Who owes Illinois tax on the parts used in a free "goodwill" vehicle repair that a manufacturer directs its dealer to perform?

Plain-English summary

A dealer trade association asked the Department to confirm how Illinois taxes "goodwill" repairs -- free repairs manufacturers sometimes direct their franchised dealers to make on vehicles that are out of factory warranty and not subject to a recall, as a customer-relations gesture. Specifically, when the manufacturer both directs the repair AND supplies the parts (or reimburses the dealer for parts already bought), who owes Illinois tax on those parts: the dealer, or the manufacturer?

The Department's answer turns on WHO initiates the free repair. If a dealer decides on its own to do a goodwill repair -- no charge to the customer, and the dealer isn't obligated to do it -- there's no "sale of service" at all; the dealer is simply using its own parts to maintain customer goodwill, and the dealer itself owes Use Tax on its own cost for those parts.

But the scenario this letter actually addresses is different: the MANUFACTURER directs the repair and supplies (or reimburses the cost of) the parts. In that situation, a real service transaction exists -- the dealer performing the repair is the "serviceperson," and the manufacturer, as the party actually causing and paying for the repair, is the "service customer." That reclassifies the tax analysis entirely: instead of simple donor/Use-Tax treatment, the dealer's liability is now calculated the same way any serviceperson's is -- on the separately-stated price of the parts, on 50% of its bill to the manufacturer, or (if the dealer qualifies as a de minimis serviceperson) on the dealer's own cost price -- with the manufacturer bearing a corresponding Service Use Tax that the dealer collects and remits.

What this means for you

Motor vehicle dealers performing manufacturer-directed goodwill repairs

Don't automatically treat every free repair the same way for tax purposes. If YOU decide to comp a repair with no manufacturer involvement, you're the one who owes Use Tax on your own parts cost. But if the manufacturer directs the repair and supplies or reimburses the parts, you're acting as a "serviceperson" for the manufacturer -- calculate your liability using the standard serviceperson methods (separately-stated price, 50% of the bill, or cost price if de minimis) rather than assuming it's simply a donation.

Manufacturers/franchisors running goodwill service campaigns

When you direct dealers to perform goodwill repairs and supply or reimburse the parts, expect to be treated as the "service customer" bearing Service Use Tax on the transaction (collected by the dealer), not as a mere donor whose dealer absorbs the whole tax cost.

Accountants and tax professionals for dealership groups

Confirm whether a dealer's goodwill-repair volume affects its "de minimis serviceperson" cost-ratio calculation (parts cost transferred incident to service vs. total service revenue, 35%/75% thresholds) -- goodwill-repair parts count toward that ratio the same as any other serviceperson transaction once the manufacturer-directed service framework applies.

Common questions

Q: If a dealer performs a free goodwill repair entirely on its own initiative, who owes tax on the parts?
A: The dealer. With no manufacturer direction, there's no service transaction -- the dealer is simply using its own parts and owes Use Tax on its own cost.

Q: What changes when the manufacturer directs the repair and supplies or reimburses the parts?
A: It becomes a service transaction: the dealer performing the repair is the serviceperson, and the manufacturer is the service customer. The dealer's tax liability is then calculated under the standard serviceperson methods rather than simple Use Tax on donated parts.

Q: What are the serviceperson's options for calculating tax on the transferred parts?
A: Separately-stated selling price of the parts; 50% of the entire bill to the manufacturer; cost price if the dealer is a registered de minimis serviceperson; or, for certain unregistered de minimis dealers, Use Tax on cost price paid to suppliers.

Q: Who ultimately bears the Service Use Tax in a manufacturer-directed goodwill repair?
A: The manufacturer, as the service customer -- though the dealer, as serviceperson, is the one who collects and remits it.

Q: Can I rely on this letter for my own dealership's goodwill repair program?
A: No. This is a General Information Letter -- not binding on the Department. Confirm your specific manufacturer arrangement and de minimis status with a tax professional.

Citations and references

Regulations:

• 86 Ill. Adm. Code 130.101; 150.101 (Retailers' Occupation Tax; Use Tax imposition)
• 86 Ill. Adm. Code 140.101; 160.101 (Service Occupation Tax Act; Service Use Tax)
• 86 Ill. Adm. Code 140.105, 140.106, 140.108, 140.109 (serviceperson tax-base methods; de minimis cost ratio)
• 86 Ill. Adm. Code 140.141(c)(3) (goodwill repairs -- dealer's own vs. manufacturer-directed)
• 86 Ill. Adm. Code 150.305 (donor's Use Tax liability on property given away)

Prior rulings referenced:

• ST 00-0001-PLR (cited by the Department as precedent for the manufacturer-directed goodwill-repair service framework)

Source

• Landing page: Illinois 2026 Sales Tax Letter Rulings
• Original PDF: ST26-0008-GIL.pdf

Original ruling text

ST 26-0008-GIL
03/11/2026 MOTOR VEHICLES
If the seller is making a goodwill repair at the direction of a manufacturer, and where
a manufacturer provides tangible personal property to the seller for the goodwill
repair, a service situation exists in which the person making the repairs is the
serviceperson and the seller is the service customer. See 86 Ill. Adm. Code
140.141(c)(3)(B). (This is a GIL).
March 11, 2026
NAME
TITLE
COMPANY
ADDRESS
Dear NAME:
This letter is in response to your letter dated December 9, 2025, 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 https://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:
INQUIRY
COMPANY is a COMPANY representing MEMBERS. COMPANY seeks
clarification from the Illinois Department of Revenue (IDOR) in the form of a
General Information Letter (GIL) on the taxation of certain goodwill repairs.
FACTS:
From time to time, FRANCHISORS institute goodwill service campaigns,
pursuant to which the franchisors direct their FRANCHISEES to complete
motor vehicle repairs free of charge to the vehicle owners. The goodwill

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service campaigns apply to vehicles for which (1) the manufacturer’s factory
warranty has expired and (2) a product recall has not been instituted. Under
the terms of a goodwill service campaign, a franchisor will provide parts
needed to make the vehicle repair free of charge to the franchisee. If a
franchisee has already purchased the parts used to make a goodwill
campaign repair, the franchisor reimburses the franchisee for the cost of
those parts.
Generally, franchisees are obligated under the terms of their sales and service
agreements to make the no-cost repairs to vehicles that are subject to a
goodwill service campaign.
REQUEST:
COMPANY respectfully requests written clarification from the Illinois
Department of Revenue in the form of a General Information Letter that when
a FRANCHISOR directs its franchisees to make goodwill repairs to vehicles
that are out of warranty and not subject to an official recall campaign and
provides necessary parts to make the repairs to the franchisees free of charge,
either via direct donation or reimbursement for the cost of previously
purchased parts, that any Use Tax due on the parts is the obligation of the
franchisor as donor under subsection (c) of Section 150.305 of Title 86 of the
Illinois Administrative Code.
DEPARTMENT’S RESPONSE:
Retailers’ Occupation Tax
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.
Service Occupation Tax
Retailers’ Occupation and Use Taxes do not apply to sales of service. The Service
Occupation Tax Act and Service Use Tax are imposed on the transfer of tangible personal
property incident to sales of service. See 86 Ill. Adm. Code 140.101 and 160.101. If the
transactions you are inquiring about do not involve the transfer of any tangible personal
property, then they generally would not be subject to Service Occupation Tax or Service Use

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Tax. For general information, see 86 Ill. Code 140.101 through 140.109 regarding sales of
service and Service Occupation Tax.
A serviceperson’s liability may be calculated in one of four ways: 1) Service
Occupation Tax on the separately stated selling price of tangible personal property
transferred incident to service; 2) Service Occupation Tax on 50% of the serviceperson’s
entire bill; 3) Service Occupation Tax on the serviceperson’s cost price if they are a
registered de minimis serviceperson; or, 4) Use Tax on the serviceperson’s cost price if they
are a de minimis serviceperson not otherwise required to be registered under Section 2a of
the Retailers’ Occupation Tax Act.
The first two methods require the serviceperson to pay Service Occupation Tax
(including local taxes) based on the selling price of the tangible personal property
transferred incident to the sale of service. Using the first method, servicepersons may
separately state the selling price of each item transferred as a result of the sale of service.
The tax is then calculated on the separately stated selling price of the tangible personal
property transferred. If the serviceperson does not separately state the selling price of the
tangible personal property transferred, they must use 50% of the entire bill to the service
customer as the tax base. Both of the above methods provide that in no event may the tax
base be less than the serviceperson’s cost price of the tangible personal property
transferred. See 86 Ill. Adm. Code 140.106. Such servicepersons should give suppliers
resale certificates and remit Service Occupation Tax using the Service Occupation Tax rates
for their locations. These methods result in the customer incurring a Service Use Tax liability.
See 86 Ill. Adm. Code 160.101.
The third way servicepersons may account for their tax liability only applies to de
minimis servicepersons who have either chosen to be registered or are required to be
registered because they incur Retailers’ Occupation Tax liability with respect to a portion of
their business. See 86 Ill. Adm. Code 140.109. Servicepersons may qualify as de minimis if
they determine that the annual aggregate cost price of tangible personal property
transferred incident to the sale of service is less than 35% of the total annual gross receipts
from service transactions (75% in the case of pharmacists and persons engaged in graphic
arts production).
The cost ratio is a measure of the amount of tangible personal property transferred
with a service. It is calculated by comparing the serviceperson’s product cost to their total
income from services. The cost of materials that are not transferred to customers incident
to a service, such as those sold at retail, removed from inventory for use, or incorporated
into repairs of real estate, must be excluded when determining the cost ratio. See 86 Ill.
Adm. Code 140.105(c).

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Servicepersons do not have the option of determining whether they are de minimis
on a transaction-by-transaction basis but must do so annually. Registered de minimis
servicepersons are authorized to pay Service Occupation Tax (which includes local taxes)
based upon their cost price of tangible personal property transferred incident to the sale of
service. Such servicepersons should give suppliers resale certificates and remit Service
Occupation Tax using the Service Occupation Tax rates for their locations. This method also
results in the customer incurring a Service Use Tax liability.
The final method of determining tax liability may be used by de minimis
servicepersons that are not otherwise required to be registered under Section 2a of the
Retailers’ Occupation Tax Act. Such de minimis servicepersons handle their tax liability by
paying Use Tax to their suppliers. If their suppliers are not registered to collect and remit tax,
the serviceperson must register, self-assess and remit Use Tax to the Department. These
servicepersons are considered to be the end-users of the tangible personal property
transferred incident to service. Consequently, they are not authorized to collect a “tax” from
the service customers. See 86 Ill. Adm. Code 140.108. Under this method the customer
incurs no Service Tax liability.
Goodwill Repairs
Goodwill repairs are repairs made by a seller for no charge that a seller is not
obligated to make. 86 Ill. Adm. Code 140.141(c)(3). If a seller makes a goodwill repair
themselves, no service situation exists. This is so because the seller makes the repair for no
charge and cannot be said to be making a sale of service. Rather, in this situation, the seller
is using repair parts to maintain the goodwill of a customer. For that reason, the seller
making the goodwill repair would incur a Use Tax liability based on their cost price of all
tangible personal property they purchased and used in making the repair, including the
repair parts transferred to the customer. 86 Ill. Adm. Code 140.141(c)(3)(A).
If the dealer is making a goodwill repair at the direction of a manufacturer, and where
a manufacturer provides tangible personal property to the seller for the goodwill repair, a
service situation exists in which the person making the repairs is the serviceperson and the
manufacturer is the service customer. In this situation, the tax liabilities depend on the
nature of the serviceperson as stated above. 86 Ill. Adm. Code 140.141(c)(3)(B); ST 00-0001PLR. Generally, if a dealer is de minimis and is required to be registered under Section 2a of
the Retailers’ Occupation Tax Act, the dealer incurs a Service Occupation Tax liability based
on their cost price of the parts transferred incident to the repair. In this situation, the
manufacturer (as the service customer) incurs a Service Use Tax liability that is to be
collected by the serviceperson-dealer. 86 Ill. Adm. Code 140.141(c)(3)(B)(ii).
When property is purchased and then given away, the donor has made a taxable use
of the property by making such gift. Therefore, it is the donor of the gift who is deemed the

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end user of the property and who is subject to the Use Tax, rather than the donee. See 86 Ill.
Adm. Code 150.305(c). The donor’s Use Tax liability is calculated on the cost price of the
property given away. When the property is purchased at retail, the base for calculating Use
Tax is the purchase price of the property. If, however, the property given away is a finished
product produced by the donor, the donor’s Use Tax liability is calculated on the donor’s
cost price of the materials and products purchased and incorporated into the finished
product. See 86 Ill. Adm. Code Section 150.305(b) and (c).
I hope this information is helpful. If you require additional information, please visit
our website at https://tax.illinois.gov/ or contact the Department’s Taxpayer Information
Division at 800-732-8866.
Very truly yours,

George L. Encarnacion, Jr.
Associate Counsel
GLE:sce

Printed by the authority of the state of Illinois.
Electronic Only - One Copy
Issued 03/11/2026; Redacted 04/08/2026