When a car dealer sells vehicles to its own rental affiliate, and the affiliate rents them out short-term (including as loaner cars while the dealer does warranty repairs), does Retailers' Occupation/Use Tax or Automobile Renting Tax apply, and what happens to manufacturer warranty reimbursements?

Plain-English summary

A motor vehicle dealer planned to create a wholly-owned affiliate that would buy loaner/rental cars from the dealer and rent them out short-term (one year or less), mostly to the dealer's own service customers who needed a car while their vehicle was being repaired. The dealer asked the Department to confirm how Illinois sales and use taxes, versus the Automobile Renting Occupation and Use Tax ("AROT"), would apply to this structure.

The Department confirmed the taxpayer's understanding:

• The dealer's sale of vehicles to the affiliate is exempt from Retailers' Occupation Tax and Use Tax, because the affiliate will use the vehicles exclusively for rentals subject to AROT (35 ILCS 120/2-5(5); 35 ILCS 105/3-5(10)).
• The affiliate's short-term rentals of those vehicles to customers are instead subject to AROT, a 5% tax on the gross receipts (rental price) from renting automobiles under lease terms of one year or less (35 ILCS 155/1 et seq.; 86 Ill. Adm. Code 180.101). It does not matter whether the affiliate makes a profit, or how much is charged for the rental.
• However, "gross receipts" for AROT purposes excludes any amount a manufacturer or service contract provider reimburses the dealer for providing a loaner vehicle while a customer's car is under warranty repair. Only rental fees actually paid for the rental are taxable, and any amount the dealer collects from the customer that exceeds the manufacturer/service-contract reimbursement remains taxable under AROT.

What this means for you

Motor vehicle dealers setting up rental affiliates

If you sell vehicles from your dealership to a related rental company (even a wholly-owned LLC) so that the affiliate can rent them out short-term, that sale can be exempt from Retailers' Occupation Tax and Use Tax under 35 ILCS 120/2-5(5) and 35 ILCS 105/3-5(10), as long as the affiliate's use of the vehicles is exclusively rentals subject to AROT. The affiliate, in turn, must register and collect AROT (5% of the rental price) on its rentals, regardless of profitability.

Dealers offering loaner cars under manufacturer warranties

When a manufacturer or service contract provider reimburses you (or your rental affiliate) for the cost of providing a loaner car to a customer whose vehicle is in for warranty or service-contract repair, that specific reimbursement is excluded from AROT "gross receipts" under 35 ILCS 155/2 and 86 Ill. Adm. Code 180.125(b). But if you also collect money from the customer beyond that reimbursement, that additional amount is still taxable under AROT.

Accountants and tax professionals

The ruling walks through several fact patterns under 86 Ill. Adm. Code 180.125(b) and 180.135: (1) a customer rents directly from a third-party rentor while their car is repaired — the rentor owes AROT on receipts from the customer, and manufacturer reimbursement to the dealer (not passed to the rentor) is not part of the rentor's AROT receipts; (2) the dealer rents a car from a rentor and provides it to the customer — the dealer's rental from the rentor is non-taxable if Section 180.135's requirements are met, and the dealer's provision of the car to the owner is non-taxable if Section 180.125(b)(2)'s requirements are met, with only the excess collected from the owner (beyond manufacturer reimbursement) being taxable.

Common questions

Q: Does the dealer owe Retailers' Occupation Tax when it sells vehicles to its own rental affiliate?
A: No. Under 35 ILCS 120/2-5(5) and 35 ILCS 105/3-5(10), sales of vehicles that the buyer will use exclusively for automobile renting subject to AROT are exempt from Retailers' Occupation Tax and Use Tax.

Q: Is the affiliate's short-term rental business taxed differently from a regular vehicle sale?
A: Yes. Renting automobiles under terms of one year or less is subject to AROT at 5% of gross receipts (35 ILCS 155/1 et seq.; 86 Ill. Adm. Code 180.101), a separate tax from Retailers' Occupation Tax and Use Tax, which apply to sales rather than rentals.

Q: Does it matter if the rental affiliate doesn't make a profit on the loaner rentals?
A: No. The ruling states "the objective of making a profit is not necessary to make the renting activity a business," so AROT applies regardless of profitability, and regardless of how much is charged for the rental (35 ILCS 155/2).

Q: Are manufacturer warranty reimbursements for loaner cars taxable under AROT?
A: No. "Gross receipts" for AROT purposes does not include amounts an automobile dealer receives from a manufacturer or service contract provider to recover the cost of operating a vehicle as a loaner while the customer's own vehicle is under warranty or service-contract repair (35 ILCS 155/2; 86 Ill. Adm. Code 180.125(b)). Only the rental fees actually paid for the rental remain taxable.

Q: What if the dealer collects more from the customer than the manufacturer reimbursement covers?
A: Any receipts the dealer receives from the vehicle owner that exceed the manufacturer or service-contract reimbursement for the cost of operating the loaner are taxable under AROT.

Citations and references

• 35 ILCS 155/1 et seq. (Automobile Renting Occupation and Use Tax Act — imposition of AROT)
• 35 ILCS 155/2 (definition of gross receipts and rental price; profit-motive irrelevant; warranty/service-contract reimbursement exclusion)
• 86 Ill. Adm. Code 180.101 (AROT rate: 5% of gross receipts from renting automobiles for one year or less)
• 86 Ill. Adm. Code 180.125(b) (loaner-vehicle exclusion under manufacturer's warranty or service contract)
• 86 Ill. Adm. Code 180.135 (non-taxable rental from third-party rentor to dealer for loaner purposes)
• 35 ILCS 120/2 (Retailers' Occupation Tax Act — tax on retail sales of tangible personal property); 86 Ill. Adm. Code 130.101
• 35 ILCS 120/2-5(5) (ROT exemption for vehicles sold for automobile renting)
• 35 ILCS 105/3 (Use Tax Act — tax on use of tangible personal property purchased at retail); 86 Ill. Adm. Code 150.101
• 35 ILCS 105/3-5(10) (Use Tax exemption for vehicles used for automobile renting)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedure)
• 2 Ill. Adm. Code 1200.120 (General Information Letters are not binding on the Department)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2023.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2023/ST-23-0008-GIL.pdf

Original ruling text

ST-23-0008-GIL 05/02/2023 AUTOMOBILE RENTING TAX
This letter discusses the renting of automobiles by dealers in Illinois under rental
terms of one year or less that are subject to the Automobile Renting Occupation
and Use Tax. 35 ILCS 155/1 et seq; 86 Ill. Adm. Code 180.101. (This is a GIL).
May 2, 2023

NAME
COMPANY
ADDRESS
Dear NAME:
This letter is in response to your letter dated December 20, 2022, 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 request a general information letter on the application of the
Illinois Retailers' Occupation Tax and Use Tax and Automobile Renting
Occupation Tax on certain motor vehicle transactions sales. Specifically,
a motor vehicle dealer ("Dealer") will sell motor vehicles to an affiliate of a
vehicle dealer ("Affiliate"), and the Affiliate will rent the motor vehicles to
customers. It is expected that most customers who rent a motor vehicle
from the Affiliate would, at the same time, have their own car in for service
with the Dealer.
The general facts are that the Dealer is registered as an Illinois
vehicle dealer (625 ILCS 5/5-101 et seq.) and Illinois tax collector for
Illinois Retailers [sic] Occupation Tax and Use Tax ("ROT and Use Tax").
35 ILCS 120/1 et seq.; 35 ILCS 105/10 et seq. The Dealer plans to create
a wholly-owned limited liability company ("AFFILIATE") to which it will sell
vehicles. AFFILIATE will engage in the business of the short-term rentals

NAME/ COMPANY
Page 2
May 2, 2023
of the vehicles (1-year or less) and register under the Automobile Renting
Occupation Tax ("AROT"). 35 ILCS 155/1 et seq. These short-term
rentals will principally be to customers of the Dealer that need loaner cars
while the Dealer provides service repairs for the customer vehicle.
AFFILIATE will be compensated either by the customer for the rental
vehicle or, alternatively, by the Dealer. The amount of the rental price
could range for $$ a day, to a significantly greater sum or possibly only a
minimal amount per day, depending on the type of the loaner and the
rental period.
Under the ROT and Use Tax, sales of vehicles to an affiliate when
the affiliate will exclusively use such vehicles for rentals that are subject to
the AROT, will not be subject to ROT and Use Tax. 35 ILCS 120/2-5 (5).
Therefore, the Dealer's sales of vehicles to AFFILIATE should not be
subject to ROT and Use Tax. Under the AROT, the short term rental of
motor vehicles to customers of the Dealer by AFFILIATE would be subject
to the AROT, absent an exemption. 35 ILCS 155/2. Even if the
AFFILIATE does not make a profit on the rentals, that is not relevant to
whether AFFILIATE's rentals are subject to the AROT. 35 ILCS 155/2.
("For this purpose, the objective of making a profit is not necessary to
make the renting activity a business.") Nor is the amount charged or
received for the rental relevant to whether the AROT applies to the
transaction, since AROT is based on the rental price paid. Id.
However, under the AROT, any reimbursement received by the
Dealer from a manufacturer pursuant to a manufacturer's warranty or a
service contract for rental fees paid by the Dealer to AFFILIATE for the
loaner rental is not subject to AROT, rather only the rental fees received
by the AFFILIATE for the rental are taxable. Id. ("Gross receipts" does
not include receipts received by an automobile dealer from a manufacturer
or service contract provider for the use of an automobile by a person while
that person's automobile is being repaired by that automobile dealer and
the repair is made pursuant to a manufacturer's warranty or a service
contract where a manufacturer or service contract provider reimburses
that automobile dealer pursuant to a manufacturer's warranty or a service
contract and the reimbursement is merely made to recover the costs of
operating the automobile as a loaner vehicle.").
Consequently, it is requested that the Department of Revenue
confirm in a general information letter that the above stated understanding
of the application of the ROT and Use Tax and AROT to the Dealer and
AFFILIATE are correct.
Thank you for your time and consideration of this matter.

NAME/ COMPANY
Page 3
May 2, 2023
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 to purchasers for use
or consumption. See 35 ILCS 120/2; 86 Ill. Adm. Code 130.101. In Illinois, 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 35 ILCS 105/3; 86 Ill. Adm.
Code 150.101. These taxes comprise what is commonly known as “sales” tax in Illinois.
If the purchases occur in Illinois, the purchasers must pay the Use Tax to the retailer at
the time of purchase. The retailers are then allowed to reduce the amount of Use Tax
they must remit by the amount of Retailers' Occupation Tax liability which they are
required to and do pay to the Department with respect to the same sales. See 86 Ill.
Adm. Code 150.130.
A person who is engaged in the business of selling motor vehicles 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 the Retailers’ Occupation Tax Act.
Unless an exemption can be found, Dealer is liable for Retailers’ Occupation Tax, and
AFFILIATE is liable for Use Tax, on the sale of the motor vehicles from Dealer to
AFFILIATE.
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 Automobile Renting Occupation and Use Tax Act.
35 ILCS 120/2-5(5); 35 ILCS 105/3-5(10).
The Automobile Renting Occupation and Use Tax Act (“AROT”) imposes a tax
upon persons engaged in this State in the business of renting automobiles in Illinois
under lease terms of one year or less at the rate of 5% of the gross receipts from such
business. 35 ILCS 155/1 et seq. See 86 Ill. Adm. Code 180.101. "Gross receipts"
means the total rental price or leasing price. "Rental price" means the consideration for
renting or leasing an automobile valued in money, whether received in money or
otherwise, including cash credits, property and services, and shall be determined
without any deduction on account of the cost of the property rented, the cost of
materials used, labor or service cost, or any other expense whatsoever, but does not
include charges that are added by a rentor on account of the rentor's tax liability under
this Act or on account of the rentor's duty to collect, from the rentee, the tax that is
imposed by AROT. 35 ILCS 155/2.
"Gross receipts" does not include receipts received by an automobile
dealer from a manufacturer or service contract provider for the use of an
automobile by a person while that person's automobile is being repaired
by that automobile dealer and the repair is made pursuant to a
manufacturer's warranty or a service contract where a manufacturer or

NAME/ COMPANY
Page 4
May 2, 2023
service contract provider reimburses that automobile dealer pursuant to a
manufacturer's warranty or a service contract and the reimbursement is
merely made to recover the costs of operating the automobile as a loaner
vehicle.
35 ILCS 155/2; 86 Ill. Adm. Code 180.125(b).
Generally, this exclusion applies when an automobile dealer makes repairs for an
automobile owner under the terms of a manufacturer's warranty or service contract and
the manufacturer's warranty or service provider’s contract provides that the
manufacturer or service provider will provide the owner with another automobile to drive
while the owner's automobile is being repaired. Pursuant to the terms of an agreement
between the manufacturer or service provider and the dealer, the dealer provides the
owner with a replacement automobile either from its sales inventory or from its rental
inventory. In exchange, the manufacturer compensates the dealer for that replacement
automobile. Sections 180.125(b) and 180.135 more fully explain the nature and scope
of the exemption.
In the case where the owner of the automobile being repaired by the dealer rents
an automobile directly from a rentor other than the dealer, the rentor owes tax based on
the gross receipts received from the owner. Under these circumstances, the dealer is
not providing the automobile to the owner, and any money the dealer receives from the
manufacturer or service contract provider for the use of an automobile by the owner
while the owner’s automobile is being repaired is not included in the rentor’s receipts for
purposes of AROT, assuming the dealer does not pass on to the rentor any money it
receives from the manufacturer or service contract provider.
In the case where the dealer rents an automobile from a rentor and provides the
automobile to the owner of an automobile being repaired by the dealer, the dealer’s
rental from the rentor is non-taxable to the dealer, so long as the requirements of
Section 180.135 are met. The dealer's subsequent provision of an automobile to the
owner is non-taxable so long as the requirements of subsection (b) of Section 180.125
are satisfied. 86 Ill. Adm. Code 180.125(b)(2). Any compensation the dealer receives
from the manufacturer or service contract provider to reimburse the dealer for the cost
of providing an automobile to the owner while the owner’s automobile is being repaired
is not subject to AROT. Any receipts the dealer receives from the owner that exceed
the compensation paid to the dealer by the manufacturer or service contract provider as
reimbursement for the cost of operating the replacement vehicle as a loaner vehicle are
taxable under AROT.
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.

NAME/ COMPANY
Page 5
May 2, 2023
Very truly yours,

Richard S. Wolters
Associate Counsel
RSW:dlb