United States: Illinois Enacts Legislation Changing Imposition Of Sales And Use Tax On Leased Motor Vehicles

Illinois has enacted legislation that imposes sales and use tax on the lease stream of motor vehicles that are sold on or after July 1, 2014.1 The taxation of vehicle leases historically has followed the traditional Illinois approach that a lessor of tangible property owes sales and use tax when an item is purchased for lease purposes and no tax is due on the lease stream. Under the legislation, a lessor that incurs an Illinois retailers' occupation tax liability on the sale of a motor vehicle following the end of a lease may not take a credit against that liability for the use tax the lessor paid on the purchase of the motor vehicle.2

Motor Vehicle Lease Stream Taxed

The Use Tax Act3 and Retailers' Occupation Tax Act4 are amended by adding new provisions concerning motor vehicle leases. The new provisions apply to motor vehicles5 that are sold on or after July 1, 2014 for the purpose of being leased for a defined period that is longer than one year. These provisions do not apply to leases of motor vehicles for which, at the time the lease is entered into, the term of the lease is not a defined period, including leases with a defined initial period with the option to continue the lease on a month-to-month or other basis beyond the initial defined period. Motor Vehicles

The motor vehicles covered by the new provisions include a vehicle of the first division6 as well as a vehicle of the second division7 that (i) is self-contained and provides living quarters, (ii) is a van designed to carry between seven and 16 passengers, or (iii) has a gross vehicle rating of 8,000 pounds or less. Thus, the new provisions apply to a significant number of motor vehicles, including many automobiles and trucks.

Selling Price

"Selling price" or "amount of sale" means the consideration received by the lessor under the lease contract, including amounts due at lease signing and all monthly or other regular payments charged over the term of the lease. The selling price also includes any amount received by the lessor from the lessee for the leased vehicle that is not calculated at the time the lease is executed, including, but not limited to, excess mileage charges and charges for excess wear and tear.

Lessor Responsible for Tax on Lease Stream

For amounts received by the lessor from the lessee that are not calculated at the time the lease is executed, the lessor must file the return and pay the tax to the Illinois Department of Revenue by the due date for returns other than transaction returns. The lessor must file all returns and make all payments to the Department electronically.

For sales that occur in Illinois, with respect to any amount received by the lessor from the lessee for the leased vehicle that is not calculated when the lease is executed, the lessor that purchased the vehicle does not incur use tax. Also, the retailer that sells the motor vehicle to the lessor is not required to collect use tax or pay the retailers' occupation tax. However, the lessor that purchased the motor vehicle assumes the liability for reporting and paying the retailers' occupation tax on these amounts directly to the Department in the same form in which the retailer would have reported and paid the tax.

If the retailer is entitled to a discount for collecting and remitting the tax to the Department, the right to the discount is transferred to the lessor with respect to the tax paid by the lessor that is not calculated at the time the lease is executed. However, the discount is only allowed if the return is timely filed and for amounts timely paid.

No Credit for Trade-Ins or Vehicles Coming Off Lease

The "selling price" of a motor vehicle that is sold on or after July 1, 2014 for the purpose of leasing for a defined period of longer than one year may not be reduced by the value of or a credit given for traded-in tangible personal property owned by the lessor. Also, the selling price may not be reduced by the value of or a credit given for traded-in tangible personal property owned by the lessee, regardless of whether the trade-in value is assigned by the lessee to the lessor.

The sale occurs at the time of the delivery of the vehicle, regardless of the due date of any lease payments. A lessor that incurs a retailers' occupation tax liability on the sale of a motor vehicle following the end of the lease may not take a credit against that liability for the use tax the lessor paid upon the purchase of the motor vehicle8 if the selling price of the motor vehicle at the time of purchase was calculated using the definition of "selling price" discussed above.

Commentary

This legislation provides a major change in the taxation of motor vehicle leases by moving the imposition of the sales and use tax from the amount received for the original purchase of the vehicle to the lease stream. An interesting piece of the legislation concerns the removal of the credit against the tax collected on the subsequent sale of the property following the end of the lease. A regulation currently provides a credit to lessors of automobiles that made retail sales of passenger cars following the end of the lease that were no longer needed.9 Under the regulation, a lessor that incurred a retailers' occupation tax liability on the sale of an item could take a credit against that liability for any use tax and local retailers' occupation tax reimbursements that the lessor paid to a supplier registered to collect Illinois tax when the lessor purchased that particular item. This credit was available to all lessors that were required to pay retailers' occupation tax when selling an item after having used that item for rental purposes, including lessors of motor vehicles. The legislation expressly eliminates this credit for the sale of motor vehicles coming off lease. Apparently, in exchange for moving the tax from the purchase price of the vehicle to the lease stream, the legislation removed the ability to take this credit.

Footnotes

1 P.A. 98-628 (H.B. 2317), Laws 2014.

2 It should be noted that in addition to the change in the sales and use tax treatment of motor vehicle leases, the legislation also allows property tax bills to be sent by e-mail if the owner or taxpayer makes a request to the tax collector in writing. 35 ILL. COMP. STAT. 200/20-5.

3 35 ILL. COMP. STAT. 105/2. This tax is imposed on purchasers of tangible personal property in Illinois and is measured by the purchase price.

4 35 ILL. COMP. STAT. 120/1. This tax is imposed on the occupation of selling and is measured by the selling price of tangible personal property sold by a retailer to a customer in Illinois.

5 An existing statute defines "motor vehicle" as every vehicle that is self-propelled and every vehicle that is propelled by electric power obtained from overhead trolley wires, but not operated upon rails, except for vehicles moved solely by human power, motorized wheelchairs and low-speed electric or gas bicycles. The statute divides motor vehicles into two divisions. 625 ILL. COMP. STAT. 5/1-146.

6 Id. The first division includes motor vehicles that are designed for carrying not more than 10 people.

7 Id. The second division includes motor vehicles that are designed for carrying more than 10 people; designed or used for living quarters; designed for pulling or carrying freight, cargo or implements of husbandry; and motor vehicles of the first division remodeled and used as motor vehicles of the second division.

8 This also applies to any tax the lessor paid with respect to any amount received from the lessee for the leased vehicle that was not calculated at the time the lease was executed.

9 ILL. ADMIN. CODE tit. 86 § 130.2013(h).

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