Does a lessee owe Illinois tax when buying a car at the end of a true lease after reimbursing the lessor's original Use Tax?

Plain-English summary

Under a true vehicle lease, the lessor owed Use Tax up front on its cost. A lease could privately require the lessee to reimburse that cost, but Illinois law did not make the reimbursement the lessee's own Use Tax payment.

When the consumer later bought the car at fair market value, that buyout was a second retail transaction. The buyer owed Use Tax on the buyout price. IDOR could not refund the earlier contractual reimbursement.

The lessor could claim a credit on Form ST-556 for tax it had previously paid on the vehicle, but whether it passed that benefit to the buyer was a business decision.

What this means for you

Do not treat a lease-tax reimbursement as prepayment of tax on a later buyout. Review the lease contract and negotiate any benefit from the lessor's available credit.

Common questions

Was the original amount necessarily tax paid by the lessee? No. IDOR said it was likely reimbursement under the lease.

Was the buyout taxable? Yes.

Must the lessor pass through its credit? No.

Citations and references

• 86 Ill. Adm. Code 130.2010(b) and 130.2013(h)(2).

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-16-0059-gil.pdf

Original ruling text

ST 16-0059-GIL 11/02/2016 LEASING
If lessee, under a true lease, agrees to reimburse the lessor for its Use Tax liability and
lessee subsequently buys the leased vehicle, the lessee owes sales tax on his
purchase price of the car. See 86 Ill. Adm. Code 130.2010(b) and 86 Ill. Adm. Code
130.2013(h).

November 2, 2016
Dear Xxxxx:
This letter is in response to your letter dated August 29, 2016 in which you requested
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:
Please clarify part of the tax code for me. I am a consumer that leased a car in
MONTH of 20XX (copy of the 556 for enclosed). At the time, I paid almost
$2,000 in taxes according to the way the law was previous to the 2015 changes.
Now, I’d like to purchase the car using the buyout provision of the lease.
The dealer is telling me that I would need to pay taxes on the purchase, but I
don’t agree. According to the instructions for form ST-556 on section 6, row 10,
they should be allowed to take a credit based on the previous tax paid. And it
seems to me that they should pass this credit to me since I paid the original tax.
This same scenario occurred the last time I purchased a leased vehicle: the
dealer had me fill out a form and they credited back most of the taxes based on
the fact that I had paid them when I took the lease. This was in Illinois also and
I’ve attached the 556 for that transaction as well.
DEPARTMENT’S RESPONSE:
In Illinois, persons who rent or lease the use of tangible personal property under true
leases owe Use Tax "up-front" on the cost price of the equipment which is rented. See 86 Ill.
Adm. Code 130.2010(b). True leases are those leases in which persons may "walk away"
from the lease at the end of the lease term, or purchase the leased item at fair market value.
As a result, the leasing company owed Use Tax up-front on the cost price of the car. It cannot

ST 16-0059-GIL

charge you a "tax", but many times lessors will require, in the lease agreement, that the lessee
"reimburse" the lessor for the taxes which the lessor will incur on the leased vehicle.
Your letter mentions that you paid the original tax on the car that you leased. We
cannot determine the exact nature of your transaction without reviewing the contracts.
However, it is likely that you agreed to reimburse the lessor for his Use Tax cost. Illinois tax
laws do not require a lessee, under a true lease, to pay any Use Taxes to a lessor. If your
agreement contained such a provision, it is likely that you paid these costs, rather, as
reimbursement pursuant to the terms of a private contract between yourself and the leasing
company.
When the company sells a lessee a car at the end of the lease period, it incurs
Retailers' Occupation Tax on the sale. This tax is based upon the seller's gross receipts from
sale and a corresponding amount of Use Tax must be collected from the purchaser. The tax
which is required to be collected from you when you purchase the car is properly due and
owed by you.
In your letter, you have described two distinct sales transactions. Each is treated
separately for sales tax purposes. In the first, you have likely entered into a private agreement
to pay the leasing company a reimbursement for its Use Tax liability. Since this is a private
agreement between you and the leasing company, and involved no liability which you are
obligated to pay under the Illinois tax statutes, the Department cannot refund any of these
monies to you. This is a matter of negotiation between you and the leasing company. The
second part of the transaction occurred when you bought the car from the dealership. As in
any other sales transaction, you owe Use Tax based on the selling price of the item
purchased.
You are correct that the lessor may take a credit on the ST-556 return for taxes
previously paid on the tangible personal property at the time the lessor sells such property.
See 86 Ill. Adm. Code 130.2013(h)(2). However, the choice of whether to pass on this credit
to the purchaser is a business decision on the seller’s part.
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,

Cara Bishop
Associate Counsel

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