When a motor vehicle is sold to a leasing company for a long-term lease (over one year), who owes Retailers' Occupation Tax or Use Tax, and does that include any tax amount the lessor passes through to the lessee?

Plain-English summary

This General Information Letter addresses how Illinois sales tax rules apply when a car dealer sells a motor vehicle to a leasing company, and that leasing company then leases the vehicle to a retail customer for a term longer than one year. The requesting firm described both an "indirect" lease scenario (the dealer negotiates the lease with the customer, then sells the vehicle and assigns the lease to the lessor) and a "direct" lease scenario (the dealer sells the vehicle straight to the lessor, who then negotiates the lease terms with the customer), covering both new and used vehicles.

The Department confirmed the basic tax roles: the dealer, as the seller of the vehicle, owes Retailers' Occupation Tax on the sale to the leasing company. The leasing company, as the purchaser and legal user of the vehicle, owes Use Tax. The lessee (the retail customer driving the car) does not owe either Retailers' Occupation Tax or Use Tax directly under Illinois law for a lease longer than one year — though short-term rentals of one year or less are separately subject to Automobile Renting Occupation and Use Tax.

The key question was how "selling price" — the amount the tax is measured against — is calculated for these long-term leases, and specifically whether it includes any amount the lessor charges the lessee to reimburse itself for the Use Tax it owes. Public Act 98-628, effective January 1, 2015, created a special "alternate tax base" for motor vehicles sold to a leasing company for a lease longer than one year, entered into at the same time as the sale: in that situation, "selling price" means the total consideration the lessor receives under the lease contract, including amounts due at signing and all periodic lease payments. The Department explained that this alternate definition does not include the usual carve-out (found in the general "selling price" definition) that excludes tax reimbursement amounts a seller collects from a purchaser. Because the alternate definition applies "notwithstanding any law to the contrary" and omits that carve-out, any tax-cost reimbursement the lessor collects from the lessee through the lease contract is treated as part of the taxable selling price.

The Department also addressed an informal document it had previously distributed at seminars, explaining a methodology (borrowed from a New York publication) for calculating "tax on the tax" reimbursement. The Department clarified that this document is not an official Department publication and is not necessarily a required or recommended methodology — whether and how a lessor passes its Use Tax cost through to a lessee is a private contractual matter, but whatever amount ends up in the lease contract becomes part of the taxable selling price. Finally, the Department noted that the Public Act 98-628 alternate selling-price definition applies only when the lease is entered into at the same time as the sale of the vehicle to the leasing company; it does not apply to independent leasing companies that buy a vehicle first and only later enter into a lease of it.

What this means for you

If you are a motor vehicle dealer

You remain liable for Retailers' Occupation Tax when you sell a vehicle to a leasing company, whether the lease is arranged indirectly (you negotiate it, then assign it to the lessor) or directly (you sell to the lessor, who negotiates the lease itself). This applies to both new and used vehicles moving into a long-term lease arrangement.

If you are a leasing company (lessor)

As the purchaser and user of vehicles you buy for leasing, you owe Use Tax. For leases longer than one year entered into at the same time you buy the vehicle, your taxable "selling price" is the total consideration you receive under the lease contract — not simply what you paid the dealer. If you build a tax-cost reimbursement into the lease payments charged to your lessee, that reimbursement amount is included in the taxable selling price; there is no statutory exclusion for it under the Public Act 98-628 alternate tax base. Any methodology for calculating "tax on the tax" that the Department has informally shared is not an official or mandatory publication — how you structure reimbursement in your lease contract is a private contractual choice, but the resulting contract amounts still determine what is taxed.

If you lease vehicles arranged after the initial sale

If you are an independent leasing company that purchases a vehicle and only later — not at the same time — enters into a lease of it, the Public Act 98-628 alternate selling-price definition does not apply to that purchase. The ordinary selling price rules (consideration for the sale, with allowance for trade-in credit) govern instead.

Common questions

Who owes Illinois sales tax when a dealer sells a car to a leasing company for a long-term lease?
The dealer owes Retailers' Occupation Tax as the seller, and the leasing company owes Use Tax as the purchaser/user. The lessee does not owe either tax directly on a lease longer than one year.

If the leasing company passes its Use Tax cost through to the lessee, is that reimbursement itself taxed?
Yes. Under the Public Act 98-628 alternate selling-price definition for motor vehicles leased more than one year (with the lease contemporaneous with the sale), "selling price" is the total consideration the lessor receives under the lease contract, and that definition does not exclude tax-cost reimbursement amounts, unlike the general selling-price definition.

Does this alternate tax base apply to all vehicle leases?
No. It applies only to first division motor vehicles and certain second division motor vehicles sold to a leasing company for a lease longer than one year that is entered into at the same time as the sale. It does not apply where an independent leasing company buys a vehicle first and later arranges a lease.

Is a short-term rental of a year or less taxed the same way?
No. Rentals of motor vehicles for one year or less fall under the separate Automobile Renting Occupation and Use Tax (86 Ill. Adm. Code 180.101), not the long-term lease "alternate tax base" rules discussed in this letter.

Citations and references

• 35 ILCS 120/1 — Retailers' Occupation Tax Act, definitions of "selling price" and "gross receipts," including the Public Act 98-628 alternate tax base for long-term motor vehicle leases
• 35 ILCS 105/2 — Use Tax Act, definition of "selling price," including the Public Act 98-628 alternate tax base
• 35 ILCS 120/2-10 — Retailers' Occupation Tax measured by gross receipts from sales of tangible personal property
• 35 ILCS 105/3-10 — Use Tax imposed on the selling price of tangible personal property
• 86 Ill. Adm. Code 130.101 — Retailers' Occupation Tax imposed on persons selling tangible personal property at retail
• 86 Ill. Adm. Code 130.220 — Sale of tangible personal property to a purchaser who will act as a lessor is a sale at retail subject to Retailers' Occupation Tax
• 86 Ill. Adm. Code 150.101 — Use Tax imposed on the privilege of using tangible personal property purchased at retail
• 86 Ill. Adm. Code 150.305(e) — Use Tax does not apply to rental payments from lessee to lessor; the lessor is taxable as the user on the purchase price
• 86 Ill. Adm. Code 180.101 — Automobile Renting Occupation and Use Tax applies to vehicle rentals of one year or less
• 2 Ill. Adm. Code 1200.110 — Procedures for requesting binding Private Letter Rulings (PLRs)
• 2 Ill. Adm. Code 1200.120 — Procedures for General Information Letters (GILs); not binding on the Department
• Public Act 98-628 — Amended the Retailers' Occupation Tax Act and Use Tax Act, effective January 1, 2015, to create the alternate "selling price" tax base for certain long-term motor vehicle leases

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2017.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2017/st-17-0005-gil.pdf

Original ruling text

ST 17-0005-GIL 02/09/2017 MOTOR VEHICLES
P.A. 98-628 amended the Retailers’ Occupation Tax Act and the Use Tax Act to provide that
with respect to certain motor vehicles that are sold to a leasing company for the purpose of
leasing the vehicle for a defined period that is longer than one year, “selling price” means “the
consideration received by the lessor pursuant to the lease contract.” To the extent the lease
contract includes reimbursement for charges that are added to prices on account of the
Retailers’ Occupation Tax Act or the Use Tax Act, these amounts are part of the selling price
subject to tax. See 35 ILCS 120/1. (This is a GIL.)

February 9, 2017

Re:

General Information Letter Ruling Request
Retailers’ Occupation Tax/Use Tax on Long-Term Leases of Motor Vehicles

Dear Xxxxx:
This letter is in response to your letter dated November 14, 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:
Pursuant to 2 Ill. Admin. Code § 1200.120, this firm requests a General Information
Letter from the Illinois Department of Revenue (the “Department”) addressing the
Retailers’ Occupation Tax and Use Tax implications of passing through the cost of the
lessor’s Use Tax liability to the lessee on long-term leases of passenger motor vehicles
that are subject to the alternate tax base that took effect on January 1, 20XX.
Facts
The lease transactions at issue are either indirect or direct. With respect to new
vehicles, in both the indirect and direct lease scenario the motor vehicle dealer
purchases a motor vehicle from a motor vehicle manufacturer. The dealer holds the

ST 17-0005-GIL
Page 2

vehicle in inventory to sell or lease the vehicle to a customer. A retail customer who
wishes to lease a motor vehicle selects the vehicle from the dealer’s inventory. In the
indirect scenario the terms of a lease are then negotiated between the dealer and the
customer. At that time, the dealer submits a credit application signed by the customer
to the lessor. Upon approval of the credit application by the lessor, the dealer and the
customer execute a lease, the term of which exceeds 1 year. At the same approximate
time as the execution of the lease, the dealer sells the leased vehicle and assigns the
lease rights to the lessor. In the direct lease scenario, after the retail customer identifies
the vehicle for lease, the dealer sells the vehicle to the lessor and the lessor negotiates
the terms of the lease directly with the customer. In some cases the lease transactions
will occur on used vehicles. In these cases, the vehicle will be purchased at wholesale
at auction and the lessor will negotiate the lease directly with the customer.
The tax base in all three scenarios is the alternate tax base which is the total
consideration received by the lessor under the lease agreement, including amounts due
at lease signing and all monthly or regular payments charged over the lease term. See
the definition of “selling price” in 35 ILCS § 120/1 and 35 ILCS § 105/2.
Pursuant to Ill. Admin. Code 130.220, “the sale of tangible personal property to a
purchaser who will act as a lessor of such tangible personal property is a sale at retail
and is subject to Retailers’ Occupation Tax.” Furthermore, Ill. Admin. Code 150.305(e)
provides that “[T]he Use Tax does not apply to the rental payments made by a lessee to
a lessor. However, … the lessor is legally the user of the property and is taxable on the
purchase price thereof.”
Based on these provisions it is our understanding that with respect to new motor
vehicles the dealer as the seller of the vehicle to the lessor is subject to Retailers’
Occupation Tax. With respect to new and used vehicles the lessor as the user is
subject to Use Tax. The lessee is not subject to either Retailer’s Occupation Tax or Use
Tax on the amounts due under the lease. However, for both new and used vehicles, in
a typical lease transaction the amount of Use tax imposed on the lessor is passed
through and collected from the lessee as a cost reimbursement. The tax may be paid
by the lessee up-front at lease inception in whole or in part and/or may be capitalized in
the lease in whole or in part and become part of the lease payments.
Request for Guidance
We request confirmation regarding our understanding that the dealer as the seller of the
vehicle is liable for Retailers’ Occupation Tax and that the lessor as the purchaser of the
vehicle is liable for Use Tax.
We also seek guidance on the treatment of the cost reimbursement of the tax that is
passed on to the lessee.
The definition of “selling price” in 35 ILCS § 105/2 states:
“Selling price” or the “amount of sale” means the consideration for a sale
valued in money whether received in money or otherwise, including cash,

ST 17-0005-GIL
Page 3

credits, property, other than as hereinafter provided, and services, but not
including the value of or credit given for traded-in tangible personal
property where the item that is traded-in is of like kind and character as
that which is being sold, and shall be determined without any deduction
on account of the cost of the property sold, the cost of materials used,
labor or service cost or any other expense whatsoever, but does not
include interest or finance charges which appear as separate items on the
bill of sale or sales contract nor charges that are added to prices by sellers
on account of the seller’s tax liability under the ‘Retailers’ Occupation Tax’
or on account of the seller’s duty to collect, from the purchaser, the tax
that is imposed by this Act, …” (emphasis added).
Previous informal guidance issued by the Department indicates that the tax
reimbursement received from the lessee is consideration under the lease and is
therefore subject to Retailers’ Occupation Tax and Use Tax. Although this is contrary to
the language in 35 ILCS § 105/2 we assume that the provision does not apply to the tax
cost reimbursement because the amount collected from the lessee is not tax imposed
by either the Retailers’ Occupation Tax or the Use Tax since Ill. Admin. Code
150.305(e) indicates that rental payments made by the lessee to the lessor are not
subject to such tax. We request that you provide clarification for the basis of the
Department’s position on the taxability of the tax cost reimbursement particularly in light
of 35 ILCS § 105/2.
We also request guidance with respect to the attached document that was previously
informally provided by the Department of Revenue. The document references the “tax
reimbursement’ from the lessee and the recommended calculation methodology since
tax is due on the tax reimbursement which includes tax on the tax. We request
confirmation that the Department maintains its position with respect to the document
and the recommended methodology for capturing the tax on the tax reimbursement.
Please let us know if you have any questions or would like to discuss the matter prior to
issuing the General Information Letter.
DEPARTMENT’S RESPONSE:
The 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. 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.
Retailers' Occupation Tax is measured by gross receipts from the sale of tangible personal
property to end-users. See 35 ILCS 120/2-10. “Gross receipts” is defined as “the total selling price or
the amount of such sales.” See 35 ILCS 120/1. Use Tax is imposed on “the selling price . . . of the
tangible personal property.” See 35 ILCS 105/3-10. Before January 1, 2015, “selling price” was
defined as “. . . the consideration for a sale valued in money whether received in money or otherwise,
including cash, credits, property, other than as hereinafter provided, and services, but not including

ST 17-0005-GIL
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the value of or credit given for traded-in tangible personal property where the item that is traded-in is
of like kind and character as that which is being sold, and shall be determined without any deduction
on account of the cost of the property sold, the cost of materials used, labor or service cost or any
other expense whatsoever, but does not include charges that are added to prices by sellers on
account of the seller's tax liability under this Act, or on account of the seller's duty to collect, from the
purchaser, the tax that is imposed by the Use Tax Act, . . . .” See 35 ILCS 120/1 and 35 ILCS 105/2.
Beginning on January 1, 2015, Public Act 98-628 added language to the definition of “selling price” to
provide that, “[n]otwithstanding any law to the contrary, . . .” only with respect to first division motor
vehicles and certain second division motor vehicles that are sold to a leasing company (referred to in
the statute as a “lessor”) for the purpose of leasing the vehicle for a defined period that is longer than
one year, “selling price” means “. . . the consideration received by the lessor pursuant to the lease
contract, including amounts due at lease signing and all monthly or other regular payments charged
over the term of the lease.” See 35 ILCS 120/1 and 35 ILCS 105/2.
For the tax collected at the time the vehicle is sold and the lease is contemporaneously
executed, Public Act 98-628 does not change who the Retailers’ Occupation Tax or the Use Tax is
imposed upon (Retailers’ Occupation Tax on sellers and Use Tax on purchasers (lessors)) or that the
tax is measured by the selling price. Public Act 98-628 does change how the selling price is
determined for sales to leasing companies of motor vehicles that meet the statutory criteria. For sales
meeting the statutory criteria, selling price is measured by the amount to be paid under the terms of
the lease contract rather than by the consideration received for the sale.
With that background, we will address the questions you have asked.
As indicated above, when a motor vehicle is sold to a leasing company who will lease the
vehicle for a period of more than one year, Retailers’ Occupation Tax is imposed on the seller (motor
vehicle dealer) and Use Tax is imposed on the leasing company (lessor). See 86 Ill. Adm. Code
130.101 and 86 Ill. Adm. Code 150.101. Illinois does not impose a tax on the lessee of a motor
vehicle leased for a period of more than one year. (Note, however, that Automobile Renting
Occupation and Use Tax applies to rentals of motor vehicles for one year or less; See 86 Ill. Adm.
Code 180.101).
If the sale of a motor vehicle to a lessor qualifies under the definition of “selling price” in
Section 1 of the Retailers’ Occupation Tax Act established under Public Act 98-628, any tax
reimbursement collected by the lessor from the lessee through the lease contract is included as part
of the “selling price” as defined in Public Act 98-628. This is because this alternative definition of
“selling price” in Public Act 98-628 is distinct from the previously existing definition of “selling price”
and states that its provisions apply “[n]otwithstanding any law to the contrary, . . . .” The alternative
definition of selling price in Public Act 98-624 fails to include any language allowing for the exclusion
of charges that are added to prices by sellers on account of the seller’s tax liability under the
Retailers’ Occupation Tax or on account of the seller's duty to collect, from the purchaser, the tax that
is imposed by the Use Tax Act. Instead, “selling price” in Public Act 98-628 consists of “. . . the
consideration received by the lessor pursuant to the lease contract . . . .” (35 ILCS 120/1) To the
extent that the lease contract includes a reimbursement for tax, this amount is included as part of the
consideration received by the lessor pursuant to the lease contract. Without the exclusionary
language found in the previously existing definition of “selling price,” the alternative definition of
“selling price” in Public Act 98-628 includes reimbursement for tax.

ST 17-0005-GIL
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The document you reference is a tool that a leasing company may use when it chooses to
reimburse itself under the lease contract for its Use Tax liability. It was distributed informally by the
Department at seminars held when Public Act 98-628 first became effective. It was prepared as a
practical tool to help explain to leasing companies the impact of the new law. However, it is not an
official publication of the Department and is not necessarily a recommended methodology. Whether
a lessee reimburses the lessor for the lessor’s Use Tax liability is a private contractual matter
between the parties. However, any amounts included in the lease contract become the “selling price”
on which Retailers’ Occupation Tax and Use Tax are owed. The concept in the document is
borrowed from an official New York state publication. In New York, lessees are subject to tax. Hence
the official nature of the New York publication versus Illinois.
We note also that the definition of “selling price” added by Public Act 98-628 applies only in
situations where the lease is entered into contemporaneous with the sale of the vehicle to the leasing
company. In all other cases, the selling price consists of the consideration for the sale, with an
allowance for a trade-in credit. For example, sales of vehicles to entities sometimes described as
independent leasing companies, where the leasing company purchases the vehicle and then, at a
later time, enters into a lease of the vehicle, do not qualify for the definition of selling price added by
Public Act 98-628.
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:bkl