When did Illinois tax refundable and nonrefundable advance payments for short-term automobile rentals?

Plain-English summary

A short-term vehicle-rental company considered collecting partial reservation fees or full rental charges before customers took possession, with both refundable and nonrefundable options.

Illinois imposed Automobile Renting Occupation and Use Tax at 5% of gross receipts from rentals of one year or less. A nonrefundable reservation fee was taxable when received because the customer was then irrevocably liable to pay for the right to possess the automobile. A later no-show did not reverse that result.

A refundable reservation fee was not taxable while it would be returned if the customer did not rent. Tax applied when the customer became irrevocably liable. The same timing analysis applied to refundable or nonrefundable full advance payment for the rental.

Additional rental receipts were taxed when received. Certain separately stated charges listed in Section 180.125 were excluded.

What this means for you

Rental companies should base tax timing on when a customer becomes irrevocably liable, not simply when a reservation is made or the vehicle is picked up. Refund terms and separately stated excluded charges should be clear in the booking records.

Common questions

Was a forfeited nonrefundable no-show fee taxable? Yes.

Was a fully refundable reservation deposit immediately taxable? No.

What rate did the letter state? 5%.

Citations and references

• 35 ILCS 155/1 et seq. and 155/2.
• 86 Ill. Adm. Code 180.101, 180.120(a), and 180.125.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2016.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2016/st-16-0013-gil.pdf

Original ruling text

ST 16-0013-GIL 03/15/2016

AUTOMOBILE RENTING TAX

Persons who are engaged in the business of renting automobiles in Illinois under rental terms
of one year or less are subject to the Automobile Renting Occupation and Use Tax set forth at
35 ILCS 155/1 et seq. See 86 Ill. Adm. Code 180.101. (This is a GIL).

March 15, 2016
Dear Xxxxx:
This letter is in response to your letter dated January 19, 2016, 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:
I am writing on behalf of the COMPANY and its subsidiaries (collectively the
“COMPANY”) to request an informal written opinion with respect to the applicability of
sales, gross receipts, motor vehicle rental and/or other transaction taxes, as
appropriate, that your state may impose on transactions detailed below.
COMPANY, under its own name and the ABC, DEF and GHI brands, provides shortterm motor vehicle rentals to business, leisure and insurance/warranty replacement
customers. COMPANY owns and operates various on and off-airport locations
throughout the United States, including the State of IL.
Motor vehicle “rental charges” consist of charges for time; mileage; fuel; ancillaries such
as liability waivers; personal accident insurance and navigation systems; and the
amounts for taxes, fees and cost recoveries. COMPANY, like its competitors, normally
collects payment in satisfaction of rental charges at the time the rental is returned,
although in certain instances time and mileage charges are collected in advance.
COMPANY is considering offering its customers additional payment options, to include
partial and full payment-in-advance of the actual rental, that is, payment is collected
before the customer takes possession of the vehicle. Accordingly, guidance is sought
with respect to the taxability of these options, specifically:

1. Customer pays a refundable or non-refundable reservation fee.
COMPANY collects reservation fee at the time the reservation is made,
in advance of the actual rental. The reservation fee, which will vary in
amount but at all times will be less that the total anticipated cost of the
actual rental, will be applied towards the total rental charges upon
completion of the rental. Is this fee subject to tax and if so, at what
time should tax be remitted? Should tax be remitted at time fee is
collected or when actual rental takes place?

2. Same as 1, above, only the customer does not appear at the
   anticipated time of rental reservation (no show) and forfeits the nonrefundable reservation fee. Is this fee subject to tax?
3. COMPANY collects refundable or non-refundable payment for entire
   rental in advance. COMPANY collects payment, to include all charges
   for time, mileage, ancillaries, taxes and fees, etc., at time reservation is
   made. Assuming the customer does not alter the anticipated terms,
   this payment is in full satisfaction of all rental charges. We assume
   that these charges are taxable in a manner consistent with any
   traditional rental scenario; however, does the timing of the tax payment
   change in this instance? Simply, are taxes and fees due at the time
   payment is collected or the time the actual rental transaction takes
   place?
4. Same as 3, above, only the customer does not appear at reserved time
   of rental and forfeits entire non-refundable rental charge. Is this
   charge subject to tax or is it treated as a reservation fee (no show)
   similar to question 2 above? Alternatively, does some other treatment
   apply?
   In all instances above where tax is applicable, I ask that you please indicate specifically
   which tax, or taxes, apply.
   If you have any questions, or require any additional information, please contact me via
   email at XXX or telephone at XXX.XXX.XXXX.
   Thank you for your time an attention to this matter and I look forward to your response.
   DEPARTMENT’S RESPONSE:
   Persons who are engaged in the business of renting automobiles in Illinois under rental terms
   of one year or less are subject to the Automobile Renting Occupation and Use Tax. 35 ILCS 155/1 et
   seq. See 86 Ill. Adm. Code 180.101. This tax is imposed at the rate of 5% of the gross receipts from
   such business. "Gross receipts" means all consideration received by a rentor as the rental price for
   the rental of automobiles under lease terms of one year or less. Where a rentor receives the rental
   price in installment payments, the rentor shall include the amounts of such payments only as and
   when the payments are received by the rentor. 86 Ill. Adm. Code 180.120(a). Certain separately
   stated charges, though, are not subject to tax and are listed in Section 180.125 of the Department’s
   regulations.

“Renting” means any transfer of the possession or the right to possession of an automobile to
a user for valuable consideration. 35 ILCS 155/2. A non-refundable reservation fee is taxable
because the rentee is irrevocably liable to pay the fee for the right to possess the automobile. The
tax applies at the time of the receipt of the non-refundable reservation fee. If additional receipts are
subsequently received for the rental of the automobile the tax is imposed at the time the receipts are
received.
Generally, a refundable reservation fee is not taxable if the fee is returned to the customer in
the event the customer does not rent the automobile. At the time the customer becomes irrevocably
liable to pay the fee for the right to possess the automobile the tax on the reservation fee would apply.
The same analysis applies whether the company collects a refundable or non-refundable
payment for the entire rental. Please note that certain separately stated charges are not subject to
tax. See 86 Ill. Adm. Code 180.125.
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,

Richard S. Wolters
Associate Counsel
RSW:bkl