If a car dealer sells vehicles to its own affiliate, and the affiliate rents those vehicles to the dealer's service customers as loaners, how does Illinois's Automobile Renting Tax apply, and is the sale from dealer to affiliate itself taxable?

Plain-English summary

A law firm wrote to the Illinois Department of Revenue on behalf of a motor vehicle dealer ("Dealer") that planned to restructure how it provides loaner cars to service customers. The Dealer is a registered Illinois vehicle dealer and Retailers' Occupation Tax/Use Tax collector. Under the plan, the Dealer would form a wholly-owned LLC ("COMPANY"), sell vehicles to COMPANY, and COMPANY would then engage in short-term rentals (one year or less) of those vehicles, registering under the Automobile Renting Occupation Tax ("AROT"). The rentals would principally go to the Dealer's own service customers who need a loaner while their car is being repaired, with COMPANY being compensated either by the customer directly or by the Dealer on the customer's behalf, at a daily rate that could range from minimal to substantial depending on the loaner and rental period.

The requester asked the Department to confirm two things in a GIL: (1) that the Dealer's sale of vehicles to COMPANY is exempt from Retailers' Occupation Tax and Use Tax because COMPANY will use them exclusively for AROT-taxable rentals, and (2) that COMPANY's rentals to customers are subject to AROT, measured on the gross receipts COMPANY actually receives whether paid by the Dealer or the customer.

The Department's response confirmed the general framework. Illinois's Retailers' Occupation Tax (35 ILCS 120/2) and Use Tax (35 ILCS 105/3) together make up what's commonly called "sales tax" in Illinois, and ordinarily a dealer selling a vehicle to a purchaser for that purchaser's own use (not resale) would owe Retailers' Occupation Tax, with the purchaser owing Use Tax. But both the Retailers' Occupation Tax Act and the Use Tax Act contain an exemption for gross receipts from the sale of a motor vehicle that will be used for "automobile renting" as defined in the Automobile Renting Occupation and Use Tax Act (35 ILCS 120/2-5(5); 35 ILCS 105/3-5(10)).

Separately, the Automobile Renting Occupation and Use Tax Act ("ART") imposes two taxes: an occupation tax (AROT) on persons in the business of renting automobiles in Illinois under lease terms of one year or less, at 5% of gross receipts from that business (35 ILCS 155/3), and a use tax (ARUT) on the privilege of using a rented automobile in Illinois, at 5% of the rental price paid to the rentor (35 ILCS 155/4). "Rentor" is the person renting or leasing automobiles to users; "rentee" is the user who gets possession for a period of one year or less, however that rental is paid for (35 ILCS 155/2). "Gross receipts" and "rental price" both mean the total consideration for the rental, valued in money, without deduction for the rentor's costs, and excluding amounts the rentor separately adds on account of its own tax liability or its duty to collect the ARUT from the rentee.

If the rentor is required or authorized to collect the ARUT, the rentee pays it to the rentor, and the rentor remits it to the Department — but the rentor first reduces what it must remit by any AROT it is required to and does pay on the same rental transaction (86 Ill. Adm. Code 190.115). The Department walked through the mechanics with two worked examples. In the first, the rental agreement states a $50/day rental price, of which the rentee pays $30 and the Dealer pays $20 on the rentee's behalf; the rentee owes $2.50 ARUT (5% of $50), the rentor owes $2.50 AROT, and because the rentor paid $2.50 in AROT, it owes nothing further in ARUT. In the second example, the rental agreement itself states a $30/day rental price (rentee pays $30), but the Dealer separately pays the rentor $20 based on a side agreement between the Dealer and rentor; here the rentee only owes $1.50 ARUT (5% of the stated $30 rental price), but the rentor actually received $50 in total rental price and owes $2.50 in AROT — so the rentor can only offset $1.50 of the $2.50 AROT against its ARUT remittance obligation, leaving it still liable for the full $2.50 AROT. The Department noted that the requester's letter did not specify the actual terms of the rental agreement or whether the Dealer's payments to the rentor were included in the stated rental price or in addition to it, so it illustrated the mechanics with these examples rather than resolving the exact numbers for this taxpayer's arrangement.

What this means for you

Car dealers setting up an affiliate to handle loaner-car rentals

This GIL confirms the basic two-step structure works as a matter of law: a dealer can sell vehicles to a wholly-owned rental affiliate exempt from Retailers' Occupation Tax and Use Tax (because the vehicles are earmarked for AROT-taxable renting), and the affiliate then owes AROT on its rental gross receipts while the customer (or whoever is treated as the rentee) owes ARUT on the rental price. The catch is in how you structure the actual rental agreement: if the dealer pays part of the rental cost "outside" the stated rental agreement between rentor and rentee, the rentee's ARUT liability tracks only what the rental agreement itself recites, but the rentor's AROT liability tracks everything it actually receives (from the customer and the dealer combined) — so drafting the rental agreement to accurately reflect the full rental price actually paid matters for calculating credits correctly, not just for optics.

Accountants and tax professionals

Walk clients through both worked examples carefully: when the stated rental price and the amount actually received by the rentor match ($50 stated, $50 received), the rentor's AROT payment fully offsets its ARUT remittance obligation. But when the dealer's side payment is NOT reflected in the rental agreement's stated price (agreement says $30, but rentor actually collects $50 total), the rentor ends up paying more in AROT than it can credit against ARUT, because the ARUT the rentee owes (and the rentor must remit, net of credit) is calculated only off the agreement's stated $30 price. Get the actual rental agreement language and side-payment mechanics from the client before calculating exposure.

Retailers' Occupation Tax and Use Tax on the dealer-to-affiliate sale

Remember this exemption is conditioned on the vehicles actually being used exclusively for automobile renting as defined in the Act — it's the intended/actual use, not merely the buyer's corporate affiliation with a dealer, that triggers the 35 ILCS 120/2-5(5) and 35 ILCS 105/3-5(10) exemptions.

Common questions

Q: Is the Dealer's sale of vehicles to its rental affiliate (COMPANY) taxable?
A: No. The Retailers' Occupation Tax Act and Use Tax Act both exempt gross receipts from the sale of a motor vehicle that will be used for automobile renting as defined in the Automobile Renting Occupation and Use Tax Act. 35 ILCS 120/2-5(5); 35 ILCS 105/3-5(10).

Q: Who owes the Automobile Renting Occupation Tax (AROT) versus the Automobile Renting Use Tax (ARUT)?
A: The rentor (here, COMPANY) owes AROT at 5% of its gross receipts from the rental business (35 ILCS 155/3). The rentee (the person who gets possession of the car) owes ARUT at 5% of the rental price paid to the rentor (35 ILCS 155/4), and if the rentor is required or authorized to collect it, the rentee pays the rentor, who remits it to the Department.

Q: Can the rentor offset its AROT payment against its ARUT remittance obligation?
A: Yes, but only up to the ARUT actually collected under the stated rental agreement. The Department's second example shows that if the rentor receives payments outside the stated rental agreement (e.g., a side payment from the dealer not reflected in the agreement's stated rental price), the rentor can still owe more in AROT (measured on total gross receipts) than it can credit against its ARUT remittance (measured on the agreement's stated price).

Q: Does it matter whether the customer or the dealer actually pays for the rental?
A: Not for who counts as the "rentee" — the GIL says the rentee is whoever has the right to possession of the automobile for a period of one year or less, "whether paid for by the 'rentee' or by someone else" (35 ILCS 155/2). But it does matter for how much rental price is captured in AROT versus ARUT calculations, depending on whether payments are reflected in the stated rental agreement.

Q: Does this GIL bind the Department as to this specific dealer's arrangement?
A: No. This is a General Information Letter, not a Private Letter Ruling. It lays out the general statutory and regulatory framework and illustrates it with examples, but it is not a statement of Department policy and is not binding on the Department, even as to the taxpayer who requested it.

Citations and references

Statutes:

• 35 ILCS 155/1 et seq. (Automobile Renting Occupation and Use Tax Act)
• 35 ILCS 155/2 (definitions of "rentor," "rentee," "gross receipts," "rental price")
• 35 ILCS 155/3 (Automobile Renting Occupation Tax, 5% of gross receipts)
• 35 ILCS 155/4 (Automobile Renting Use Tax, 5% of rental price)
• 35 ILCS 120/2 (Retailers' Occupation Tax Act, imposition)
• 35 ILCS 120/2-5(5) (exemption for vehicles sold for automobile renting)
• 35 ILCS 105/3 (Use Tax Act, imposition)
• 35 ILCS 105/3-5(10) (exemption for vehicles used for automobile renting)
• 625 ILCS 5/5-101 et seq. (Illinois vehicle dealer registration, referenced in the taxpayer's letter)

Regulations:

• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax regulations)
• 86 Ill. Adm. Code 150.101 (Use Tax regulations)
• 86 Ill. Adm. Code 150.130 (Use Tax credit for Retailers' Occupation Tax paid on the same sale)
• 86 Ill. Adm. Code 180.101 (Automobile Renting Occupation and Use Tax regulations)
• 86 Ill. Adm. Code 190.115 (AROT credit against ARUT remittance obligation)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedure)
• 2 Ill. Adm. Code 1200.120 (General Information Letter procedure)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2023.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2023/st23-0020-gil.pdf

Original ruling text

ST-23-0020-GIL 07/05/2023 AUTOMOBILE RENTING TAX
This letter discusses the renting of automobiles by dealers in Illinois under rental
terms of one year or less that are subject to the Automobile Renting Occupation
and Use Tax. 35 ILCS 155/1 et seq; 86 Ill. Adm. Code 180.101. (This is a GIL).
July 5, 2023

NAME
LAW FIRM
ADDRESS
Dear NAME:
This letter is in response to your letter dated May 19, 2023, 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:

We request a general information letter on the application of the
Illinois Retailers' Occupation Tax and Use Tax and Automobile Renting
Occupation Tax on certain motor vehicle transactions sales. Specifically,
a motor vehicle dealer ("Dealer") will sell motor vehicles to an affiliate of a
vehicle dealer ("Affiliate"), and the Affiliate will rent the motor vehicles to
customers. It is expected that most customers who rent a motor vehicle
from the Affiliate would, at the same time, have their own car in for service
with the Dealer.
The general facts are that the Dealer is registered as an Illinois
vehicle dealer (625 ILCS 5/5-101 et seq.) and Illinois tax collector for
Illinois Retailers [sic] Occupation Tax and Use Tax ("ROT and Use Tax").
35 ILCS 120/1 et seq.; 35 ILCS 105/10 et seq. The Dealer plans to create
a wholly-owned limited liability company ("COMPANY") to which it will sell
vehicles. COMPANY will engage in the business of the short-term rentals

LAW FIRM/ NAME
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July 5, 2023
of the vehicles (1-year or less) and register under the Automobile Renting
Occupation Tax ("AROT"). 35 ILCS 155/1 et seq. These short-term
rentals will principally be to customers of the Dealer that need loaner cars
while the Dealer provides service repairs for the customer vehicle.
COMPANY will be compensated either by the customer for the rental
vehicle or, alternatively, by the Dealer. The amount of the rental price
could range for $$ a day, to a significantly greater sum or possibly only a
minimal amount per day, depending on the type of the loaner and the
rental period.
Under the ROT and Use Tax, sales of vehicles to an affiliate when
the affiliate will exclusively use such vehicles for rentals that are subject to
the AROT, will not be subject to ROT and Use Tax. 35 ILCS 120/2-5 (5).
Therefore, the Dealer's sales of vehicles to COMPANY should not be
subject to ROT and Use Tax.
Under the AROT, the short term rental of motor vehicles to
customers of the Dealer by COMPANY would be subject to the AROT,
absent an exemption. 35 ILCS 155/2. Even if the COMPANY does not
make a profit on the rentals, that is not relevant to whether COMPANY’S
rentals are subject to the AROT. 35 ILCS 155/2. ("For this purpose, the
objective of making a profit is not necessary to make the renting activity a
business.") Nor is the amount charged or received for the rental relevant
to whether the AROT applies to the transaction, since AROT is based on
the rental price paid. Id.
Consequently, it is requested that the Department of Revenue
confirm in a general information letter that the above stated understanding
of the application of the AROT to COMPANY is correct, including that the
tax is properly measured based on the gross receipts actually received by
COMPANY, whether received from the Dealer and/or customer, absent an
exemption.
Thank you for your time and consideration of this matter.
DEPARTMENT’S RESPONSE:
The Illinois Retailers' Occupation Tax Act imposes a tax upon persons engaged
in this State in the business of selling tangible personal property to purchasers for use
or consumption. See 35 ILCS 120/2; 86 Ill. Adm. Code 130.101. In Illinois, 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 35 ILCS 105/3; 86 Ill. Adm.
Code 150.101. These taxes comprise what is commonly known as “sales” tax in Illinois.
If the purchases occur in Illinois, the purchasers must pay the Use Tax to the retailer at

LAW FIRM/ NAME
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July 5, 2023
the time of purchase. The retailers are then allowed to reduce the amount of Use Tax
they must remit by the amount of Retailers' Occupation Tax liability which they are
required to and do pay to the Department with respect to the same sales. See 86 Ill.
Adm. Code 150.130.
A person who is engaged in the business of selling motor vehicles to a purchaser
for his use and not for the purpose of resale, is a retailer engaged in the business of
selling tangible personal property at retail under the Retailers’ Occupation Tax Act.
Unless an exemption can be found, Dealer is liable for Retailers’ Occupation Tax, and
COMPANY is liable for Use Tax, on the sale of the motor vehicles from Dealer to
COMPANY.
The Retailers’ Occupation Tax Act and Use Tax Act contain exemptions from tax
for gross receipts received from proceeds from the sale of a motor vehicle that is used
for automobile renting, as defined in Automobile Renting Occupation and Use Tax Act.
35 ILCS 120/2-5(5); 35 ILCS 105/3-5(10).
The Automobile Renting Occupation and Use Tax Act (“ART”) imposes an
occupation tax (“AROT”) upon persons engaged in this State in the business of renting
automobiles in Illinois under lease terms of one year or less at the rate of 5% of the
gross receipts from such business. 35 ILCS 155/3. See 86 Ill. Adm. Code 180.101.
ART also imposes a use tax (“ARUT”) upon the privilege of using, in this State, an
automobile which is rented from a rentor at the rate of 5% of the rental price of such
automobile paid to the rentor under any rental agreement. 35 ILCS 155/4.
"Rentor" means any person, firm, corporation or association engaged in the
business of renting or leasing automobiles to users. "Rentee" means any user to whom
the possession, or the right to possession, of an automobile is transferred for a valuable
consideration for a period of one year or less, whether paid for by the "rentee" or by
someone else. 35 ILCS 155/2.
"Gross receipts" means the total rental price or leasing price. "Rental price"
means the consideration for renting or leasing an automobile valued in money, whether
received in money or otherwise, including cash credits, property and services, and shall
be determined without any deduction on account of the cost of the property rented, the
cost of materials used, labor or service cost, or any other expense whatsoever, but does
not include charges that are added by a rentor on account of the rentor's tax liability
under this Act or on account of the rentor's duty to collect, from the rentee, the tax that
is imposed by the ARUT. 35 ILCS 155/2.
If the rentor is required or authorized to collect the ARUT, then the rentee must
pay the tax to the rentor. The rentor must remit the ARUT it collects to the Department,
but first reduces what it must remit in this connection by the AROT (if any) which it is
required to pay and does pay to the Department in connection with the same
automobile rental transaction. 86 Ill. Adm. Code 190.115.

LAW FIRM/ NAME
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July 5, 2023
As explained above, ART is composed of two taxes: an occupation tax is
imposed on the person engaged in the business of renting automobiles (the rentor), and
a use tax is imposed on the person renting the automobile (the rentee). The use tax is
imposed at the rate of 5% of the rental price of such automobile paid to the rentor under
the rental agreement. Your letter does not state the terms of the rental agreement, or
more specifically, the rental price the rentee pays the rentor for renting the automobile.
Nor does your letter state whether any additional amount the dealer pays to the rentor
for renting the automobile is included in the rental price stated in the rental agreement
between the rentor and rentee or is addition to the amount stated in the rental
agreement.
For example, if the rental agreement between the rentor and rentee specifies a
rental price of $50 per day, and the rentee pays $30 to the rentor and the dealer pays
$20 to the rentor on the rentee’s behalf, the rentee is liable for $2.50 in ARUT (5% of
$50). The rentor is liable for $2.50 in AROT. The rentor can reduce the amount of
ARUT it is required to remit to the Department by the amount of AROT it pays to the
Department. In other words, if the rentor pays $2.50 in AROT, it has no obligation to
remit the $2.50 in ARUT it collected from the rentee.
Another example: if the rental agreement between the rentor and rentee specifies
a rental price of $30 per day, and the rentee pays $30 to the rentor and the dealer pays
$20 to the rentor based on an agreement between the dealer and the rentor, the rentee
is liable for $1.50 in ARUT (5% of $30). However, the rentor received a total rental price
of $50 for leasing the automobile and is liable for $2.50 in AROT. The rentor can
reduce the amount of ARUT it required to remit to the Department by $1.50 but is liable
for $2.50 in AROT.
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:dlb