After a car is bought back by the manufacturer under Illinois's lemon law, how does the consumer get the Illinois sales tax on it refunded?

Subject

Claims For Credit:

Plain-English summary

This is an Illinois Department of Revenue General Information Letter (GIL) -- a lower tier of guidance that just points a taxpayer to the relevant rules; it is not a statement of Department policy and is not binding on the Department. A representative wrote in on behalf of a consumer ("XXX") whose vehicle had been repurchased by the manufacturer/dealer in April 2017 under Illinois's New Vehicle Buyer Protection Act (the state's "lemon law"). The consumer was reimbursed the purchase price, dealer document fees, license fees, an extended warranty, and county tax -- but not the Illinois state sales tax, even though a settlement agreement said he was entitled to that sales tax refund from the State. The representative asked what steps the client needed to take with the Department to get that state sales tax back.

The Department's answer was not what the requester likely hoped for: the consumer himself generally cannot file a claim with the Department at all. Under 86 Ill. Adm. Code 130.1501, only a taxpayer who paid tax that was not due -- as a result of a mistake of fact or an error of law -- may file a claim for credit, and only if that taxpayer actually remitted the tax to the Department (or has since unconditionally repaid it to the person from whom it was collected). In a normal vehicle sale, the retailer is the one who remitted the sales tax to the state, not the consumer. So when a manufacturer buys back a vehicle under Section 3 of the New Vehicle Buyer Protection Act (815 ILCS 380/3), it is the retailer -- not the consumer -- who has a mechanism to claim a credit or refund for the sales tax on the repurchased price. The retailer must first refund the tax it collected to the consumer, and only then may it apply to the Department for the credit. Filing is voluntary, not required, and whether the retailer does so is described as "a private matter between the supplier and the purchaser." The Department candidly acknowledged that this may "not appear to be equitable" to the consumer, but said no mechanism exists under Illinois sales tax law for a consumer to make such a claim directly with the Department unless the consumer personally remitted the tax to the Department.

What this means for you

Consumers with a lemon-law vehicle buyback

If your car was bought back under the New Vehicle Buyer Protection Act and you're still owed sales tax under a settlement, the Department is not who you go to directly. Your only route is through the dealer/retailer who originally collected and remitted the sales tax on your purchase -- they are the ones who can seek a credit from the Department, and only after refunding that tax to you first. If the retailer won't cooperate, this GIL suggests that's a private dispute between you and the retailer/manufacturer (potentially under your settlement agreement), not something the Department can fix directly.

Dealers and retailers handling vehicle buybacks

When a manufacturer accepts return of a vehicle and refunds the purchase price under Section 3 of the New Vehicle Buyer Protection Act (815 ILCS 380/3), the tax on that purchase price is treated as "erroneously paid." You, as the retailer, can file a claim for credit under 86 Ill. Adm. Code 130.1501 -- but only after you first refund the sales tax to the customer. The credit claim is limited to tax on the purchase price actually refunded, including required collateral charges like documentary fees, but excludes any allowance the manufacturer deducted for the consumer's use of the vehicle. Filing for the credit is voluntary, not mandatory.

Accountants and tax professionals

Remember the structural rule at the heart of this letter: under 86 Ill. Adm. Code 130.1501, only the party that actually remitted tax to the Department (or has since unconditionally repaid it to whoever bore the tax) can file a claim for credit. A purchaser who paid tax to a retailer -- rather than directly to the Department -- has no independent path to a Department-level refund. This comes up any time a client asks about getting sales tax back after a return, buyback, or cancelled sale: the answer usually routes back through the retailer, not the end consumer.

Common questions

Q: Can a consumer file directly with the Illinois Department of Revenue for a sales tax refund after a lemon-law vehicle buyback?
A: Generally no. Only the retailer who actually remitted the tax to the Department can file a claim for credit, unless the consumer personally paid tax directly to the Department (not through a retailer).

Q: What does the retailer have to do before it can claim a credit?
A: The retailer must first refund the tax money to the purchaser. Only after doing that can it apply for the credit from the Department, following the procedures in 86 Ill. Adm. Code 130.1501.

Q: Is the retailer required to refund the tax and seek a credit?
A: No. The letter states retailers are not required by law to do this -- it's voluntary, and whether the retailer refunds the tax and seeks the credit is described as a private matter between the supplier and the purchaser.

Q: What exactly counts as "erroneously paid" tax in a vehicle buyback?
A: Tax is deemed erroneously paid when a manufacturer accepts the return of a motor vehicle and refunds the purchase price under Section 3 of the New Vehicle Buyer Protection Act (815 ILCS 380/3). The claim covers tax on the purchase price refunded, including required collateral charges (e.g., documentary fees), but not any reasonable-use deduction the manufacturer subtracted from the refund.

Q: Does this letter resolve the consumer's specific situation?
A: Not fully. This is a GIL, so it only explains the general rule and points to the regulation -- it doesn't order the retailer to act or guarantee the consumer will get the tax back. The Department acknowledged the result "may not appear to be equitable" but said no other mechanism exists for a consumer in that position.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2018.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2018/st-18-0039-gil.pdf

Original ruling text

ST 18-0039-GIL 12/06/2018

CLAIMS FOR CREDIT:

If a taxpayer pays an amount of tax under the Retailers' Occupation Tax 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. 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. See 86 Ill. Adm. Code 130.1501. (This is a GIL).

December 6, 2018
Re: Sales Tax Reimbursement
Dear Xxxx
This letter is in response to your letter dated November 1, 2018, 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:
I am writing on behalf on XXX. XXX purchased a vehicle from COMPANY. The vehicle
was repurchased by COMPANY 1 in April 2017 under the New Vehicle Buyer Protection
Act.
XXX was reimbursed his purchase price, dealer document fees, license fees,
COMPANY 2 extended warrant, and COUNTY tax. XXX has not been reimbursed
Illinois Sales Tax. According to the settlement agreement, XXX has to receive
applicable sales tax refund from the State of Illinois.
Can you please advise me what steps my client needs to take with the Illinois
Department of Revenue for the state to reimburse XXX state sales tax on the
repurchased vehicle?
Thank you in advance for your assistance.

ST 18-0039-GIL
Page 2
DEPARTMENT’S RESPONSE:
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, only that supplier/retailer can file a claim for credit.
Tax is deemed to be erroneously paid by a retailer when the manufacturer of a motor vehicle
sold by the retailer accepts the return of that automobile and refunds to the purchaser the purchase
price of the vehicle, as provided in Section 3 of the New Vehicle Buyer Protection Act [815 ILCS
380/3]. The claim is limited to taxes applicable to the purchase price of the automobile refunded to
the consumer, which includes all collateral charges required to be included in the sales tax calculation
(e.g., documentary fees), but does not include any reasonable allowance for consumer use of the
automobile deducted from the purchase price by the manufacturer. Retailers filing such claims must
comply with all requirements of 86 Ill. Adm. Code 130.1501.
The retailer must first refund tax money paid by the purchaser before proceeding with the
claim. Once the retailer has done this, he or she must apply for the credit in the manner described in
the regulation. Retailers are not required by law to apply for such credits; rather, this procedure is
voluntary. Whether or not the retailer refunds the tax paid and files a claim for credit with the
Department is a private matter between the supplier and the purchaser.
In the scenario described in your letter, only COMPANY can file a claim for credit or refund.
COMPANY customers cannot file claims for credit or refund directly with the Department based upon
tax that was paid by customers to COMPANY This may not appear to be equitable, but no
mechanism exists under Illinois sales tax laws for customers to make such claims directly with the
Department unless the customer is the one that remitted the tax directly to the Department.
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
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