How are leases of tangible personal property taxed in Illinois?

Illinois has two types of leases of tangible personal property: “true leases” and “conditional sales agreements.”

  • Generally, a true lease has no buyout provision. If a buyout provision does exist, it must be a buyout option based on fair market value to remain a true lease. For tax purposes, in a true lease, the lessor is the end user and must pay use tax on its cost price of the tangible personal property. Lessees do not have a tax liability under a true lease.
  • A conditional sales agreement 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, at the time the lessor and lessee enter into the lease agreement, the lessor is guaranteed that the leased property will be sold. Taxes due from a conditional sale are due when each periodic payment is made.

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