trailers).
• Security agreements where the lessee does not take full control.
• Rent-to-own agreements under the Rental-Purchase Agreement Act.
• Certain computer software licenses that qualify under a five-part exemption test.
• Rentals in Chicago, which are still subject to Chicago’s 1% home rule use tax but not the new statewide rules.

How This Affects Businesses

One of the biggest changes under the new rules is that lessors no longer have to pay sales tax upfront when purchasing rental inventory. This shift could improve cash flow by reducing the immediate tax burden on businesses acquiring leased equipment. However, lessors must now track and remit sales tax on each lease payment, which may require accounting system updates and process adjustments. For lessees, the change means sales tax will now be added to lease invoices, increasing ongoing rental costs that businesses will need to factor into their budgeting.

Another concern is how previously taxed inventory will be handled. No tax credit is available for businesses that already paid sales tax on rental equipment before January 1, 2025, but are now required to collect tax on lease payments for those same assets. This creates a potential double taxation issue, where sales tax was paid at the time of purchase and must now also be collected from the lessee. While many opposed this outcome, lawmakers did not include a remedy in the final legislation. The only available credit remains the long-standing rule that allows lessors to claim a tax credit when they stop leasing equipment and sell it instead.

The Illinois Department of Revenue may issue additional guidance. Businesses will want to monitor updates and consult tax professionals to ensure compliance.

What Businesses Should Do Now

To comply with the new rules, businesses should take the following steps:

• Review existing lease agreements to determine tax implications.
• Update accounting and invoicing systems to reflect the new tax structure.
• Ensure compliance with destination-based tax collection rules.
• Monitor Illinois Department of Revenue guidance for updates, especially on pre-2025 inventory concerns.
• Consult a tax professional, such as the ones at Wilson Lewis, to ensure proper implementation and compliance.

Contact Us

The new Illinois lease tax structure is a major shift for businesses that lease equipment to customers. While it streamlines tax collection for the state, it also introduces new compliance requirements for businesses. If you have questions about how these changes impact your business or need assistance with another tax or accounting issue, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.