Does Illinois cap the trade-in credit on vehicle sales and use tax, and how does the state tax leased, rental, and out-of-state vehicle purchases?

Plain-English summary

This GIL is the Department of Revenue's response to an organization that maintains a nationwide "Title and Registration Textbook" used by government offices — the kind of reference guide state motor-vehicle and licensing agencies consult. The group asked the Department to review and update its Illinois summary for 2022. Rather than issuing new guidance, the Department fact-checked the group's existing write-up on Illinois vehicle sales and use tax and suggested specific corrections.

The reviewed material (and the Department's corrections) cover several distinct vehicle-tax topics: the base 6.25% state tax rate on vehicle titling (with local add-ons in some areas); the trade-in credit cap of $10,000 per first-division vehicle, which the Department noted was set to be eliminated effective January 1, 2022; the $15 flat use tax on transfers between close family members, expanded as of September 1, 2021 to include post-divorce transfers between former spouses made within 90 days of a final dissolution order; how leased vehicles are taxed on the full lease amount (no trade-in credit) versus how short-term rental vehicles are instead subject to Automobile Renting Tax; and exemptions for vehicles sold to interstate carriers, schools, and qualifying charitable/religious organizations.

Because this is a GIL, it does not create new policy — it only points to existing statutes, regulations, and administrative practice, and it corrects a private publication rather than ruling on a specific taxpayer's transaction.

What this means for you

Car dealers and finance/leasing companies

If you sell, lease, or finance vehicles titled in Illinois, this letter is a handy checklist of the moving pieces: the 6.25% base state rate plus local tax, the (now-eliminated, as of January 1, 2022) $10,000 trade-in cap for first-division vehicles, and the different tax treatment for leases (taxed on the full lease contract amount, no trade-in credit) versus short-term rentals (Automobile Renting Tax instead of upfront use tax). If you are a remote retailer or marketplace facilitator selling vehicles that must be titled or registered in Illinois and you meet the remittance threshold, you must collect state and local Retailers' Occupation Tax and file Form ST-556 (or ST-556-LSE for simultaneous lease transactions).

Individuals buying, leasing, gifting, or inheriting a vehicle

If you buy a vehicle out of state and move to Illinois, you may be exempt from use tax if the vehicle was purchased and titled elsewhere at least three months before your move. Nonresidents buying in Illinois for registration elsewhere are generally not taxed here (subject to a reciprocity exception). Transfers between spouses, parents, children, or siblings that aren't through a retailer carry a flat $15 use tax rather than a percentage of value — and this now expressly includes a transfer from one spouse to the other within 90 days of a final divorce decree. Transfers to a surviving spouse are tax-exempt.

Accountants and tax professionals advising on vehicle transactions

The letter is useful as a status check on several rules in flux as of late 2021: confirm whether your client's transaction predates or postdates the January 1, 2022 elimination of the $10,000 trade-in cap, verify the September 1, 2021 expansion of the $15 family-transfer rate to post-divorce spousal transfers under 86 Ill. Adm. Code 151.105(d)(3), and remember that leased vehicles (taxed on the lease amount) and rental vehicles (Automobile Renting Tax) follow different regimes than an outright retail sale.

Common questions

Q: What is the trade-in credit cap for Illinois vehicle sales and use tax?
A: As of this 2021 letter, the credit for a trade-in on a first-division motor vehicle was capped at $10,000. The Department specifically flagged that, effective January 1, 2022, that $10,000 cap would be eliminated.

Q: Is there a reduced tax rate for vehicle transfers between family members?
A: Yes. Private-party (non-retailer) transfers of a motor vehicle between spouses, parents, children, or siblings carry a flat $15 use tax instead of tax on the full value. Effective September 1, 2021, this $15 rate also applies to a transfer from one spouse to the other in a divorce, as long as the transfer happens within 90 days of the final, non-appealable dissolution order (86 Ill. Adm. Code 151.105(d)(3)).

Q: How are leased vehicles taxed differently from purchased or rented vehicles?
A: For a lease of more than one year, the lessor owes Illinois Use Tax on the full amount of the lease contract (with no trade-in credit), due upfront when applying for title and registration. For rentals of one year or less, the rentor is instead subject to Automobile Renting Tax (5% state, plus up to 1% local and 6% Metropolitan Pier and Exposition Authority tax where applicable) rather than upfront use tax, provided the rentor is registered to collect that tax.

Q: Are vehicles sold to charities, schools, or religious organizations exempt?
A: Vehicles sold to an interstate carrier for hire, a school, a religious organization, or a qualifying charitable organization are exempt from the vehicle use tax described in this letter.

Q: Do out-of-state or remote vehicle sellers have to collect Illinois tax?
A: Under the Leveling the Playing Field for Illinois Retail Act (Public Acts 101-0031 and 101-0604), remote retailers and marketplace facilitators of property required to be titled or registered in Illinois who meet the tax remittance threshold must collect state and local Retailers' Occupation Tax, based on where the property is shipped, delivered, or where the purchaser takes possession, and must file Form ST-556 or ST-556-LSE.

Citations and references

Statutes and rules:

• 35 ILCS 120/1 (definition of "selling price"; remote retailer/marketplace facilitator definitions)
• 35 ILCS 120/2(a)-(b) (remote retailer/marketplace facilitator remittance threshold)
• Public Acts 101-0031 and 101-0604 (Leveling the Playing Field for Illinois Retail Act)
• 86 Ill. Adm. Code 151.105(d)(3) ($15 use tax on spousal/divorce transfers)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedure)
• 2 Ill. Adm. Code 1200.120 (General Information Letters 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/st21-0044-gil.pdf

Original ruling text

ST-21-0044 11/09/2021 MISCELLANEOUS
This letter responds to an annual survey. (This is a GIL.)

November 9, 2021
NAME
E-MAIL
Dear NAME:
This letter is in response to your e-mail dated July 12, 2021, 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 updating the information in the Title and Registration Textbook which
is used by government offices throughout the country would you like any
changes made to the information below for 2022 or is it correct as displayed?
SALES OR USE TAX APPLICABLE TO TITLING- State tax rate is 6.25% with
some locally imposed taxes. RESIDENTS who purchase a new or used vehicle from
out-of-state dealers, lending institutions, or leasing companies pay state tax of
6.25% but may include LOCAL TAXES depending on location in the state, on the
net price after trade-in allowance, with CREDIT for sales or use taxes paid to
other state. MILITARY PERSONNEL ARE NOT EXEMPT from sales taxes.
Individuals moving into Illinois are EXEMPT from the USE TAX if vehicle was
purchased AND titled in another state for at least 3 months prior to moving into
Illinois. With some exceptions, NON-RESIDENTS who purchase a vehicle in
Illinois for registration in another state are not subject to tax if not titled in Illinois.
Nonresidents are not entitled to this exemption if the vehicle will be titled in a
state that does not give Illinois residents an exemption on their purchases in that
state of vehicles that will be titled in Illinois (i.e. if there is no reciprocal exemption).

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Purchaser must acquire or affix driveaway permit or purchaser must affix nonIllinois license plates to remove from Illinois. Vehicles sold to an INTERSTATE
CARRIER to be used for hire, a SCHOOL, a RELIGIOUS ORGANIZATION, or a
CHARITABLE ORGANIZATION are EXEMPT.. The sale or transfer of a vehicle
from an individual other than a retailer is subject to VEHICLE USE TAX (Form
RUT-50) on the model year if the selling price was less than $15,000, and on the
selling price if $15,000 or more. The VEHICLE USE TAX on sales or transfers of
motorcycles and ATVs is $25.00, and the tax is $15.00 when the sale or transfer
of any motor vehicle is between spouse, parent. brother, sister, or child. The
Illinois· Department of Revenue collects Chicago and Cook County's Local
Vehicle Use Tax on non-retail transactions on Form RUT-5O as well. TAX
EXEMPT when transferring to a surviving spouse. NOTE: There are NO USE
TAXES on PRIVATE PARTY TRANSFERS on mobile homes, trailers, and
snowmobiles. You need a use permit. The sale or transfer of an airplane or boat
between an individual other than a retailer is subject to the
AIRCRAFT/WATERCRAFT USE TAX at the rate of 6.25% with no locally
imposed taxes. The tax is based on the selling price or fair market value of the
airplane or boat. whichever is greater. TAX EXEMPT when sold to an
EXEMPT ORGANIZATION, INTERSTATECARRIER for hire, SURVIVING
SPOUSE, or use in PRODUCTION AGRICULTURE.. When a customer receives
more than one vehicle from a dealer for their trade-in, and no money changes
hands (even trade), a completed tax form is required with every Application for
Title, regardless of whether taxes are due or not. The net purchase price is
defined as the actual purchase price less the trade-in value(s). If the net
purchase price is zero or less, then the tax due is zero. However, beginning
January 1, 2020, for purposes of calculating sales and use tax, the trade-in
credit claimed for each first division motor vehicle being traded in cannot
exceed $10,000. To receive assistance with tax computation and for updates
please contact the Illinois Department of Revenue at (800) 732-8866 or (217)
782-3336. By mail contact Illinois Department of Revenue, Sales and Use
Taxes, 101 W. Jefferson Street, Springfield, IL 62702 and on the Internet
www.tax.illinois.gov. NOTE: Updates may be implemented, for details please
contact the state.
SALES OR USE TAX APPLICABLE TO REGISTRATION - None. For
information please contact the Illinois Department of Revenue at (800) 7328866 or (217) 782-3336. By mail contact Illinois Department of Revenue,
Sales and Use Taxes, 101 W. Jefferson Street, Springfield, IL 62702 and on

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the Internetwww.tax.illinois.gov. NOTE: Updates may be implemented, for
details please contact the state.
LEASED VEHICLES - TAXES - All vehicles brought into Illinois to be titled
and registered require an Illinois Use Tax Transaction Return (Form RUT-25)
to be filed within 30 days of bringing the vehicle into the state. (Note: Taxes on
vehicles purchased from an Illinois dealer are generally handled directly by the
dealer.) For LEASED VEHICLES (periods of more than one year): Lessor is
considered user of the vehicle and incurs Illinois Use Tax liability when vehicle
is brought into the state. Effective January 1, 2016, the taxable "selling price"
of motor vehicles of the first division and certain motor vehicles of the second
division sold for the purpose of leasing the vehicles for a defined period of more
than one year is based on the amount of the lease contract, with no credit for
trade-ins. See the definition of "selling price" at 35 ILCS 120/1. The Illinois Use
Tax is due upfront at the time of applying for title and registration and is based
on address of lessee where vehicle will be titled and registered. The STATE
TAX rate is 6.25% but may include LOCAL TAXES up to 7.25% depending on
location in the state. A Bill of Sale or other specific proof of the purchase price
must be submitted with the Use Tax Return. Trade-in deduction (except in
cases where the taxable selling price is the amount of the lease contract)
and/or credit for sales tax previously paid in another state is allowed to reduce
Illinois Use Tax but only if clearly and separately stated on the Bill of Sale or
other proof of purchase and limited to $10,000 for each first division motor
vehicle traded in. For RENTAL VEHICLES (one year or less): Rentor is
considered user of vehicle. If rentor is currently registered to collect
AUTOMOBILE RENTING TAX in Illinois, vehicle is exempt from up front Illinois
Use Tax, however a Use Tax Return is still required when applying for title and
registration. Rentor pays Automobile Renting Tax each month based on
receipts received from renting. AUTOMOBILE RENTING TAX rate is 5%
STATE, 1% LOCAL (if applicable), and 6% METROPOLITAN PIER AND
EXPOSITION AUTHORITY (if applicable). No PERSONAL PROPERTY
TAXES. MUNICIPAL OR COUNTY USE TAX on vehicles imposed by certain
municipalities or by Cook County, which, except for Chicago in some cases,
are administered and collected by the municipality or county. The Illinois
Department of Revenue administers collections of stale taxes on vehicles.
NOTE: Updates may be implemented please contact Taxpayer Assistance at
(800) 732-8866 or (217) 782-3336. The issuance of titles and registrations of

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vehicles are administered by the Office of the Secretary of State. For more
information, call (217) 782-6387.
DEPARTMENT’S RESPONSE:
The Department cannot approve third-party publications. We advise you to
consult Illinois Statutes and administrative rules as well as Department Publications on
these matters. However, in the interest of limiting the dissemination of incorrect or
incomplete information, we make the following suggestions. Before getting into our
suggestions, you should be aware of a change in the law which is applicable to certain
retailers and lessors of tangible personal property which is required to be licensed or
titled in Illinois.
Public Acts 101-0031 and 101-0604 amended the Retailers’ Occupation Tax Act
and enacted the Leveling the Playing Field for Illinois Retail Act to implement a series of
structural changes to the Illinois sales tax laws. As a result, under a proposed rule filed
by the Department, remote retailers and marketplace facilitators of property required to
be titled or registered in Illinois and who meet a tax remittance threshold, will incur State
and local Retailers’ Occupation Tax, at the tax rate in effect at the location to which the
titled or registered property is shipped or delivered, or the location in Illinois where the
purchaser takes possession of the property. See 35 ILCS 120/1 and 35 ILCS 120/2(a)
and (b) for the definition of a remote retailer and marketplace facilitator as well as the
tax remittance threshold test.
Remote retailers and marketplace facilitators who meet the tax remittance
threshold for filing must file Form ST-556, Sales Tax Transaction Return, for sales of
property that must be titled or registered, or Form ST-556-LSE, Transaction Return for
Leases, for sales of property that must be titled or registered and that is simultaneously
being leased as part of the transaction.
For more information regarding the compliance requirements for remote retailers
and marketplace facilitators, visit the Department’s dedicated resource page for the
Leveling the Playing Field for Illinois Retail Act at: Leveling the Playing Field for Illinois
Retail Act Resource Page.
Concerning the document, you provided, we offer the following suggestions.
Under Sales or Use Tax Applicable To Titling:
Current: “Vehicles sold to an INTERSTATE CARRIER to be used for hire, a
SCHOOL, a RELIGIOUS ORGANIZATION, or a CHARITABLE ORGANIZATION are
EXEMPT.”
Change: Consider changing the sentence after “… to be used for hire,” to say “a
corporation, society, association, foundation, or institution organized and operated

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exclusively for charitable, religious, or educational purposes, with an active identification
number issued by the Department” are EXEMPT. Capitalize any words you deem
appropriate.
Current: “However, beginning January 1, 2020, for purposes of calculating sales
and use tax, the trade-in credit claimed for each first division motor vehicle being traded
in cannot exceed $10,000.”
Change: Following this sentence add: “Effective January 1, 2022, the $10,000
trade-in cap is eliminated.”
Current: “The VEHICLE USE TAX on sales or transfers of motorcycles and ATVs
is $25.00, and the tax is $15.00 when the sale or transfer of any motor vehicle is
between spouse, parent. brother, sister, or child.”
Change: With respect to the $15 tax liability when dealing with transactions
between family members, the following transaction should also be included as you
deem appropriate. Effective September 1, 2021, a $15 tax liability applies when a
transfer is from one spouse to the other spouse in a dissolution of marriage and the
transfer is made no later than 90 days from the date of a final, non-appealable order of
dissolution of marriage. 86 Ill. Adm. Code 151.105 (d)(3).
Under Leased Vehicles:
Current: “A Bill of Sale or other specific proof of the purchase price must be
submitted with the Use Tax Return.
Change: This appears to be a transition from a lease to a sale of a leased
vehicle. To help clarify this transition we suggest adding at the beginning of this
sentence the following statement: “For a sale of a leased vehicle”.
Current: “Trade-in deduction (except in cases where the taxable selling price is
the amount of the lease contract) and/or credit for sales tax previously paid in another
state is allowed to reduce Illinois Use Tax but only if clearly and separately stated on the
Bill of Sale or other proof of purchase and limited to $10,000 for each first division motor
vehicle traded in.”
Change: Include the provision as discussed above that effective January 1, 2022,
the $10,000 trade-in cap is eliminated.
We 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,

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Thomas Grudichak
Associate Counsel
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