If an Indiana resident buys a car in Illinois and trades in another vehicle, does Illinois tax apply, and does the $10,000 trade-in credit cap still apply?

Plain-English summary

An Illinois car dealer asked the Department whether an Indiana resident buying a first-division motor vehicle (a car, essentially) could get more than the usual $10,000 trade-in credit just because the buyer is from out of state. In the example given, the buyer paid $40,000 for the vehicle and traded in another vehicle worth $15,000, leaving $25,000 in cash consideration.

The Department's answer: no special treatment. Two things are true here, and neither depends on the buyer being from Indiana in the buyer's favor:

1. The sale is taxable in Illinois. Illinois law exempts sales of vehicles to nonresidents who won't title the car in Illinois — but only if the buyer's home state offers a matching ("reciprocal") exemption to Illinois residents buying there. Indiana does not, according to the Department's own reciprocal/non-reciprocal chart (Publication ST-58). Because Indiana is a non-reciprocal state, the exemption does not apply, and the sale is instead taxed at Illinois's regular 6.25% rate (since Indiana's 7% rate would otherwise apply but is capped at the Illinois rate).
2. The $10,000 trade-in cap still applies. Since Public Act 101-31 took effect, only the first $10,000 of a like-kind, first-division vehicle trade-in can be excluded from the taxable "selling price." There's no carve-out for nonresident buyers, so the dealer must still apply tax to $5,000 of the $15,000 trade-in value ($15,000 − $10,000), on top of the $25,000 cash paid.

The letter also flags that this cap goes away for sales starting January 1, 2022, once Public Act 102-353 removes the $10,000 limit.

What this means for you

Auto dealers

When you sell a first-division vehicle to an out-of-state buyer who takes delivery in Illinois, first check the state where the vehicle will be titled against the Department's reciprocal/non-reciprocal chart (Publication ST-58). If that state is non-reciprocal (like Indiana), you must charge Illinois Retailers' Occupation Tax — there's no automatic nonresident exemption. And regardless of residency, you can only deduct up to $10,000 of a like-kind trade-in's value when figuring the taxable selling price, for sales before January 1, 2022.

Out-of-state vehicle buyers

If you buy a car in Illinois and plan to title it in your home state, whether you owe Illinois sales tax depends on whether your state gives Illinois residents a matching exemption. If it doesn't (Indiana didn't, as of this 2021 letter), Illinois will tax your purchase at the lesser of Illinois's 6.25% rate or your home state's rate — and your trade-in credit is capped at $10,000 just like an Illinois resident's would be.

Accountants and tax professionals

This GIL is a good example of how the item (25)/(25-5) reciprocal exemption interacts with the separate $10,000 trade-in cap under 86 Ill. Adm. Code 130.425 — the two issues are independent, and failing the reciprocity test does not somehow exempt the trade-in from the cap. Also note the sunset: the $10,000 cap disappears for sales on or after January 1, 2022 under Public Act 102-353, so this analysis is time-limited.

Common questions

Q: Does Illinois ever exempt vehicle sales to nonresidents?
A: Yes — under 35 ILCS 120/2-5(25), if the vehicle won't be titled in Illinois and either a drive-away permit is issued or the buyer has out-of-state plates to transfer. But item (25-5) takes that exemption away if the buyer's home state doesn't offer a reciprocal exemption to Illinois residents.

Q: Was Indiana a reciprocal state at the time of this letter?
A: No. The Department's Publication ST-58 (Reciprocal – Non-Reciprocal Vehicle Tax Rate Chart) listed Indiana as non-reciprocal, so the nonresident exemption didn't apply, and the sale was taxed at Illinois's 6.25% rate rather than Indiana's higher 7% rate.

Q: Does being a nonresident give you a bigger trade-in credit?
A: No. The $10,000 cap on the trade-in deduction for first-division vehicles under 86 Ill. Adm. Code 130.425 applies the same way regardless of the buyer's residency. In the letter's example, only $10,000 of the $15,000 trade-in could be excluded from tax.

Q: Is this $10,000 cap permanent?
A: No. The letter notes that Public Act 102-353 removes the $10,000 cap on trade-in deductions for sales occurring on or after January 1, 2022.

Q: Is this letter binding on the Department?
A: No. It's a General Information Letter (GIL), which only points to relevant regulations and guidance. It is not a statement of Department policy and is not binding, unlike a Private Letter Ruling (PLR).

Citations and references

Statutes and rules:

• 35 ILCS 120/2-5(25) (nonresident motor vehicle exemption when not titled in Illinois)
• 35 ILCS 120/2-5(25-5) (denial of exemption for non-reciprocal states; reciprocal tax rate)
• 35 ILCS 120/1; 35 ILCS 120/2-10 (gross receipts/selling price; ROT measure)
• 35 ILCS 105/2; 35 ILCS 105/310 (Use Tax Act selling price; imposition of Use Tax)
• 86 Ill. Adm. Code 130.425 ($10,000 trade-in deduction cap for first division vehicles)
• 86 Ill. Adm. Code 130.101; 86 Ill. Adm. Code 150.101 (imposition of ROT and Use Tax)
• 2 Ill. Adm. Code 1200.120 (General Information Letters)
• Public Act 101-31 (enacted the $10,000 trade-in cap); Public Act 102-353 (removes the cap for sales on/after 1/1/2022)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2021.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2021/st21-0034-gil.pdf

Original ruling text

ST-21-0034 09/07/2021 MOTOR VEHICLES
The sale of a first division motor vehicle to an Indiana resident who takes delivery
in Illinois but will register the motor vehicle in Indiana is subject to Illinois
Retailers’ Occupation Tax and Use Tax, including the $10,000 cap on the
deduction allowed for the value of the trade-in of a first division motor vehicle
when calculating the tax. See 35 ILCS 120/2-5(25-5)) and 86 Ill. Adm. Code
130.425. (This is a GIL.)
September 7, 2021
Dear NAME:
This letter is in response to your letter dated January 31, 2020, 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.
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 have reviewed the recently amended definition of “selling” price
contained in 35 ILCS 105/2, and also Illinois Department of Revenue
(IDOR) Informational Bulletin FY2020-1 and also IDOR’s Trade-in Credit
Limit Frequently Asked Questions (FA-14).
QUESTION
Given the fact pattern described below, is there any exception to the
$10,000 trade-in credit limit that would apply to a transaction involving an
Indiana resident who purchases a First Division motor vehicle from an
Illinois auto dealer that would allow for a $15,000 trade-in credit because
of the customer’s status as an Indiana resident?
FACTS
On 1/15/2020, resident of the state of Indiana purchases a First Division
motor vehicle from an Illinois auto dealer for $40,000 and trades in

NAME
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September 7, 2021
another First Division motor vehicle worth $15,000, therefore the cash
consideration paid to the Illinois dealer is $25,000.
Thank you for your time and attention to this request for a General
Information Letter.
In a follow-up communication, you added the following information:
This transaction is taxed at the rate of 6.25% (non-reciprocal tax rate),
pursuant to ST-58, Reciprocal – Non-Reciprocal Vehicle Tax Rate Chart
(attached).
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.
$10,000 Cap on Trade-in Deduction
Retailers' Occupation Tax is measured by gross receipts from the sale of tangible
personal property to end-users. See 35 ILCS 120/2-10. “Gross receipts” is defined as
“the total selling price or the amount of such sales.” See 35 ILCS 120/1. Use Tax is
imposed on “the selling price . . . of the tangible personal property.” See 35 ILCS 105/310. Before the enactment of Public Act 101-31, the Retailers’ Occupation Tax Act and
Use Tax Act defined “selling price” or the “amount of sale,” in relevant part, as “the
consideration for a sale valued in money whether received in money or otherwise,
including cash, credits, property, other than as hereinafter provided, and services, but
not including the value of or credit given for traded-in tangible personal property where
the item that is traded-in is of like kind and character as that which is being sold . . . .”
See 35 ILCS 105/2 and 35 ILCS 120/1, emphasis added. Public Act 101-31 amended
the definition of “selling price” in the Retailers’ Occupation Tax Act and the Use Tax Act
to provide that, “beginning January 1, 2020, ‘selling price’ includes the portion of the
value of or credit given for traded-in motor vehicles of the First Division as defined in
Section 1-146 of the Illinois Vehicle Code of like kind and character as that which is
being sold that exceeds $10,000.” (emphasis added) This provision capped at $10,000
the deduction allowed for the value of the trade-in of a first division motor vehicle when
calculating tax on the sale of a motor vehicle. See 86 Ill. Adm. Code 130.425.
Sale of Vehicle to Resident of Non-Reciprocal State
Item (25) of Section 2-5 of the Retailers’ Occupation Tax Act provides an
exemption from the tax for “. . . a motor vehicle sold in this State to a nonresident even

NAME
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September 7, 2021
though the motor vehicle is delivered to the nonresident in this State, if the motor
vehicle is not to be titled in this State, and if a drive-away permit is issued to the motor
vehicle as provided in Section 3-603 of the Illinois Vehicle Code or if the nonresident
purchaser has vehicle registration plates to transfer to the motor vehicle upon returning
to his or her home state.” (35 ILCS 120/2-5(25))
Item (25-5) of Section 2-5 of the Retailers’ Occupation Tax Act provides in part
that “[t]he exemption under item (25) does not apply if the state in which the motor
vehicle will be titled does not allow a reciprocal exemption for a motor vehicle sold and
delivered in that state to an Illinois resident but titled in Illinois.” (35 ILCS 120/2-5(25-5))
Publication ST-58, Reciprocal – Non-Reciprocal Vehicle Tax Rate Chart indicates that
Indiana is a non-reciprocal state for purposes of item (25-5). Item (25-5) goes on to
provide that “[t]he tax collected under this Act on the sale of a motor vehicle in this State
to a resident of another state that does not allow a reciprocal exemption shall be
imposed at a rate equal to the state's rate of tax on taxable property in the state in which
the purchaser is a resident, except that the tax shall not exceed the tax that would
otherwise be imposed under this Act.” The State sales tax rate in Indiana is 7%, which
exceeds the 6.25% rate under the Retailers’ Occupation Tax Act. Therefore, sales of
motor vehicles to residents of Indiana who take delivery in Illinois are subject to Illinois
Retailers’ Occupation Tax at the rate of 6.25%.
Discussion
There is no exception to the $10,000 cap on the trade-in deduction for sales of
first division motor vehicles to Indiana residents who take delivery in Illinois. Sales of
motor vehicles to residents from non-reciprocal states who take delivery in Illinois are
subject to Retailers’ Occupation Tax. As a result, all provisions of the Retailers’
Occupation Tax Act apply, including the $10,000 cap on the deduction allowed for the
value of the trade-in of a first division motor vehicle when calculating tax on the sale of a
motor vehicle.
We note, however, that for sales that occur on or January 1, 2022, Public Act
102-353, removes the $10,000 cap on the deduction that may be taken for trade-ins
when calculating tax.
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,

SJM:bkl

Samuel J. Moore
Associate Counsel