Could a vehicle lessor obtain an Illinois tax refund when a long-term lessee moved out of state or ended the lease early?

Plain-English summary

A couple leased a vehicle in Illinois for 39 months, then moved to another state that imposed its own vehicle tax without credit for Illinois tax. Their monthly lease payment reimbursed the lessor for Illinois tax, and the new state's tax would create an additional contractual reimbursement. They asked whether the lessor could recover Illinois tax because of the move or early lease termination.

IDOR said no. Illinois did not tax a motor-vehicle lease longer than one year. It treated the lessor as the end user and imposed Use Tax on the original sale of the vehicle to that lessor.

Because the tax attached to the completed vehicle sale, a later move, retitling, registration change, or early lease termination did not affect it. The lessee's monthly reimbursement obligation came from the private lease agreement, not Illinois tax law.

IDOR noted that Illinois allowed credit in the reverse situation for tax properly due and paid to another state when a leased vehicle moved into Illinois. A different state's refusal to grant reciprocal credit had to be addressed with that state.

What this means for you

For a long-term lease, distinguish the lessor's Illinois Use Tax from the lessee's contractual promise to reimburse the lessor. Changing the vehicle's later location does not reopen the original Illinois vehicle sale.

Common questions

Did moving out of Illinois create a refund? No.

Did early termination create a refund? No.

Was the monthly tax reimbursement itself imposed by Illinois law? No; it was contractual.

Citations and references

• 86 Ill. Adm. Code 130.220.
• 35 ILCS 155/1 et seq.; 86 Ill. Adm. Code 180.101.
• 86 Ill. Adm. Code 150.310(a)(3).

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-15-0061-gil.pdf

Original ruling text

ST 15-0061-GIL MOTOR VEHICLES
Lessors of motor vehicles for a term of more than one year in Illinois are deemed end
users of the property to be leased. As end users of the property located in Illinois, lessors
owe Use Tax on the selling price of such property. See 86 Ill. Adm. Code 130.220. (This
is a GIL.)

October 23, 2015

DearXxxxx:
This letter is in response to your letter dated August 25, 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 letter you have stated and made inquiry as follows:
In January 2014, my wife NAME leased a vehicle from a ABC dealership in
Illinois. As part of the lease agreement, we are obligated to reimburse ABC for
all taxes paid by ABC. At the initiation of the lease, ABC paid the State of
Illinois the full amount of sales tax on the vehicle. In turn, ABC bills my wife a
pro-rated portion of the sales tax on her monthly lease. The term of the lease is 39
months.
Earlier this year, my wife and I moved to STATE, and according to STATE law
we are required to register the vehicle with the state. Doing so triggers a
“Transaction Privilege Tax,” which is STATE’s equivalent to the Illinois Sales
Tax. STATE does not provide any credit for taxes paid to Illinois. If we follow
STATE law and register the vehicle in STATE, ABC will be assessed Transaction
Privilege Tax and in turn will raise our monthly lease payment to reimburse for
the taxes paid.

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Therefore, our lease payment to ABC will include reimbursement for taxes paid
to both Illinois and STATE. ABC contends that there is no solution to the
problem and that we must reimburse them for sales tax paid to two states.
Obviously, I find it unfair as we are being taxed twice for the same transaction.
I am asking for your help to identify a solution to this double tax issue. At a
minimum, I have two questions regarding Illinois taxes:


Given that ABC was required to pay Illinois all sales tax at the initiation of
the lease, may ABC request a refund on the sales taxes given that we
moved out of Illinois before the end of the vehicle lease?



If ABC terminated the lease early, would they be able to re-file the sales
taxes on this vehicle and request a refund?

I would appreciate any help that you can provide. If you need to contact me
directly, my phone number is (312) 343-1813.
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.
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.
The Retailers' Occupation Tax does not allow a refund of tax paid on the purchase of a
motor vehicle by a leasing company because the lessee moves out of Illinois before the end of
the lease term or because the lease contract is terminated early. The tax is imposed on the sale of

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the vehicle to the leasing company, not on the lease transaction. Therefore, any change related to
the titling or registration of the vehicle after the sale or resulting from a lease termination after
the sale does not impact the tax that was paid based on the original sale of the vehicle to the
leasing company.
While STATE law governs the registration of vehicles in STATE, we will note that in the
reverse situation, where a lessee moves into Illinois during the term of a vehicle lease that
exceeds one year with a vehicle he or she originally leased and registered in another state,
Illinois law allows for a credit for tax that was properly due and paid in that other state against
the Use Tax owed in Illinois. See 86 Ill. Adm. Code 150.310(a)(3). To the extent that any state
other than Illinois does not allow such a credit, this is an issue that you must take up with that
state.
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