On Aug. 25, 2017, Illinois Gov. Bruce Rauner signed Senate Bill 1434, providing for two new “rental sales taxes” – an occupation tax and a use tax – effectively shifting the burden of the tax to the renter or consumer under a rental-purchase agreement. The taxes are imposed at the state rate of 6.25 percent and are scheduled to become effective on Jan. 1, 2018.
The rental-purchase agreement occupation tax is imposed on those in the business of renting merchandise under a rental-purchase agreement. A “rental-purchase agreement” is defined as an agreement for the use of merchandise by a consumer for personal, family, or household purposes for an initial period of four months or less, or that is automatically renewable with each payment after the initial period and permits the consumer to become the owner of the merchandise. The tax is imposed at 6.25 percent of the gross receipts received from the business. A certificate of registration from the Illinois Department of Revenue issued to persons in the business of renting merchandise is required, however, those currently with a certificate under the Retailers’ Occupation Tax will not need to obtain a separate certificate.
The rental-purchase agreement use tax is imposed on the privilege of using, in Illinois, merchandise which is rented from a merchant. The tax is imposed at 6.25 percent of the rental price paid under the purchase agreement. The tax must be collected from the consumer by the merchant maintaining a place of business in the state, or remitted directly to the department by the consumer.
Transactions subject to the new rental taxes are not also subject to the state sales and use tax. Accordingly, within three months of the effective date of the new taxes, merchants may file for a one-time credit for the state use tax paid on merchandise subject to the new rental taxes that was purchased during the six month period prior to the effective date.
Additionally, a purchaser of merchandise subject to the rental taxes must certify that the item is purchase to be rented under a rental purchase agreement and provide proof of registration in order to purchase the merchandise exempt from the sales and use tax.
The new rental taxes do not apply to tangible personal property required to be titled and registered with an Illinois state agency.
Takeaways
It is expected that the department will issue additional guidance before the effective date of the new taxes. The new rental taxes allow renters to purchase merchandise exempt from the sales and use tax and then collect the rental tax from their consumers – essentially how most other states treat the sales tax on rentals. Businesses currently renting merchandise under a rental-purchase agreement should speak to their tax advisors on how the new taxes will impact those agreements.
