Illinois Sales & Use Tax Update: Leases and Digital Services

Illinois Sales & Use Tax Update: Leases and Digital Services

As of January 1, 2025, Illinois will implement significant changes to its sales and use tax laws, particularly impacting the leasing of tangible personal property. Here’s what you need to know:

Key Changes:

1. Tax Shift to Lease Payments

   Previously, lessors were responsible for paying sales or use tax on the purchase of tangible personal property intended to lease. Starting January 1, 2025, the sales tax will instead be applied to the lease payments made by the lessee. This change affects leases that are in effect, entered into, or renewed after this date.

   
   

2. Exemptions from the New Tax

   Leases subject to local home rule lease taxes, such as the Chicago Lease Tax, will remain exempt from this new state requirement. This means that businesses in areas with existing local taxes should continue to adhere to those regulations.

   
   

3. Sales for Resale Treatment

   Moving forward, purchases of tangible personal property by lessors will be considered sales for resale, thus exempting them from sales or use tax. However, this applies only to property acquired on or after January 1, 2025. Be mindful that lease payments on property acquired before this date may still incur sales tax, leading to potential double taxation issues.

Reminder: Chicago Lease Tax

It's essential to remember that Chicago has imposed a Lease Tax on leases of tangible personal property for decades. Currently set at a flat rate of 9%, this tax applies to various services, including cloud computing offerings such as SaaS, PaaS, and IaaS. Lessors with physical or economic nexus in Chicago (those deriving $100K in revenue) must collect this tax.

Companies based in Chicago or those with remote employees may also have Lease Tax liabilities if their suppliers do not charge tax on taxable leases or licenses.

Conclusion

These updates are significant for businesses engaging in leasing and digital services in Illinois. We encourage you to review your leasing agreements and consult with our team for personalized guidance to ensure compliance and optimize your tax strategy as these changes take effect.