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Illinois Tax on Consumer Rentals Goes into Effect

As of January 1, 2018, two new taxes are in effect in Illinois on rented merchandise. The enactment of these laws occurred in August 2017, but was not effective until this month. Specifically, two taxes are on (1) transactions in which a consumer rents merchandise, and (2) a consumer’s use of rented merchandise. These complimentary taxes are imposed on those engaged in the business of renting merchandise under “rental purchase agreements.” Rental purchase agreements must meet two requirements. First, they must (1) note that the consumer will use the merchandise for personal, family, or household purposes; and (2) have an initial period of 4 months or less that is automatically renewable after the initial period with each payment made.

While businesses are liable for the new rental sales and rental use taxes, if use tax is not paid by the customer to the business, then it is the customer who is liable for the tax. Business owners must provide evidence when purchasing their merchandise, which is exempt from sales and use tax, that they are registered with the Department of Revenue as renters of merchandise. To be registered, rental sales tax must be reported on mytax.illinois.gov and paid electronically using Form ST-201, Rental Purchase Agreement Occupation Tax Return.

In December 2017, the Illinois Department of Revenue issued an Informational Bulletin to clarify the new taxes before they went into effect. The guidance was specifically for rent-to-own businesses and customers. Purchases made by these businesses, which are subject to the new rental sales and rental use taxes, are exempt as of January 1, 2018, from Illinois sales and use tax. However, the Department was clear that businesses are required to collect and remit tax on rent paid under rental purchase agreements entered into before January 1, 2018. Consequently, the Illinois Department of Revenue is also offering a one-time credit for taxes paid on purchases of rent-to-own merchandise during the latter half of 2017.

Jeanette Moffa is an attorney who concentrates on state and local taxes at Moffa, Sutton, & Donnini, P.A. She is also an adjunct professor and assistant editor to the American Bar Association’s The Sales and Use Tax Deskbook. She can be reached at 954-800-4138 or JeanetteMoffa@FloridaSalesTax.com.