Illinois Enacts Legislation Fundamentally Changing Taxation of Car Leases
May 2, 2014
Governor Quinn recently signed Public Act 98-0628 into law which subjects motor vehicle leases of more than one year to Illinois Retailers’ Occupation (Sales) Tax on each lease payment. This is a significant change in the law which previously subjected the lessor to tax when the vehicle was acquired for lease (and not on each payment). Motor vehicle leases of one year or less will generally continue to be subject to the Automobile Renting Occupation Tax.
Notably, this law eliminates a trade-in credit for both the lessor (e.g., an advance trade-in credit), and for the lessee trading in a vehicle against the new lease, regardless of whether the trade-in value is assigned to the lessor by the lessee.
Notwithstanding the loss of a possible trade-in credit, the cost to lease a car will generally be lower under the new law since tax will be based on each lease payment (plus related fees and charges), and not on the full capitalized cost of the car. Currently, a consumer must pay sales tax on the full cost of the car even though he or she may only be leasing it for 24 or 36 months.
This change in the law aligns Illinois with 47 other states that impose a sales tax on the lease payment stream. It is also expected to generate additional revenue for the state.
We expect the Illinois Department of Revenue will issue guidance on a number of open issues, including the implementation of the law and whether or not there will be any transition rules to address the utilization of pre-existing advance trade-in credits so such credits would not expire worthless.
The change in the law is effective January 1, 2015.
If you have any questions, please do not hesitate to contact a member of the Levenfeld Pearlstein Tax Group.