Written By: Ashley Trabaris, CPA, MST, Manager
The Illinois General Assembly recently passed significant changes to the sales tax on leases of tangible personal property (TPP), effective January 1, 2025. This legislation, part of the tax omnibus bill (Public Act 103-0592), shifts the tax burden from the acquisition cost of TPP to the rental charges paid by customers. Previously, Illinois taxed the purchase of TPP for leasing purposes but did not tax the rental charges, unlike most other states. This change aims to align Illinois’ tax practices more closely with those of other states, simplifying the tax process for lessors and lessees.
Under the new law, lessors will no longer pay sales tax on the acquisition cost of TPP. Instead, they will charge sales tax on the rental charges, using the same sourcing rules as for sales of TPP. This means the tax rate will depend on the location of the rental business, consistent with the origin based sourcing currently used to determine the sales tax rates to charge. This shift is expected to streamline tax compliance and reduce the upfront tax burden on businesses purchasing TPP for lease.
For an example, if you rent a piece of equipment, such as a copier, under the old law you didn’t pay any sales tax on the rental of that copier. Instead, the company renting out the copier would pay the tax when they purchased it. With the new law, you will be paying sales tax on each rental payment for the copier and the company renting out the copier would have purchased it tax free using a resale certificate.
However, there are exceptions to the new rules. Short-term and long-term rentals of automobiles, leases of titled property like boats and aircraft, and rent-to-own transactions will continue to be taxed under existing statutes. Additionally, the City of Chicago will maintain its own tax structure, including a 1% home rule use tax on TPP purchased for lease purposes. This carve-out prevents a potential 19.25% combined tax rate on leases in Chicago, which would have been unfeasible. As the new legislation takes effect, businesses should prepare for transitional challenges and ensure compliance with the updated tax requirements.
Another upcoming change effective January 1, 2025, from Illinois HB4951, the sales tax vendor discount will be capped at $1,000 per month. For those filing and paying the tax timely, this retailer’s discount was available to all companies at a flat 1.75% of tax due or $5 per calendar year, whichever is greater. This discount was originally intended to compensate businesses for the costs of collecting and remitting sales tax. However, with automation reducing the manual work involved, the cap is seen as justified. This change will mainly affect businesses collecting over $57,000 in tax monthly, who must now ensure they only take the allowable discount.
If you have any questions on your requirements in regards to these changes, please contact a member of your Porte Brown advisory team.
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