How did Illinois tax a motor vehicle bought by a lessor for a lease longer than one year, and who could claim a refund?

Plain-English summary

A long-term vehicle lessee believed the lessor had passed through more tax than the correct rate and asked whether the excess should be refunded.

IDOR explained that the rate on an Illinois motor-vehicle sale depended on the retailer's location. In the cited city, the rate was 7.25%: 6.25% state plus 1% Regional Transportation Authority tax.

Illinois did not impose state-administered sales or use tax on lease receipts for a vehicle leased longer than one year. Instead, the lessor was the end user and owed Use Tax on the vehicle sale. Any lessee obligation to reimburse that cost arose from the private lease agreement, not Illinois tax law.

For qualifying leases beginning after Public Act 98-628 took effect January 1, 2015, taxable selling price generally became the amount shown as total lease payments rather than the lessor's dealer purchase price. Local lease or vehicle use taxes administered by a jurisdiction could still apply separately.

Only the person who paid tax to IDOR could file a credit claim. A retailer first had to unconditionally repay the customer, and IDOR could not force a retailer to pursue the voluntary claim.

What this means for you

Separate the dealer's tax on the vehicle sale from the lease's contractual reimbursement line. If the passed-through amount appears wrong, the customer may need the lessor or retailer to refund it and then seek the Department credit.

Common questions

Did Illinois tax long-term lease receipts? No, under the rules discussed.

Who owed tax on the vehicle purchase? The lessor.

Could the lessee directly claim the Department credit? Only if the lessee was the remitter.

Citations and references

• 86 Ill. Adm. Code 130.101 and 130.220.
• 35 ILCS 155/1 et seq.; 86 Ill. Adm. Code 180.101.
• 86 Ill. Adm. Code 130.1501.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2015.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2015/st-15-0056-gil.pdf

Original ruling text

ST-15-0056 GIL – August 28, 2015 - MOTOR VEHICLES
The Retailers’ Occupation Tax rate charged on the sale of a motor vehicle in Illinois depends
on the rate of tax imposed on the retailer where the sale occurs. See 86 Ill. Adm. Code
130.101. For State-administered tax purposes, sales and use taxes do not apply to lease
receipts. Lessors of motor vehicles for a term of more than one year in Illinois are deemed end
users of the property to be leased. See 86 Ill. Adm. Code 130.220. The one exception is the
short-term rental of automobiles. See 86 Ill. Adm. Code 180.101. (This is a GIL.)

August 28, 2015

Dear Mr. XXXX:
This letter is in response to your complaint to the Attorney General’s Office which was referred
to us on July 22, 2015, in which you request information. The Department issues two types of letter
rulings. Private Letter Rulings (“PLRs”) are issued by the Department in response to specific
taxpayer inquiries concerning the application of a tax statute or rule to a particular fact situation. A
PLR is binding on the Department, but only as to the taxpayer who is the subject of the request for
ruling and only to the extent the facts recited in the PLR are correct and complete. Persons seeking
PLRs must comply with the procedures for PLRs found in the Department’s regulations at 2 Ill. Adm.
Code 1200.110. The purpose of a General Information Letter (“GIL”) is to direct taxpayers to
Department regulations or other sources of information regarding the topic about which they have
inquired. A GIL is not a statement of Department policy and is not binding on the Department. See 2
Ill. Adm. Code 1200.120. You may access our website at www.tax.illinois.gov to review regulations,
letter rulings and other types of information relevant to your inquiry.
The nature of your inquiry and the information you have provided require that we respond with
a GIL. In your complaint to the Attorney General’s Office, in relevant part, you have stated and made
inquiry as follows:
The third item I asserted in my original complaint was the issue of sales tax on the
transaction. I see in the lease, $3729.00 was passed through to me. That comes up to
9.6% sales tax. I calculate the total sales tax should have been $2798.50 at a rate
7.25%. My portion as reported on IDR form ST-556-LSE, was $311.00, leaving the
remainder that could be passed back though to me by the lessor, of $2487.50.
1.
2.

Is this the proper forum to address this, or was it forward to the Illinois
Department of Revenue?
If this is the correct forum, and my interpretation of the tax and/or accounting
rules are correct, I believe the $930.50 should be refunded to me.

DEPARTMENT’S RESPONSE:
The Illinois Retailers' Occupation Tax Act imposes a tax upon persons engaged in this State in
the business of selling tangible personal property at retail to purchasers for use or consumption. See

86 Ill. Adm. Code 130.101. In Illinois, Use Tax is imposed on the privilege of using, in this State, any
kind of tangible personal property that is purchased anywhere at retail from a retailer. See 86 Ill. Adm.
Code 150.101. These taxes comprise what is commonly known as "sales" tax in Illinois.
For sales occurring in Illinois, the sales tax rate charged on the sale of a motor vehicle
depends on the rate of tax imposed on the retailer where the sale occurs. The sales tax rate on
motor vehicles sold in CITY, Illinois is 7.25% of the selling price of the vehicle. This rate consists of
the State Retailers’ Occupation Tax rate of 6.25% plus a 1% Regional Transportation Authority
Retailers’ Occupation Tax.

Motor Vehicle Leases:
With respect to leases, however, it is important to understand that the State of Illinois does not
impose a tax on the lease of a motor vehicle for a term of more than one year (the lease or rental of
an automobile for a term of one year or less, however, is subject to the Automobile Renting
Occupation and Use Tax. See 35 ILCS 155/1 et seq. and 86 Ill. Adm. Code 180.101). Consequently,
with respect to Department-administered taxes, lessees of motor vehicles for a term of more than one
year incur no tax liability. Lessors of motor vehicles for a term of more than one year in Illinois are
deemed end users of the property to be leased. See 86 Ill. Adm. Code 130.220. As end users of the
property located in Illinois, lessors owe Use Tax on the selling price of such property. However, it is
typical of such leases to contain contractual provisions stating that the lessees will reimburse the
lessors for their tax costs. This is not a matter of Illinois tax law but of a private agreement between
lessors and lessees. If the lessee agrees to such provisions, he or she is bound to satisfy that duty
because of a contractual agreement, not because of Illinois tax law.
When determining the Use Tax owed by the lessor of a motor vehicle, which the lessee may
have a contractual obligation to reimburse, please note that, effective January 1, 2015, Public Act 98628 changed the definition of “selling price” on which tax is measured for many situations in which a
motor vehicle is sold to a lessor to be leased. For qualifying motor vehicles sold for the purpose of
being leased for a defined period that exceeds one year, the taxable selling price is now the amount
paid under the lease contract rather than the amount that the leasing company pays to the motor
vehicle dealer to purchase the car. The “selling price” on which tax is measured for these qualifying
leases is typically the amount found in a box on the lease contract captioned “Total of Payments.” In
most cases, the tax amount is less than the amount charged in these transactions prior to January 1,
2015. Motor vehicles that qualify under P.A. 98-628 are all first division motor vehicles and certain
second division motor vehicles. For more information, see Informational Bulletin FY 2015-03 “Leased
Motor Vehicle Changes and New Reporting Requirements.”
Although the State of Illinois does not tax leases other than short-term rentals of motor
vehicles discussed above, it is also important to note that some jurisdictions impose a tax on lease
transactions that is administered by the local taxing jurisdiction. In addition, some local jurisdictions
may impose a local use tax on motor vehicles registered in that jurisdiction, which tax is administered
by that local jurisdiction. To determine whether such a local lease tax or use tax is imposed, please
contact the local jurisdiction where the vehicle is registered.

Claims for Credit:

If a taxpayer pays an amount of tax under the Retailers' Occupation Tax Act that is not due,
either as a result of a mistake of fact or an error of law, the taxpayer may file a claim for credit with
the Department. See 86 Ill. Adm. Code 130.1501. Please note that only persons who have actually
paid tax to the Department can file a claim for credit. No credit shall be given the taxpayer unless the
taxpayer shows that he or she has borne the burden of the tax or has unconditionally repaid the
amount of the tax to the purchaser from whom it was collected. In other words, if a purchaser has
paid tax to his supplier/retailer, only that supplier/retailer can file a claim for credit.
The supplier must first refund tax money paid by the purchaser before proceeding with the
claim. Once the supplier has done this, he or she must apply for the credit in the manner described in
the regulation. Suppliers/retailers are not required by law to apply for such credits; rather, this
procedure is voluntary. Whether or not the supplier refunds the tax paid and files a claim for credit
with the Department is a private matter between the supplier and the purchaser.
I hope this information is helpful. If you require additional information, please visit our website
at www.tax.illinois.gov or contact the Department’s Taxpayer Information Division at (217) 782-3336.

Very truly yours,

Samuel J. Moore
Associate Counsel
SJM:mdb
Cc:

Consumer Protection Division
Office of the Attorney General