A new Illinois law changes how tax applies to items sold under rental purchase agreements.
Through Dec. 31, 2017, Illinois retailers in the business of renting merchandise under rental purchase agreements typically paid use tax on the purchase of their inventory. To prevent double taxation, tax could not then be charged on rental receipts (the sale of the rental).
Under the new Rental Purchase Agreement Occupation and Use Tax Act, merchants are allowed an exemption from use tax on the purchase of merchandise that will be rented out under a rental purchase agreement, also known as a rent-to-own agreement. If they take the exemption, they must charge purchasers sales tax on their rental.
To claim and ensure the validity of such an exemption, the retailer must provide Form ST-261, Exemption Certificate for Property Subject to Rental Purchase Agreement Tax, when purchasing an item for rental.
Taxable rental purchase agreements
A rental purchase agreement allows the use of merchandise by a consumer for an initial period of four months or less, after which the lease is automatically renewable with each payment. Such agreements enable the purchaser to become the owner of rented merchandise. Rental purchase agreements do not apply to motor vehicles, watercraft, or other items that must be titled or registered by an Illinois state agency.
Taxable gross receipts include the total rental (leasing) price, but not receipts received for club program fees, delivery, processing, reinstatement, or waiver. Furthermore, the taxable rental price doesn’t include separately stated insurance charges.
Since the rental purchase agreement occupation tax takes effect Jan. 1, 2018, it applies to all applicable gross receipts received on or after that date, including rental payments on contracts with current customers that were in place prior to Jan. 1.
Form ST-201, Rental Purchase Agreement Occupation Tax Return, must be filed electronically, and payments must be made electronically through mytax.illinois.gov. Additional information is available from the Illinois Department of Revenue.
Tax compliance can quickly be complicated by exemptions. However, tax automation software facilitates exemption certificate management and overall tax compliance with tax automation software. Learn more.