Illinois Archives - Thompson Tax

Understanding the New Illinois Sales and Use Tax for Leased or Rented Tangible Personal Property: Effective January 2025

Jan 21, 2025 | Sales and Use Tax

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As the Illinois business landscape continues to evolve, so do the tax regulations that govern it. With the introduction of P.A. 103-592, effective January 1, 2025, a significant change occurred: businesses that lease or rent tangible personal property will now be classified as retailers and subject to Illinois’ Sales and Use Tax laws.

Who Needs to Pay Attention?

If your business involves leasing or renting tangible personal property, this change directly impacts you. The law targets “all persons who, in the ordinary course of business, lease or rent tangible personal property,” meaning not only large retailers but also smaller enterprises and individual proprietors will be affected. Understanding what constitutes a lease under this new definition is essential to effectively navigating the upcoming tax requirements.

Defining a Lease

According to the new regulations, a “lease” is defined broadly. It refers to the transfer of possession or control of tangible personal property for a fixed or indeterminate term in exchange for consideration. This means that whether you call it a lease, rent, or something else – if you are providing tangible personal property in a manner that fits this definition, you are subject to the new sales tax requirements. Importantly, agreements intended solely as security agreements that do not involve the transfer of possession do not qualify as leases.

Registrations and Tax Obligations

As a newly defined retailer, your business must register with the Illinois Department of Revenue. Once registered, businesses must remit sales tax on lease or rental receipts. Register now to ensure compliance and avoid penalties.

Important Steps to Register

MyTax Illinois Portal: Utilize the MyTax Illinois online system to add new tax registrations.
Form ST-1: All lease receipts are reported on the sales and use tax return.

You can complete and submit updated paper forms if electronic registration is not feasible.

Tax Exemptions on Purchases for Lease or Rent

For businesses that purchase tangible personal property specifically for leasing or rental, there is a pathway to claim a tax exemption. Starting January 1, 2025, companies may use Form CRT-61, Certificate for Resale, to exempt purchases that will indirectly incur Retailers’ Occupation Tax through leasing activities, which can provide significant financial relief for qualifying purchases.

What Receipts Are Taxed?

Understanding what receipts from lease or rental transactions are subject to taxation is crucial for compliance. The lessor is responsible for remitting tax only on the portion of the selling price they receive within the specific reporting period. If you manage multiple contracts or leases, it’s essential to track payments closely to ensure accurate tax reporting.

The “selling price” in the context of a lease or rental agreement aligns with what’s typically understood in retail transactions – including any credits or services provided.

Existing Contracts and Future Tax Liabilities

One common question concerns existing contracts established before the new law takes effect. The law applies to all gross receipts received on or after January 1, 2025, meaning that agreements signed before that date will still incur tax on payments made afterward. All business owners must communicate with customers regarding these changes to avoid misunderstandings.

Determining Tax Rates for Lease Transactions

Suppose your business involves making lease or rental agreements that require periodic payments. In that case, you will need to determine the correct tax rate to apply based on the primary property location of the leased item. Each location may have different local tax rates in addition to the state tax, thus necessitating careful attention to the addresses associated with each lease. Businesses can leverage the Tax Rate Finder on the MyTax Illinois homepage to identify the appropriate rates by property address.

Handling Multiple Permanently Located Business Sites

Understanding how to report receipts from each site is imperative for businesses operating in multiple locations. Receipts must be reported on Form ST-2, which is specifically designed for businesses with multiple tax sites. Each site needs to be registered individually in the MyTax Illinois system.

Filing and Payment Timing

Compliance involves proper registration, tax collection, and timely filing of tax returns. Form ST-1 is due on or before the 20th of the month following the end of each reporting period. If the filing date falls on a weekend or holiday, it will extend to the next business day.

Rental Purchase Agreements versus Standard Leases

It’s important to differentiate between standard leases and rental purchase agreements. Rentals that fall under the Rental Purchase Agreement Tax, primarily for personal, family, or household purposes, do not fall under the new Retailers’ Occupation Tax. This segmentation means that some businesses may be exempt from the new tax regulations if they primarily deal with rental purchases.

Local Lease Transaction Tax Implications

One potentially complex area involves businesses conducting business in regions with local lease transaction taxes. The new legislation specifies that tangible personal property subjected to a local lease transaction tax adopted before January 1, 2023, is exempt from the state’s lease tax. This necessitates thorough recordkeeping and an understanding of local tax ordinances that may vary significantly from state rules.

No Tax Credits for Pre-Paid Taxes

Businesses should note that no credit is available for taxes paid on tangible personal property previously purchased for leasing purposes. However, if you incur tax liabilities from off-lease sales of previously rented items, you may qualify for a credit, provided state tax was paid at the time of purchase.

Depreciation Considerations

Businesses may also wonder about depreciation on leased merchandise they previously utilized outside Illinois. Unfortunately, no depreciation for out-of-state use is allowed under the new tax law, which imposes taxes based solely on lease or rental receipts collected.

Direct Tax Liability for Non-Compliant Lessors

Lastly, should you lease tangible personal property from a business that does not collect the tax, you are still legally obliged to pay that tax directly to the IDOR. This underscores the importance of maintaining accurate tax records and being diligent about tax reporting and payment responsibilities.

How Thompson Tax Can Help

The changes to Illinois sales and use taxes on leased or rented tangible personal property bring both challenges and opportunities for businesses operating in the state. Thompson Tax can assist your business with understanding the details of these changes, ensuring you obtain the necessary registrations and implement the proper compliance practices.

Our team of experts is equipped to provide guidance and support, helping businesses effectively navigate this new regulatory landscape. Contact Thompson Tax today for all of your sales and use tax needs. We are your Trusted Tax Advisors.

Navigating Illinois Sales and Use Tax: Current and 2025 Direct Pay Requirements

Aug 26, 2024 | Sales and Use Tax

The landscape of sales and use tax compliance is constantly evolving, particularly for businesses operating in Illinois. The state’s Direct Pay Permit (DPP) program offers a way to streamline tax reporting and payment, so staying updated on current and forthcoming changes is essential.

Understanding the Illinois Direct Pay Permit

The Direct Pay Permit (DPP) allows qualifying businesses to pay use tax directly to the Illinois Department of Revenue (IDOR) rather than at the point of purchase. This program is especially beneficial for companies dealing with complex transactions, large-scale purchasing, or situations where determining the taxability of purchases can be challenging.

Current Requirements for the Direct Pay Permit

As of 2024, businesses seeking to participate in Illinois’ DPP program must meet several critical criteria:

1. Eligibility Criteria:

Complex Tax Situations: Businesses must demonstrate that they frequently encounter complex situations where determining sales tax liability is problematic. This often applies to companies involved in manufacturing, construction, or those with multi-state operations.
Significant Purchases: A business must have substantial annual taxable purchases to qualify. While the exact threshold can vary, companies must demonstrate a certain volume of transactions that justify using a DPP.

2. Application Process:

The process to obtain a DPP involves submitting a detailed application to the IDOR, outlining the business’s tax situation, and providing supporting documentation. The department reviews each application on a case-by-case basis to determine eligibility.

3. Reporting and Compliance:

Once granted a DPP, businesses are responsible for remitting use tax directly to the IDOR. This includes regular reporting of taxable purchases, adhering to strict record-keeping practices, and ensuring timely payment of taxes.

4. Permissible Purchases:

Not all purchases can be made under a DPP. Businesses must be aware of the categories of goods and services eligible for direct pay, as certain transactions may still require payment of sales tax at the point of sale.

5. Ongoing Requirements:

Compliance doesn’t end with receiving a DPP. Businesses must continually monitor their tax situation, as the IDOR may review or audit DPP holders to ensure they are correctly managing their tax liabilities.

Anticipated Changes in 2025

Looking ahead to 2025, the IDOR is expected to implement several changes to the Direct Pay Permit requirements, reflecting a broader trend toward tightening tax compliance and enhancing revenue collection.

1. Requirement to Conduct an Annual Review:

DPP holders will be required to conduct an annual review of their purchase activities for the 12-month period ending December 31 of the prior calendar year. This review must be completed by March 31, 2025, to ensure that purchases were sourced correctly and that the appropriate tax rates were applied. The initial review under these new rules is due by March 31, 2025, and will cover the calendar year ending December 31, 2024.
If the review uncovers any errors in sourcing or tax rates, the permit holder must file an amended return by April 20 of the same year to correct these discrepancies. Failure to conduct the purchase review may result in a $6,000 penalty. However, this penalty can be avoided if at least 95% of the transactions for the reviewed period were correctly sourced and taxed or if the permit holder exercised ordinary business care and diligence.

2. Revised Eligibility Thresholds:

The IDOR may increase the thresholds for qualifying purchases or introduce new criteria that focus on the business’s operational complexity. This could mean that only larger businesses or those with more intricate tax situations will be eligible for a DPP.

3. Enhanced Application Scrutiny:

The application process is likely to become more rigorous, with additional documentation being required to justify the need for a DPP. Businesses may need to provide more detailed financial records, transaction histories, and explanations of their tax challenges.

4. Stricter Compliance Measures:

Reporting requirements are expected to become more stringent, with the possibility of more frequent audits or reviews by the IDOR. Businesses may need to enhance their internal controls and tax reporting systems to ensure full compliance.

5. Potential for Narrowed Scope:

The IDOR may revise the types of purchases that can be made under a DPP, potentially narrowing the scope to focus on specific industries or transaction types. Businesses must stay informed about these changes to avoid inadvertently violating the terms of their DPP.

6. Increased Educational Resources:

To help businesses adapt to these changes, the IDOR is expected to roll out more educational resources, including updated guidelines, webinars, and FAQs. Staying engaged with these resources will be crucial for businesses to navigate the evolving landscape.

Preparing for 2025: What Businesses Should Do Now

To prepare for the upcoming changes, businesses currently using or considering a Direct Pay Permit should take proactive steps:

Review Current Practices: Assess your current use of the DPP, ensuring that all procedures align with IDOR requirements. Identify any areas where compliance could be improved.
Stay Informed: Follow IDOR announcements regarding changes to the DPP program and regularly check for updates on eligibility, reporting, and permissible purchases.
Consult with Tax Professionals: Consider working with tax professionals, such as Thompson Tax, who specialize in Illinois sales and use tax. We can provide guidance on how to best prepare for the 2025 changes and ensure ongoing compliance.

Stay Informed!

The Direct Pay Permit is a valuable tool for businesses facing complex sales and use tax challenges in Illinois. However, with significant changes on the horizon in 2025, staying informed and prepared is essential. By understanding the current requirements and anticipating the future landscape, businesses can continue to benefit from the DPP while avoiding potential pitfalls.

Reach out to Thompson Tax today for further updates. We are your one-stop sales and use tax shop!