How did Illinois sales-tax credit rules apply when a defective boat was replaced through a lawsuit settlement?

Plain-English summary

A boat owner sued over a leaking boat and settled for a new boat plus transfer of the old accessories. The owner's attorney argued that the replacement was compensation, not a taxable sale, and asked IDOR to rule that no tax was due.

IDOR did not decide the issue solely by calling the replacement a lawsuit settlement. It said the tax result depended on how the defective boat's return was structured.

If the dealer refunded the original purchase price and tax and the customer then bought a second boat, whoever had paid the first transaction's tax to IDOR could amend and claim a credit or refund for that tax. In an ordinary dealer sale, that claimant was the dealer; only a person who actually paid tax to the Department could file. If the purchaser had paid Use Tax directly to IDOR, the purchaser could file.

If the dealer instead accepted the old boat as a trade-in, no credit or refund was available for the original sale. The trade-in allowance reduced the gross receipts subject to tax on the new boat.

A claimant also had to show that tax was paid through a mistake of fact or error of law and that the claimant bore the tax burden or unconditionally repaid the customer. Dealers were not required to pursue a claim.

What this means for you

A replacement under a settlement was not automatically tax-free. Documents should clearly show whether the first sale was rescinded and refunded or whether the old property was traded toward the replacement, because those structures produced different credit and tax-base results.

Common questions

Could the boat owner always file the refund claim? No. Usually the dealer had paid the tax to IDOR and was the eligible claimant.

What if the owner paid Use Tax directly? The owner could file a claim.

What if the old boat was a trade-in? No refund on the first sale, but the allowance reduced taxable receipts on the second boat.

Citations and references

• 86 Ill. Adm. Code 130.1501.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2015.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2015/st-15-0039-gil.pdf

Original ruling text

ST 15-0039 GIL - 06/24/2015 - CLAIMS FOR CREDIT
This letter provides a general discussion of claim for credit procedures. See 86 Ill. Adm. Code
130.1501. (This is a GIL.)

June 24, 2015

Dear Mr. XXXX:
This letter is in response to your letter dated April 4, 2014, in which you request 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:
I represent Mr. YYYY and am authorized to write this letter on his behalf. In March
2007, Mr. YYYY purchased a BRAND boat from COMPANY. Mr. YYYY alleged that the
boat leaked, and Mr. YYYY filed a lawsuit for monetary damages. The parties
confidentially settled the lawsuit whereby, instead of COMPANY compensating Mr.
YYYY for his damages, COMPANY agreed to provide Mr. YYYY with a new boat and
transfer the accessories (e.g., motors, batteries, console, seat box, etc.) from the old
boat to the new boat. The settlement agreement contains a confidentiality clause.
However, if you request a copy, I believe I would be justified in providing one to you.
The sales tax at issue is with regard to the compensation Mr. YYYY received pursuant
to a settlement agreement. He paid taxes on the initial boat purchase. I do not think it
is appropriate for him to have to pay sales tax on his settlement award, which is in effect
what is happening. I respectfully request a “Letter Ruling” concluding that no sales tax
is due regarding this “new boat” because it is a settlement award I [sic] a lawsuit. If you
require any additional information, please feel free to contact me. Thank you.
DEPARTMENT’S RESPONSE:
Please refer to 86 Ill. Adm. Code 130.1501 on our website, which describes the procedures
used to obtain claims for credit or refunds for taxes that were erroneously paid. Only persons who
have actually paid taxes to the Department can file claims for credit or refund. In retail sales of boats,
these persons would be the dealers who remitted the taxes to the State. Claimants must establish

such taxes were paid through mistakes of fact or errors of law. The Department is only authorized to
approve credits for claimants who clearly establish they have borne the burden of taxes erroneously
paid or that they have unconditionally repaid the taxes to the vendees from whom they collected such
taxes.
If boat dealers pay tax erroneously to the Department, then only such boat dealers may file
and receive claims for credit. Retailers, including boat dealers, are not required under Illinois law to
file claims for credit. Whether boat dealers do file such claims is a business decision on their part. If,
however, Use Tax was paid directly to the Department by the purchaser, the purchaser may file a
claim for credit.
The tax implications of the settlement of the type discussed here will depend on how the return
of the defective boat was structured. In general, if a retailer refunds the purchase price of a defective
boat to a customer (including the tax, if originally collected by the retailer), and the customer then
purchases a second boat, then whoever paid tax to the Department for the first boat could file an
amended return regarding the first boat and thereby claim a credit or refund of the tax paid on the first
boat. If, however, the retailer accepted the original boat as a trade-in for the new boat, then no claim
for credit or refund could be filed on the sale of the first boat. However, the gross receipts subject to
tax on the second boat would be reduced by the amount allowed for the trade-in of the first boat.
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,

Samuel J. Moore
Associate Counsel