United States

Illinois changes application of sales tax to vehicle leases

Overall lease tax cost likely to be reduced


On April 21, 2014, Illinois enacted Public Act 098-0628, changing the manner in which sales tax applies to long-term leases of passenger cars, light trucks, recreational vehicles and passenger vans. These changes may make it cost effective for lessees to delay entering into long-term leases until after the law becomes effective on Jan. 1, 2015.

Under prior law, when a lessor leased a vehicle for more than one year, the lessor was required to pay use tax on the full capitalized cost of the leased vehicle subject to a trade-in deduction for the offsetting value of trade-ins from the lessor (advanced trade-in credits) or from the lessee (under a third-party trade-in credit). No sales tax was charged to the lessee for any amount calculated at the time the lease was executed (e.g., down payment, acquisition fees, lease fees, monthly payments) or at any time subsequent to the execution of the lease (e.g., excess mileage charges, wear and tear charges, value adjustments).  However, because the lessor paid use tax on the full capitalized cost of the leased vehicle vehicles at the time of the lease, the lessor was entitled to a credit for the amount of use tax paid when the vehicle was later sold to an Illinois customer.

Effective for vehicle leases of more than one year, the lessor will pay use tax on all amounts calculated at the time the lease was executed, and will subsequently collect sales tax from the lessee on all amounts calculated after that time. No reduction will be allowed for trade-ins, and no credit will be allowed on sale of the vehicle subsequent to the termination of the lease.

Even with the loss of a trade-in credit, the tax cost of leasing a vehicle will generally be lower under the new law. To illustrate, consider the following example:

A lessee leases a vehicle that has a full capitalized cost of $35,000. The lessee assigns to the lessor a trade-in vehicle valued at $5,000, and pays a down payment of $5,000 at the time the lease is executed. The lessee makes 36 monthly payments of $400, and, at the end of the lease period, the lessee is charged $1,000 for going over mileage limits and wear and tear.

Under the current rules the lessor would pay use tax on the full capitalized cost of the vehicle less the assigned trade-in value ($35,000–$5,000 = $30,000). No further taxes would be due from lessor or lessee over the course of the lease or upon lease termination. Accordingly, the total amount subject to tax would be $30,000.

Under the new law, the trade-in would have no impact on the tax calculation, and tax would be charged on the down payment and the total lease payments at the time the lease was executed ($5,000 + $14,400 = $19,400). At the end of the lease term, the lessor would collect and remit tax on the $1,000 charge for going over mileage limits and wear and tear. Accordingly, the total amount subject to tax under the new law would be $20,400.

It is likely that the Illinois Department of Revenue will issue guidance on a number of open issues, including procedural implementation of the law and whether or not there will be any specific rules to address the utilization of pre-existing advance trade-in credits. However, even with some outstanding questions, this new approach to taxing leases of vehicles is likely to reduce overall lease costs. Lessees, particularly those with an impending fleet renewal, should consider delaying entering into leases until after the effective date.

This document contains general information, may be based on authorities that are subject to change, and is not a substitute for professional advice or services.  This document does not constitute assurance, tax, consulting, business, financial, investment, legal or other professional advice, and you should consult a qualified professional advisor before taking any action based on the information herein.  RSM LLP, its affiliates and related entities are not responsible for any loss resulting from or relating to reliance on this document by any person.

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