Could dealership service-loaner vehicles qualify for Illinois' interim-use exemption before retail resale?

Plain-English summary

An automobile dealership used about 15 manufacturer-leased vehicles as free loaners for service customers for roughly one year. The manufacturer then wholesaled the vehicles to the dealership, which moved them into used inventory and collected tax on the eventual retail sale. The dealer asked whether it also owed tax when the vehicles were first titled.

IDOR explained the interim-use exemption but did not approve the dealer's exact procedure. A retailer's demonstration or interim use before sale was excluded from taxable "use" only when the requirements of 86 Ill. Adm. Code 150.306 were met.

For loaner vehicles, the dealer had to purchase the vehicle for resale, carry it in sales inventory, and keep it available for sale during the interim-use period. The accounting and federal deduction or depreciation treatment also mattered. IDOR said the request did not clearly explain the dealership's payments to the manufacturer, so it could not confirm eligibility.

For a vehicle that did qualify, the dealer should mark Step 5, Box F, "Other," and write "Interim Use" on Form ST-556.

What this means for you

Using a vehicle as a customer loaner does not automatically create or defeat the exemption. Ownership, inventory status, availability for sale, book treatment, and depreciation all matter. A vehicle merely leased from the manufacturer before later purchase may require closer analysis.

Common questions

Did IDOR approve this dealership's loaners? No; it lacked enough information.

Must the vehicle be in sales inventory? Yes.

How was a qualifying vehicle reported? Step 5, Box F "Other" on ST-556, marked "Interim Use."

Citations and references

• 35 ILCS 105/2.
• 86 Ill. Adm. Code 150.306.

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-15-0076-gil.pdf

Original ruling text

ST 15-0076-GIL 12/03/15 USE TAX
This letter concerns the interim use exemption. See 86 Ill. Adm. Code 150.306. (This is a GIL.)

December 3, 2015
Dear Xxxxx:
This letter is in response to your letter dated June 3, 2015 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:
Per multiple inquiries to the state auditor department and other dealerships we
are hoping to clear up some confusion and discrepancies we have about taxes on
loaner vehicles that we have in our dealership. Our dealership includes a loaner
department for our service customers with about 15 vehicles. MANUFACTURER
leases us the vehicles for a monthly payment. When the vehicles come in, we complete
an Illinois 556 form and title.
We use the vehicles for approximately one year as loaners free of charge to the
customers. MANUFACTURER then wholesales them to our dealership. DEALERSHIP
then puts them into our Used Vehicle department for resale. When we sell the vehicle
“retail” to a customer, we collect the tax and forward that to the state.
The state auditor says we need to pay tax on those vehicles when we first title
them, and when we sell them retail. I have checked with MANUFACTURER and other
dealers in our state and they advised me they are not paying tax on those vehicles until
they are retailed. They advised us to check “other” on the 556 forms and put “for interim
use.” Those dealerships are charging for their rentals and collecting the 5% tax as they
rent it. We are not charging the customers as we go.
I am hoping you can clear up the confusion for us. I spoke to the supervisor to
the auditors; INDIVIDUAL and she informed me if the dealership does pay up front, we
should get to credit back what the customer pays us for the “retail” sale. As of this date
there has been no one able to verify anything in writing explaining what the proper
procedure is. INDIVIDUAL directed us to your office to help clarify the proper
procedure.

Please call if you have any questions.

DEPARTMENT’S RESPONSE:
The Illinois 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. In Illinois, a Use Tax is also 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.
However, Section 2 of the Use Tax Act states in part that “'Use' does not mean the
demonstration use or interim use of tangible personal property by a retailer before he sells that
tangible personal property.” See 35 ILCS 105/2. The Department's regulation at 86 Ill. Adm. Code
150.306 describes the Interim Use and Demonstration Exemption. Specifically, subpart (a)(1)
provides guidance regarding when tangible personal property qualifies for the interim use exemption.
In particular, please note that the property must be available for sale during the interim use period.
Whether the property will qualify for the interim use exemption depends, among other things, on how
the property is carried on the retailer’s books and whether the property is deducted or depreciated
under certain provisions of the Internal Revenue Code. It is not clear from the information provided
the nature of the payments the dealership makes to the manufacturer, but the interim use exemption
is only available if the retailer has purchased the item for resale and the item is in the retailer’s sales
inventory.
Vehicles that are purchased for resale by an automobile dealership but are used in the interim
as loaner cars may, if the requirements of the rule are met, qualify for the interim use exemption
under 86 Ill. Adm. Code 150.306. For vehicles that qualify, you should mark Step 5, Box F “Other”
and write “Interim Use” when completing the ST-556 Sales Tax Transaction Return.
We note that your letter describes how other automobile dealerships document an exemption.
Without more information we cannot verify that this is the correct procedure to use.
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

SJM:mdb