Illinois and Maine Explain Changes to Sales Tax on Leases Effective January 1, 2025

At a glance:

• The main takeaway: Illinois and Maine recently issued guidance summarizing legislation enacted last year that changes the way businesses need to collect and remit tax on leased tangible personal property beginning on January 1, 2025.
• Assess the impact: The new rules impact any taxpayer that enters into new leases with customers or has existing leases with customers and is receiving lease payments.
• Take the next step: Businesses that lease property to lessees in Illinois or Maine should review these new rules carefully and adjust their sales and use tax collection process accordingly. Aprio’s State and Local Tax (SALT) team can help.

Schedule a free consultation today to learn more!

The full story

Illinois and Maine recently issued guidance[1] explaining changes to each state’s sales tax treatment of leases that went into effect on January 1, 2025, pursuant to legislative changes enacted last year.[2] Historically, and unlike almost all other states, Illinois and Maine required sales or use tax to be paid on the initial purchase of property to be leased by the lessor and did not require the lessor to collect sales tax on the lease payments received from the lessee. As a result of the new legislation, these states will reverse this practice, applicable to any lease agreement entered into on or after January 1, 2025, as well as existing lease agreements where lease payments are made after January 1, 2025. This article discusses some of the impacts on lessors under these new rules.

Sales for Resale

Since these new rules now treat leases as retail sales, lessors who purchase property with the intention of leasing it may now purchase the property tax-free as a sale for resale by providing the vendor with a resale certificate.

Selling Price

Both states define the selling price, for which sales tax is to be applied, to include certain costs associated with any materials used and labor or services costs incurred, including maintenance and transportation costs. The Maine guidance notes specifically that the selling price also includes itemized charges for costs incurred by the lessor and passed to the lessee as separate charges such as finance or interest charges and property tax.

Prewritten Computer Software

Illinois has historically provided that canned software, including canned software that is electronically delivered, is considered tangible personal property and subject to sales tax; however, a license of software is not a taxable retail sale if certain criteria are met.[3]   Under the revised legislation, computer software that is “leased or rented” will continue to qualify as an exempt license of software if the same criteria are satisfied.

Under prior law, Maine generally treated software licenses as leases, and thus, software licenses were taxable to the lessor, except in cases where the software license was perpetual or for more than 10 years (with no annual renewals).[4]  Under Maine’s new rules, the sale, lease, rental, or license of canned computer software or a product transferred electronically is a taxable sale of tangible personal property, which will be subject to sales tax.

Sourcing of Lease Payments

Illinois and Maine both provide two methods when determining the appropriate sales tax rate to charge, each being dependent upon whether the lease requires recurring periodic payments, as well as the location at which the lessee takes possession of the property. If the lease does not require periodic payments and the lessee takes possession of the property at the lessors’ place of business, origin sourcing is applied, and the rate to charge is the sales tax rate of the lessor’s business location. For a lease requiring periodic payments in which the lessor delivers the property to the lessee, destination sourcing is applied and the applicable sales tax rate is that of the “primary property location.”[5] 

Exemptions

Generally, the same exemptions that apply to sales will now also apply to leases. In addition, Illinois provides an exemption for any tangible personal property that is subject to a local lease transaction tax, such as the City of Chicago Personal Property Lease Transaction Tax.[6]⁷

While not specifically enacted as part of the changes to Maine’s lease rules, the state added a new exemption for sales (including leases and rentals) to nonprofit organizations that are determined by the IRS to be exempt under IRC section 501(c)(3), providing the tangible property is being used for the purpose for which the organization was organized.[7]

Refunds or Credits

The Illinois legislation does not contain any provision that would provide lessors a credit or refund for sales tax they paid when they purchased the property for purposes of leasing it. However, Maine’s new law does provide a limited refund opportunity for sales and use tax previously paid by qualified lessors on purchases of qualifying lease property on or after January 1, 2023, and before January 1, 2025. In order to qualify, the lessor must have subsequently collected and remitted sales or use tax to the state of Maine on that property on or after January 1, 2025. The refund must be requested between January 1, 2027, and March 31, 2027, and it will cover sales or use tax collected between January 1, 2025, and December 31, 2026.[8] 

The bottom line

Businesses that lease property to lessees in Illinois or Maine should review these new rules carefully and adjust their sales and use tax collection process accordingly.  Aprio’s SALT team can assist businesses in understanding the impact of these changes and ensure compliance with sales and use tax obligations to avoid unexpected liabilities or penalties. In addition, we can help businesses develop and maintain the necessary documentation to submit with Maine refund claims in 2027. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

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[1] See Illinois Informational Bulletin FY 2025-15 and a Maine Notice issued to sales and use tax account holders.

[2] See Illinois HB 4951 and Maine H.P.1420-L.D.2214.

[3] 35 ILCS 120/2-5(49)(1).

[4] See Maine Instructional Bulletin, No. 20, 11/15/2022.  Given new rules for leases, this guidance is now no longer available on the state’s website.

[5] 35 ILCS 120/2-12(5.5)(i)(ii); 36 M.R.S. § 1819(3).

[6] 35 ILCS 120/2-5(49)(2).

[7] 36 M.R.S. § 1760(115).

[8] 36 M.R.S. § 2022.