Can an auto dealership claim the Illinois Use Tax interim-use exemption for vehicles it titles to a captive finance company and uses as service loaners?

Subject

Use Tax (Redaction Revised 4/8/2021)

Plain-English summary

This taxpayer — an automobile dealership — asked the Illinois Department of Revenue for a Private Letter Ruling ("PLR") confirming that vehicles it places into loaner service qualify for the Use Tax "interim use" exemption under 86 Ill. Adm. Code 150.306. The dealership explained that these loaner vehicles stay titled in the name of a captive finance company (for insurance purposes only), remain in the dealership's inventory/floor plan, are used in the service department for customers, and are eventually sold once pulled from loaner service, with no Section 179 depreciation deduction claimed and no gross receipts exceeding the vehicle's retail selling price.

The Department declined to issue a PLR at all. Because the dealership had already received two Notices of Tax Liability denying the interim-use exemption on the same issue, and the matter was pending before the Department's Office of Administrative Hearings, the Department exercised its discretion under 2 Ill. Adm. Code 1200.110(a)(4) to decline the ruling request and instead issued this General Information Letter ("GIL").

Rather than deciding the dealership's specific facts, the GIL walks through the general legal framework: Illinois imposes Retailers' Occupation Tax on retail sales (86 Ill. Adm. Code 130.101) and a companion Use Tax on the privilege of using property purchased at retail (86 Ill. Adm. Code 150.101). But the Use Tax Act's definition of "use" excludes a retailer's own demonstration or interim use of property before it is sold (35 ILCS 105/2), and 86 Ill. Adm. Code 150.306 spells out when that interim-use/demonstration exemption applies. The GIL specifically notes that the exemption is unavailable if title is held by anyone other than the retailer, the manufacturer, or a captive finance company (86 Ill. Adm. Code 150.306(a)(1)(A)(i)) — meaning the dealership's practice of titling loaners to a captive finance company does not automatically disqualify it, but the dealership would still need to prove the other conditions of Section 150.306 and could not use a letter ruling to protest the two outstanding Notices of Tax Liability; that has to go through a formal protest and hearing.

What this means for you

Automobile dealers with loaner-vehicle programs

If your dealership uses vehicles as service loaners while they remain unsold inventory, the interim-use/demonstration exemption in 86 Ill. Adm. Code 150.306 may apply, but only if you satisfy all of its conditions — including how the vehicle is titled, how it is carried on your books, whether it is deducted or depreciated under the Internal Revenue Code, and whether the property remains available for sale during the loaner period. Titling a loaner to a captive finance company for insurance purposes, standing alone, does not disqualify the vehicle under 150.306(a)(1)(A)(i), but you should be prepared to document that arrangement.

Taxpayers already disputing a Notice of Tax Liability

This GIL is a reminder that a letter ruling request is not a substitute for a formal protest. If the Department has issued a Notice of Tax Liability, you must protest it and request a hearing directly with the Department's Office of Administrative Hearings — you cannot resolve it by asking for a Private Letter Ruling, and the Department will decline to rule if the same issue is already in that hearing process.

Accountants and tax professionals

Note the procedural posture here: this is a GIL, not a PLR, precisely because the Department used its discretion under 2 Ill. Adm. Code 1200.110(a)(4) to decline a ruling on a matter already in litigation before the Department. The GIL restates the general rule under 150.306 but does not apply it to confirm or deny this taxpayer's specific exemption claim — that determination will come out of the administrative hearing, not this letter.

Common questions

Q: Did the Department confirm this dealership's loaner vehicles qualify for the interim-use exemption?
A: No. The Department expressly declined to issue a ruling on the merits and instead issued a General Information Letter describing the general rules. The dealership's specific exemption claim remains to be decided in its pending Office of Administrative Hearings matter.

Q: Why didn't the Department issue the requested Private Letter Ruling?
A: Because the Department has discretion whether to issue a PLR (2 Ill. Adm. Code 1200.110(a)(4)), and it determined that declining was appropriate since the same issue was already pending before the Department's Office of Administrative Hearings.

Q: Does titling a loaner vehicle to a captive finance company disqualify it from the interim-use exemption?
A: Not by itself. 86 Ill. Adm. Code 150.306(a)(1)(A)(i) allows title to be held by the retailer, the vehicle's manufacturer, or a captive finance company without losing the exemption — but the taxpayer still must meet the rule's other conditions.

Q: Can a taxpayer use a letter ruling request to protest a Notice of Tax Liability?
A: No. The GIL states directly that a Notice of Tax Liability cannot be protested through a letter ruling request; the taxpayer must file a formal protest and request a hearing with the Department's Office of Administrative Hearings.

Q: What is the difference between a PLR and a GIL, according to this letter?
A: A PLR is issued in response to a specific taxpayer's facts and is binding on the Department as to that taxpayer, to the extent the facts are correct and complete. A GIL merely directs a taxpayer to relevant regulations or other information sources and is not a statement of Department policy and not binding on the Department.

Citations and references

• 35 ILCS 105/2 (Use Tax Act definition of "use"; excludes demonstration or interim use by a retailer before sale)
• 86 Ill. Adm. Code 130.101 (imposition of Retailers' Occupation Tax)
• 86 Ill. Adm. Code 150.101 (imposition of Use Tax)
• 86 Ill. Adm. Code 150.306 (Interim Use and Demonstration Exemption)
• 86 Ill. Adm. Code 150.306(a)(1)(A)(i) (exemption unavailable if title held by anyone other than retailer, manufacturer, or captive finance company)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedures)
• 2 Ill. Adm. Code 1200.110(a)(4) (Department's discretion whether to issue a PLR)
• 2 Ill. Adm. Code 1200.120 (General Information Letter procedures)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2020.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2020/st20-0036-gil.pdf

Original ruling text

ST 20-0036 12/10/2020 USE TAX (REDACTION REVISED 4/8/2021)
This letter concerns the interim use exemption. See 86 Ill. Adm. Code 150.306. (This is a
GIL.)
December 10, 2020

Dear Xxxx:
This letter is in response to your letter dated August 28, 2020, 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:
The COMPANY is requesting a “Private Letter Ruling” for our account in regards
to the vehicles we place into service loaner status. When we file the ST-556 for
the service loaner vehicles we are marking them as exempt for “Interim Use”. Per
Title 86 Part 150 Section 150.306 Interim Use and Demonstration Exemptions,
we find that we do qualify due to the following facts.

1. The vehicles are part of COMPANY1 Loaner Program in which we title
   the vehicle in COMPANY2’s name, a captive finance company, for
   insurance purposes only.
2. The vehicles are used in COMPANY’s service department for the benefit
   of our customers.
3. The vehicle is never removed from our inventory and/or floor plan.
4. Once the vehicle is removed from loaner service, the title is signed over to
   the COMPANY so that we may sell the vehicle.
5. We do NOT elect to claim an Internal Revenue Code section 179
   deduction on the item as a depreciable business asset.
6. The gross receipts received DO NOT exceed the retailer’s selling price of
   the vehicle.

We have been granted and are currently awaiting a late discretionary hearing for
the matter of the “Interim Use” exemption for the vehicles we place in loaner
service (please see attached notice). In the meantime, we have received two
additional notices in which we have been denied “interim use” for the same issue
that we are awaiting our hearing. I’ve attached the returns along with a copy of
Title 86 Part 150 Section 150.306 for your convenience. We are furthermore
requesting that these 2 additional returns be either included in the Private Letter
Ruling or be attached to our Late Discretionary Hearing. Should any additional
information be needed please contact NUMBER.
DEPARTMENT’S RESPONSE:
The Department’s regulation “Public Information, Rulemaking and Organization”
provides that “[w]hether to issue a private letter ruling in response to a letter ruling request is
within the discretion of the Department. The Department will respond to all requests for private
letter rulings either by issuance of a ruling or by a letter explaining that the request for ruling will
not be honored.” 2 Ill. Adm. Code 1200.110(a)(4). The Department recently met and determined
that it would decline to issue a Private Letter Ruling in response to your request. Your letter
indicates that this matter is currently before the Department’s Office of Administrative Hearings.
We hope, however, the following General Information Letter will be helpful in addressing your
questions.
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, a Use Tax is also 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.
However, Section 2 of the Use Tax Act states in part that “'[u]se' does not mean the
demonstration use or interim use of tangible personal property by a retailer before he sells that
tangible personal property.” See 35 ILCS 105/2. The Department's regulation at 86 Ill. Adm.
Code 150.306 describes the Interim Use and Demonstration Exemption. Specifically, subpart
(a)(1) provides guidance regarding when tangible personal property qualifies for the interim use
exemption. In particular, please note that the property must be available for sale during the
interim use period. Whether the property will qualify for the interim use exemption depends,
among other things, on how the property is carried on the retailer’s books and whether the
property is deducted or depreciated under certain provisions of the Internal Revenue Code.
Vehicles that are purchased for resale by an automobile dealership but are used in the
interim as loaner cars may, if the requirements of the rule are met, qualify for the interim use
exemption under 86 Ill. Adm. Code 150.306. Subdivision (a)(1)(A) of the rule sets forth
conditions under which the interim use exemption may not be claimed. Item (i) in that
subdivision provides that the exemption may not be claimed if “title to the item is held by any
party other than the retailer, except that title may be held by the retailers, the manufacturer of the
item, or a captive finance company[.]” 86 Ill. Adm. Code 150.306(a)(1)(A)(i) Your letter

indicates that loaner vehicles are titled in the name of a captive finance company for insurance
purposes. You should provide documentation supporting this assertion in your late discretionary
hearing proceedings.
You also state that you have received two additional Notices of Tax Liability. You
cannot protest a Notice of Tax Liability by submitting a letter ruling request. In order to protest
any Notice of Tax Liability, you must file a protest and request a hearing directly with the
Department’s Office of Administrative Hearings.
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:tlc