Could a short-term car-rental company sell its fleet to a related title-holding entity and lease it back without Retailers' Occupation Tax or Use Tax?

Plain-English summary

A company rented automobiles to rideshare drivers and other individuals for periods of one year or less and collected Automobile Renting Occupation and Use Tax (AROT). It proposed selling its entire fleet to a related entity formed to hold title, then leasing the vehicles back for more than one year while continuing the same short-term customer rentals.

IDOR first rejected the company's occasional-sale theory. A business that rents vehicles and later sells them is treated as a retailer for those sales, so the occasional-sale exception did not apply.

The transaction nevertheless qualified for the separate rental-use exemptions in 35 ILCS 120/2-5(5) and 35 ILCS 105/3-5(10). Before transfer, the companies had entered the sale and three-year lease, committed that the fleet would remain in short-term rentals subject to AROT, and continuously collected AROT before and after the transfer. The seller and buyer could therefore claim their respective exemptions.

The title-holding entity could also claim the exemption on future vehicles if the intercompany lease and written rental-use commitment existed before purchase, the vehicles were promptly transferred to the rental company, and they were actually used for short-term rentals subject to AROT. When the title-holding entity eventually sold the vehicles, it would owe Retailers' Occupation Tax on their selling price.

What this means for you

The exemption depended on documented pre-purchase intent, an existing lease, prompt transfer, actual qualifying rental use, and uninterrupted AROT collection. It was not a general related-party or occasional-sale exemption.

Common questions

Did the occasional-sale exemption apply? No.

Why was the fleet transfer still exempt? The vehicles remained committed to and used for short-term automobile renting subject to AROT.

What about the title holder's later sale of used vehicles? The ruling says that later sale would be subject to Retailers' Occupation Tax.

Citations and references

• 35 ILCS 120/1c and 120/2-5(5); 35 ILCS 105/3-5(10); 35 ILCS 155/1 et seq.
• 86 Ill. Adm. Code 130.101, 150.101, and 180.101.
• 2 Ill. Adm. Code 1200.110.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2017.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2017/st-17-0004-plr.pdf

Original ruling text

ST 17-0004-PLR 05/25/2017 RETAILERS’ OCCUPATION TAX
This letter discusses the applicability of the exemptions from tax in the Retailers’ Occupation
Tax Act and Use Tax Act for gross receipts received from proceeds from the sale of a motor
vehicle that is used for automobile renting, as defined in the Automobile Renting Occupation
and Use Tax Act. 35 ILCS 120/2-5(5); 35 ILCS 105/3-5(10). (This is a PLR.)

May 25, 2017

RE:

COMPANY
COMPANY 1
Private Letter Ruling Request

Dear Xxxxx:
This letter is in response to your letter dated March 3, 2017 in which you requested
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.
Review of your request disclosed that all the information described in paragraphs 1 through 8
of Section 1200.110 appears to be contained in your request. This Private Letter Ruling will bind the
Department only with respect to COMPANY and COMPANY 1 for the issue or issues presented in
this ruling, and is subject to the provisions of subsection (e) of Section 1200.110 governing expiration
of Private Letter Rulings. Issuance of this ruling is conditioned upon the understanding that neither
COMPANY or COMPANY 1, nor a related taxpayer is currently under audit or involved in litigation
concerning the issues that are the subject of this ruling request. In your letter you have stated and
made inquiry as follows:
As counsel for and on behalf of COMPANY (“COMPANY”) and COMPANY 1
(“COMPANY 1”), a related legal entity that will hold legal title to the motor vehicles that
are rented and/or leased by COMPANY, we, pursuant to 2 Ill. Admin. Code §1200.110,
hereby formally request a Private Letter Ruling (“PLR”), confirming that, based upon the
facts represented below, (i) COMPANY’s one-time sale of its entire fleet of motor
vehicles to COMPANY 1, which vehicles will subsequently be leased back to
COMPANY for rental or lease, is exempt from Retailers’ Occupation Tax and (ii) the
lease of motor vehicles from COMPANY 1 back to COMPANY are exempt from Illinois

ST 17-0004-PLR
Page 2
Retailers’ Occupation Tax and Illinois Use Tax because COMPANY’s rental of the motor
vehicles acquired from COMPANY 1 to end users are subject to Automobile Renting
Occupation and Use Tax (“AROT”). Neither COMPANY nor COMPANY 1 are currently
under audit by the Department regarding this issue. In addition, neither COMPANY nor
COMPANY 1 are aware of any authority contrary to the views expressed in this PLR
request. Furthermore, we ask that our client’s name, address, and any contracts or
exhibits attached be kept confidential and deleted from the publicly disseminated
version of a PLR issued in response to this request. A Power of Attorney authorizing us
to represent COMPANY and COMPANY 1 before the Department in connection with
this PLR request is attached as Exhibit A.
FACTS
COMPANY is in the business of renting motor vehicles to transportation network drivers
who use the rented motor vehicles primarily in providing ground transportation services
in connection with the driver’s participation in COMPANY 2’s (“COMPANY 2”) platform
and service for matching transportation network drivers with passengers that request
rides through COMPANY 2’s Application (“COMPANY 2 Program”). COMPANY also
rents motor vehicles to individuals, who will pick up the vehicle from a designated
location, and use the vehicle for personal use on an hourly or daily basis (“City
Program”). COMPANY is not engaged in the sale of motor vehicles at retail.
COMPANY enters into rental agreements (“COMPANY 2 Agreements”) with the
transportation network drivers pursuant to which COMPANY rents motor vehicles
directly to transportation network drivers, COMPANY 2’s independent contractor drivers,
for their use in providing transportation services to the public through the COMPANY 2
Program. COMPANY also enters into rental agreements (“City Agreements”) with
individuals pursuant to which COMPANY rents motor vehicles directly to individuals, for
their individual use, on an hourly or daily basis. The rental periods in both scenarios are
always for one year or less in duration and the rents derived therefrom are subject to
the AROT.
COMPANY is registered to collect and remits the AROT. On its initial purchase of
motor vehicles, which were subsequently rented in the COMPANY 2 and City
PROGRAMS, COMPANY claimed the “Sold for rental use” exemption on the applicable
Illinois Form ST-556 and/or Illinois form RUT-25. Subsequently, COMPANY collects
and remits the AROT based on its charges for motor vehicle rentals to COMPANY 2
and City PROGRAM drivers used in Illinois for periods of one year or less.
COMPANY 1, a related legal entity, was formed for the purpose of holding legal title to
the above described motor vehicles. COMPANY now proposes to sell its entire fleet of
motor vehicles to COMPANY 1 in a single arm’s length transaction and subsequently
leaseback the motor vehicles from COMPANY 1 for use in the COMPANY 2 and City
PROGRAMS. The duration of the leases between COMPANY 1 to COMPANY will be
for more than one year. COMPANY’s lease of the vehicles from COMPANY 1 will be a
true lease for Illinois purpose. In the future, COMPANY 1 will acquire all new vehicles
that will be leased to COMPANY for use in the COMPANY 2 Programs and City
PROGRAMS.

ST 17-0004-PLR
Page 3

At all times throughout, and after this transaction, COMPANY will rent the motor
vehicles to individuals and the transportation network drivers. The terms and conditions
of the rental agreements between COMPANY and the drivers will not change. In fact,
the sale will occur while some of the vehicles are under rent to, and possession of, City
Program and COMPANY 2 transportation network drivers. The sale/leaseback
transaction described above will not interrupt possession rights of the rentees or
COMPANY. Likewise, after the completion of the sale to COMPANY 1 and leaseback
to COMPANY, COMPANY will continue to remit all applicable AROT based on its
charges for automobile rentals to COMPANY 2 and individual drivers.

ILLINOIS LAW & ANALYSIS
Retailers’ Occupation Tax, Use Tax and Automobile Renting Occupation and Use Tax
In Illinois, the Retailers’ Occupation Tax or the Use Tax is imposed on the sale of a
motor vehicle by a retailer. 35 ILCS 120/3. A “Retailer” is defined to include every
person engaged in the business of making sales at retail. 3 ILCS 105/2. A “sale at
retail” includes any transfer of the ownership or title to tangible personal property for
valuable consideration to a purchaser, 35 ILCS 120/1. Retail sales of motor vehicles,
which are required to be registered or titled with the Illinois Secretary of State must be
reported by the retailer. A separate transaction return must be prepared for each sale
and filed with the Department. 35 ILCS 120/3, 35 ILCS 105/9, 35 ILCS 105/10. 86 ILL.
Admin Code 130.540.
However, rentors that are subject to the AROT incur neither use tax (“UT”) liability on
the selling price of the vehicles, nor Retailers’ Occupation Tax (“ROT”) on the rental
receipts. 35 ILCS 120/2-5(5) (ROT exemption), 35 ILCS 105/3-5(10) (UT exemption).
The AROT defines “renting” as the transfer of the possession or right to possession of
an automobile to a user for a valuable consideration for a period of one year or less. 35
ILCS 155/2. Illinois imposes the AROT on all persons engaged in the business of
renting automobiles for periods of one year or less in Illinois at the rate of 5% of the
gross rental receipts received from such business. 35 ILCS 155/3. There is also a
complimentary use tax imposed upon the privilege of using, in the State, an automobile
which is rented from a rentor, at the rate of 5% of the rental price of such automobile
paid to the rentor under any rental agreement. 35 ILCS 155/4. The tax must be
collected from the rentee by a rentor maintaining a place of business in the State and
remitted to the Department of Revenue. 35 ILCS 155/4. Every person engaged in the
business of renting automobiles in Illinois is required to register with the Department of
Revenue. 35 ILCS 155/3.
Sale/Leaseback Transaction
In a typical sale/leaseback situation, user A, purchases taxable property from retailer B.
User A then sells the taxable property to lessor C, and lessor C leases the taxable
property back to User A. Under Illinois law, the first transaction, the retail sale from
retailer B to user A, is a taxable retail sale. The second transaction, the sale from user

ST 17-0004-PLR
Page 4
A to lessor C is a nontaxable occasional sale so long as user A is not otherwise
engaged in the business of selling like-kinded property. 86 Ill. Admin. Code §
130.110(e). “The isolated or occasional sale of tangible personal property at retail by a
person who does not hold himself out as being engaged (or who does not habitually
engage) in selling such tangible personal property at retail…does not constitute
engaging in a business of selling tangible personal property at retail within the meaning
of the [Retailers’ Occupation Tax Act]”. 35 ILCS 120/1, 86 ILL. Admin. Code § 130.115.
The third transaction, the leaseback of the motor vehicle from lessor C to user A, is not
taxable because Illinois does not impose a sales tax liability on rental receipts in a sale
leaseback. 86 ILL. Admin. Code § 130.2010; See also IL PLR ST 01-0031 (7/26/2001).
Under the facts presented in this request, there would be no ROT/UT due on the sale of
motor vehicles from COMPANY to COMPANY 1 because this is not a retail sale and/or
the sale would qualify as an isolated or an occasional sale not subject to tax.
COMPANY’s one-time sale would qualify as an isolated or occasional sale of tangible
personal property because COMPANY does not hold itself out as being engaged (or
who does not habitually engage) in selling motor vehicles at retail. Indeed, COMPANY
is not engaged in the sale of motor vehicles at retail. COMPANY’s business is strictly
limited to the renting of automobiles for less than one year directly to individual drivers
for use in the City PROGRAM and transportation network drivers for use in the
COMPANY 2 Program. Moreover, no tax would be due on COMPANY’s leaseback of
the vehicles from COMPANY 1 because the agreement is a true lease of more than one
year as part of the sale/leaseback transaction. Accordingly, no tax is due on
COMPANY 1’s lease to COMPANY because Illinois does not impose a tax on rental
receipts from a true lease of more than one year.
Alternatively, should the Department not treat COMPANY’s sale of the motor vehicles
as an isolated or occasional sale exempt from ROT/UT, COMPANY contends that no
additional tax should be due because it will continue to collect AROT on its rental
receipts derived from the rental of motor vehicles for less than one year to individual
and network transportation drivers. The sale of the motor vehicles to COMPANY 1
does not disturb the lease terms and conditions between COMPANY and the rentees.
In short, at all times, the motor vehicles are being rented to a user for a valuable
consideration for a period of one year or less. Simply put, nothing has changed. To
disregard this fact, and impose ROT on the sale from COMPANY to COMPANY 1,
would result in a double taxation on the same property, the motor vehicles.
REQUEST FOR RULING.
Pursuant to 2 Ill. Admin. Code Section 1200.110, COMPANY and COMPANY 1
respectfully request that the Department of Revenue issue a private letter ruling
declaring:
(i) No additional Retailers’ Occupation or Use Tax is due on the
sale/leaseback transaction described above because COMPANY’s sale of motor
vehicles to COMPANY 1 qualifies as an isolated or occasional sale; and/or (ii) no
additional Retailers’ Occupation or Use Tax is due on the sale/leaseback transaction
described above because COMPANY will be collecting applicable AROT from the end
users of the motor vehicles sold to and leased back from COMPANY 1. The imposition

ST 17-0004-PLR
Page 5
of ROT/UT on the above described transaction would result in a double taxation of the
same property.
If you concur, please issue your favorable ruling to the undersigned. If you do not
concur, please advise so that we may discuss your reasoning before an adverse ruling
is issued.

DEPARTMENT’S RESPONSE:
The 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. Use Tax is 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.
A person who is engaged in the business of leasing or renting motor vehicles and who, in
connection with such business sells any used motor vehicle to a purchaser for his use and not for the
purpose of resale, is a retailer engaged in the business of selling tangible personal property at retail
under this Act to the extent of the value of the motor vehicle sold. 35 ILCS 120/1c.

Persons who are engaged in the business of renting automobiles in Illinois under rental terms
of one year or less are subject to the Automobile Renting Occupation and Use Tax (“AROT”). 35
ILCS 155/1 et seq. See 86 Ill. Adm. Code 180.101. This tax is imposed at the rate of 5% of the gross
receipts from such business. "Gross receipts" means all consideration received by a rentor for the
rental of automobiles under lease terms of one year or less. “Renting” means any transfer of the
possession or the right to possession of an automobile to a user for valuable consideration. 35 ILCS
155/2.
COMPANY is in the business of leasing or renting motor vehicles for periods of one year or
less. When COMPANY sells motor vehicles after they are no longer leased or rented by it,
COMPANY is liable for Retailers’ Occupation Tax, unless an exemption from the tax can be found.
Based on the language in Section 1c of the Retailers” Occupation Tax Act, the occasional sale
exemption does not apply to sales of motor vehicles by persons engaged in the business of leasing or
renting motor vehicles. COMPANY cannot claim the occasional sale exemption on the sale of the
motor vehicles to COMPANY 1.
Unless an exemption can be found, COMPANY is liable for Retailers’ Occupation Tax, and
COMPANY 1 is liable for Use Tax, on the sale of the motor vehicles from COMPANY to COMPANY

1. The Retailers’ Occupation Tax Act and Use Tax Act contain exemptions from tax for gross receipts
   received from proceeds from the sale of a motor vehicle that is used for automobile renting, as
   defined in AROT. 35 ILCS 120/2-5(5); 35 ILCS 105/3-5(10).
   It is our understanding, based on your letter and additional information submitted to the
   Department, that prior to the transfer of the vehicles, COMPANY entered into the agreement with
   COMPANY 1 to sell the vehicles to COMPANY 1 and also entered into a 3 year lease whereby
   COMPANY 1 leased the vehicles to COMPANY. You also represented that the COMPANY had

ST 17-0004-PLR
Page 6
committed to COMPANY 1 that after the sale of the vehicles to COMPANY 1 and lease of the
vehicles by COMPANY, COMPANY would use the vehicles for short term rentals subject to AROT.
Prior to the sale to COMPANY 1, COMPANY was collecting and remitting AROT on the rental of the
motor vehicles. After the sale to COMPANY 1, COMPANY continued to collect and remit AROT on
the rental of the motor vehicles. There has been no lapse in the collection and remittance of AROT
by COMPANY as a result of the sale of the motor vehicles to COMPANY 1. When COMPANY 1
ultimately sells the motor vehicles that it purchased from COMPANY it will be liable for Retailers’
Occupation Tax based on the selling price of the motor vehicles at the time the motor vehicles are
sold.
It is the Department’s ruling that COMPANY and COMPANY 1 may claim the rental exemption
contained in Section 2-5(5) of the Retailers’ Occupation Tax Act and Section 3-5(10) of the Use Tax
Act, respectively, on the motor vehicles sold from COMPANY to COMPANY 1 and leased by
COMPANY for automobile renting, as defined in AROT.
Regarding the purchase of new motor vehicles by COMPANY 1 and leased to COMPANY for
the use of short term rentals subject to AROT, COMPANY 1 may also claim the rental exemption for
newly-purchased vehicles as long as COMPANY and COMPANY 1 have entered a lease agreement
for the motor vehicles prior to the purchase, COMPANY has committed in writing to COMPANY 1
prior to the purchase to use the vehicles for automobile renting subject to AROT, the motor vehicles
are promptly transferred to COMPANY after the purchase, and the motor vehicles are in fact used by
COMPANY for the use of short term rentals subject to AROT.
The factual representations upon which this ruling is based are subject to review by the
Department during the course of any audit, investigation, or hearing and this ruling shall bind the
Department only if the factual representations recited in this ruling are correct and complete. This
Private Letter Ruling is revoked and will cease to bind the Department 10 years after the date of this
letter under the provisions of 2 Ill. Adm. Code 1200.110(e) or earlier if there is a pertinent change in
statutory law, case law, rules or in the factual representations recited in this ruling.
I hope this information is helpful. If you have further questions related to the Illinois sales tax
laws, please visit our website at www.tax.illinois.gov or contact the Department’s Taxpayer
Information Division at (217) 782-3336.
Very truly yours,

Richard S. Wolters
Chairman, Private Letter Ruling Committee
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