When a dealer sells a motor vehicle with a trade-in, can the buyer and dealer lower the sale price and the trade-in value by equal amounts to get around the $10,000 cap on the tax-free trade-in credit?

Plain-English summary

A car dealer wrote to the Illinois Department of Revenue asking about a rule that had just taken effect: Public Act 101-31 amended the definition of "selling price" under the Retailers' Occupation Tax Act and the Use Tax Act so that, starting January 1, 2020, the tax-free credit for a traded-in motor vehicle is capped at $10,000. Any trade-in value above $10,000 gets added back into the taxable "selling price" of the new vehicle.

The dealer asked whether a buyer and seller could get around that cap by negotiating both halves of the deal down by the same amount — for example, dropping a $21,000 sale price to $20,000 while also dropping an $11,000 trade-in allowance to $10,000, so the cap never technically applies. The dealer gave two worked examples showing this could cut the tax owed (from $687.50 to $625 in one example, and from $3,125 to $1,250 in a larger deal).

The Department's answer did not bless or ban the practice outright. Instead, it explained that "selling price" and trade-in value, while partly subjective, are checked against objective factors the Department uses when reviewing returns. If the numbers a dealer reports deviate from those objective values, the Department can correct the return and assess tax based on its own best judgment — and filing a return that's knowingly false can expose the dealer to fraud penalties. The Department also flagged that the $10,000 cap was temporary: Public Act 102-353 removed it entirely for vehicle sales occurring on or after January 1, 2022.

What this means for you

Car dealers and dealership finance staff

For deals closing between January 1, 2020 and December 31, 2021, the value of a First Division motor vehicle trade-in above $10,000 was taxable — it could no longer be netted against the sale price tax-free. Restructuring a deal (dropping both the sale price and the trade-in allowance by the same amount) to keep the trade-in under $10,000 is not something the Department pre-approved here; it warned it will compare reported figures to objective market values and adjust returns that don't line up. Since January 1, 2022, this entire issue is moot — the cap was repealed and the full trade-in value is again excludable regardless of amount.

Buyers negotiating a vehicle purchase with a trade-in

If you bought or sold a vehicle with a trade-in during 2020 or 2021, the tax you owed depended on how the sale price and trade-in value were documented, not just the net cost to you. Dealers had an incentive to be cautious about restructuring deals purely to shrink the taxable trade-in credit, since the Department can override reported numbers it considers unrealistic.

Accountants and tax professionals

This GIL is a useful pointer to the mechanics of the (since-repealed) $10,000 trade-in cap under 35 ILCS 105/2 and 35 ILCS 120/1, and to the Department's general authority under 35 ILCS 120/4 to correct returns using its "best judgment and information" when reported values look artificial. It's also a reminder that the cap only ever applied to sales from January 1, 2020 through December 31, 2021 — Public Act 102-353 removed it for sales from January 1, 2022 onward, so this analysis is now largely historical.

Common questions

Q: Is the $10,000 trade-in tax cap still in effect?
A: No. It applied only to motor vehicle sales from January 1, 2020 through December 31, 2021. Public Act 102-353 removed the cap for sales occurring on or after January 1, 2022, so the full trade-in value can again be excluded from the taxable selling price.

Q: Did the Department say it's legal to lower the sale price and trade-in value together to avoid the cap?
A: Not exactly. The Department didn't say the negotiation itself was prohibited, but it stressed that reported selling price and trade-in value must reflect objective values it uses to review returns. If a dealer's numbers deviate from those objective values, the Department can correct the return and assess tax on its own best judgment, and a fraudulent return can bring criminal penalties under 35 ILCS 120/13.

Q: What kind of vehicle trade-in did the cap apply to?
A: First Division motor vehicles as defined in Section 1-146 of the Illinois Vehicle Code (generally passenger vehicles) traded in for a vehicle of "like kind and character."

Q: Is a GIL like this binding on the Department?
A: No. A General Information Letter only points the taxpayer to relevant statutes, regulations, and other sources; it is not a statement of Department policy and is not binding, unlike a Private Letter Ruling issued under 2 Ill. Adm. Code 1200.110.

Citations and references

Statutes and regulations:

• 35 ILCS 105/2; 35 ILCS 120/1 (definition of "selling price," including the $10,000 motor-vehicle trade-in cap)
• 35 ILCS 120/2-10 (Retailers' Occupation Tax measured by gross receipts)
• 86 Ill. Adm. Code 130.101; 86 Ill. Adm. Code 150.101 (imposition of Retailers' Occupation Tax and Use Tax)
• 86 Ill. Adm. Code 130.425 (motor-vehicle trade-in rule)
• 35 ILCS 105/3-10 (Use Tax imposed on selling price)
• 35 ILCS 120/4 (Department authority to correct returns)
• 35 ILCS 120/13 (fraud penalties)
• Public Act 101-31 (enacted the $10,000 cap, effective January 1, 2020)
• Public Act 102-353 (repealed the cap for sales on or after January 1, 2022)
• 2 Ill. Adm. Code 1200.120 (GILs are non-binding)

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/st21-0038-gil.pdf

Original ruling text

ST-21-0038 09/02/2021 MOTOR VEHICLES
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.” See 35 ILCS 105/2, 35 ILCS 120/1, and 86 Ill. Adm. Code 130.425.
(This is a GIL.)
September 2, 2021
Dear NAME:
This letter is in response to your letter 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:
We are requesting a Letter Ruling for clarification on the new sales tax changes
dictated in Public Act 101-0031 in regards to the $10,000 trade-in credit limit
towards the amount subject to sales tax.
In a vehicle purchase transaction involving a trade in, there are multiple parts that
can be negotiated separately or together. The tax code prior to 1/1/2020 figured
tax on the difference between the vehicle purchased and the vehicle traded in. The
new tax code puts a limit on the tax credit given on the vehicle being traded in.
Given that both sides of the purchase transaction are negotiable, can the buyer
with an $11,000 car to trade that is buying a $21,000 vehicle state that they will
accept less for their vehicle if an equal amount is taken off the vehicle being
purchased? If we drop our price to $20,000 and they accept $10,000 for their trade
in, the sales tax owed is less than if we stayed at at [sic] $21,000 and gave them
$11,000 for the trade in.

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1. Is there anything that says we or they can’t negotiate a deal structured to pay
   as little sales tax as possible?
   Example #1

$21,000
$11,000
---------$10,000
$687.50

sale price dropped to
trade in value dropped to
balance due plus tax
tax due

$20,000
$10,000
---------$10,000
$625.00

2. If it is acceptable to negotiate a small amount as shown in example #1 to
   structure for tax efficiency, is there an upper limit that they can negotiate?
   Customer has a $40,000 vehicle to trade that they would accept $10,000 for if
   we drop the price of our $60,000 vehicle to an equally losing price of $30,000.
   Example #2

$60,000
$40,000
---------$20,000
$3,125

sale price dropped to
trade in value dropped to
balance due plus tax
tax due

$30,000
$10,000
---------$20,000
$1,250

The point being that dealers will routinely sell a vehicle at what looks like a loss if
they a [sic] getting a vehicle traded in at a bargain to make up for that loss when it
is sold. Sales tax on vehicle purchases had always been calculated on the
difference between the vehicle bought and the vehicle traded because there is no
way to manipulate the numbers to pay less tax. Under the new tax law, it appears
that a customer can negotiate the structure of the sale in such a way that the
$10,000 tax credit limit doesn’t apply. Is it acceptable to negotiate the purchase
and trade numbers equally lower to pay the least amount of tax possible?
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.
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

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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. 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.” 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.
Section 4 of the Retailers’ Occupation Tax provides that “[a]s soon as practicable
after any return is filed, the Department shall examine such return and shall, if
necessary, correct such return according to its best judgment and information.” See 35
ILCS 120/4. While selling price and trade-in value have a subjective element, there are
objective factors the Department uses when determining “selling price” reported on a
return. To the extent the selling price or trade-in value listed on a return filed with the
Department deviates from the objective values used by the Department, the Department
will adjust the return and assess tax according to its best judgment and information.
In addition, any person engaged in the business of selling tangible personal
property at retail in this State who files a fraudulent return is subject to criminal penalties
under Section 13 of the Retailers’ Occupation Tax Act. See 35 ILCS 120/13.
We note, however, that for sales that occur on or January 1, 2022, Public Act
102-353, removes the $10,000 limit on the deduction that may be taken for trade-ins
when calculating tax.
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

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