Can a car buyer get a sales-tax trade-in credit when a manufacturer's Lemon Law settlement money is applied toward a replacement vehicle?

Plain-English summary

The Illinois Department of Revenue confirmed in this GIL that a manufacturer's Lemon Law settlement is not a trade-in for sales tax purposes, and no trade-in credit can be taken against the sales tax owed on a replacement vehicle for the portion of the price covered by that settlement.

A law firm representing a car dealer asked the Department to weigh in after a customer disputed how the dealer filled out an ST-556 (the state's sales tax transaction return for vehicle sales). The customer's original vehicle had mechanical problems, and the manufacturer eventually offered a "Replacement" resolution under the New Vehicle Buyer Protection Act (Illinois's Lemon Law). As part of that resolution, the customer signed the original vehicle's title directly over to the manufacturer, and the manufacturer paid money to the dealer that was applied toward the purchase price of a replacement vehicle, including a refund of the sales tax due on that replacement vehicle. The dealer reported no trade-in and no trade-in credit on the ST-556. The customer later argued the original vehicle should have counted as a trade-in, which would have lowered the taxable gross receipts and entitled the customer to a tax refund.

The Department sided with the dealer. Under the Retailers' Occupation Tax Act, "gross receipts" (the amount sales tax is measured against) excludes the value of a traded-in item only when that item is of "like kind and character" to what's being purchased. While trading one motor vehicle for another normally qualifies as like kind and character, the Department's own regulation carves out an exception: no trade-in credit is allowed for the part of a new car's price that represents a Lemon Law settlement from the manufacturer. Here, the original vehicle's title was reassigned directly to the manufacturer, not traded to the dealer, and the money involved was manufacturer settlement proceeds, not a trade-in. So the ST-556 was filed correctly with no trade-in credit.

What this means for you

Car dealers handling Lemon Law replacements

When a manufacturer resolves a defective-vehicle claim by paying money toward a customer's next vehicle purchase, do not report that as a trade-in on the ST-556, even if the customer's old vehicle title gets reassigned as part of the deal. The settlement proceeds are part of taxable gross receipts, not an offsetting trade-in value, because they come from the manufacturer under the Lemon Law, not from a like-kind vehicle handed over to the dealer.

Consumers who accept a manufacturer buyback or replacement

If your defective vehicle is resolved through a Lemon Law replacement and the manufacturer applies settlement funds toward a new vehicle, you should not expect that arrangement to generate an additional sales-tax reduction as if you had traded in your old car. The law specifically blocks a trade-in credit for that portion of the price.

Accountants and tax professionals

The key regulatory hook is 86 Ill. Adm. Code 130.425(h), which is a narrow exception to the general "like kind and character" trade-in rule in 130.425(a)-(b). Even though vehicle-for-vehicle trades are ordinarily like kind and character, settlement proceeds tied to the New Vehicle Buyer Protection Act are excluded from that treatment. Also note the Department declined to issue a Private Letter Ruling here because it found existing regulations dispositive of the question (2 Ill. Adm. Code 1200.110(a)(3)(D)), issuing this GIL instead.

Common questions

Q: Does trading in a used car normally reduce the sales tax owed on a new car in Illinois? A: Yes. Gross receipts subject to Illinois sales tax exclude the value of a traded-in item when it is of "like kind and character" to the item purchased, and trading any motor vehicle for any other motor vehicle generally qualifies. See 86 Ill. Adm. Code 130.425(a)-(b).

Q: Why didn't that trade-in exception apply here?
A: Because the money applied to the replacement vehicle came from the manufacturer as a Lemon Law settlement, not from a traded-in vehicle handed to the dealer. The regulation specifically excludes Lemon Law settlement proceeds from trade-in credit treatment, regardless of what happens to the old vehicle's title. See 86 Ill. Adm. Code 130.425(h).

Q: What happened to the customer's original, defective vehicle? A: Its title was reassigned directly to the manufacturer as part of the replacement agreement. It was not traded to the dealer, which is part of why the Department found there was no trade-in for tax purposes.

Q: Is a General Information Letter the same as a binding ruling? A: No. A GIL only points a taxpayer to relevant regulations and other information; it is not a statement of Department policy and does not bind the Department. The Department noted it declined to issue a Private Letter Ruling here because existing regulations already resolved the question.

Q: Does this mean Lemon Law settlement money is taxed twice? A: No new tax is imposed on the settlement itself. The point is narrower: the settlement dollars simply do not create an extra trade-in credit to reduce the sales tax on the replacement vehicle's full purchase price.

Citations and references

Statutes and rules:

• 815 ILCS 380 (New Vehicle Buyer Protection Act, "Lemon Law")
• 35 ILCS 120/1, 120/2, 120/2-10 (Retailers' Occupation Tax Act — "sale at retail," imposition of tax, gross receipts)
• 86 Ill. Adm. Code 130.101
• 86 Ill. Adm. Code 130.425(a)-(b) (trade-in of like kind and character; motor vehicles qualify)
• 86 Ill. Adm. Code 130.425(h) (no trade-in credit for Lemon Law settlement proceeds)
• 2 Ill. Adm. Code 1200.110 (private letter ruling procedure; declined here under (a)(3)(D))
• 2 Ill. Adm. Code 1200.120 (general information letters)

Case law cited by the Department:

• Keystone Chevrolet v. Kirk, 69 Ill. 2d 483 (1978) (gross receipts include amounts from any source, including manufacturer rebates/allowances)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2025.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2025/st25-0016-gil.pdf

Original ruling text

ST 25-0016-GIL 03/18/2025 TRADE-INS
No trade-in credit may be taken for that portion of the purchase price of a new automobile representing a settlement which the purchaser has obtained from an automobile manufacturer pursuant to the New Vehicle Buyer Protection Act [815 ILCS 380]. See 86 Ill. Adm. Code 130.425(h). (This is a GIL). March 18, 2025 NAME COMPANY ADDRESS EMAIL Dear NAME: This letter is in response to your letter dated December 18, 2024, which was submitted via email to the Department. 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 https://tax.illinois.gov/ to review regulations, letter rulings and other types of information relevant to your inquiry. The Department’s regulation “Public Information, Rulemaking and Organization” provides that “[w]hether to issue a private letter ruling in response to a letter ruling request is within the discretion of the Department. The Department will respond to all requests for private letter rulings either by issuance of a ruling or by a letter explaining that the request for ruling will not be honored.” See 2 Ill. Adm. Code 1200.110(a)(4). The Department declines to issue a Private Letter Ruling in this instance. A private letter ruling will not be issued if there are regulations dispositive of the subject of the request. See 2 Ill. Adm. Code 1200.110(a)(3)(D). We hope that the following general information will be of assistance. In your letter you have stated and made inquiry as follows: From: COMPANY1

COMPANY/NAME
Page 2
March 18, 2025
Taxable Location Number: NUMBER
Taxable Location Name:
LOCATION
Dealer's License no.:
NUMBER1
Re:

Request For Private Letter Ruling by Illinois Department of Revenue Tax Return Type: ST-556- Sales Tax Transaction Return Tax Return No.: NUMBER2 Confirmation Number: NUMBER3 Date of Filing: DATE Purchaser's Name: NAME1 Purchased Vehicle VIN: VIN Purchased Vehicle Description: MAKE/MODEL Trade-In Vehicle: None

Our firm represents COMPANY1 ("COMPANY1") of CITY, Illinois, and requests on behalf of COMPANY1 a private letter ruling from the Illinois Department of Revenue ("Department") relating to the above-described ST-556 State Sales Tax Transaction Return ("ST-556") of COMPANY1 customers, NAME1 ("NAME1"), involving the Replacement of a MAKE/MODEL1 ("Vehicle I") with the above-described MAKE/MODEL ("Vehicle 2") by COMPANY2 ("COMPANY2"). Specifically, COMPANY1 requests that the Department provide a private letter ruling relating to the above described ST-556, more pertinently relating to the application of trade-in credit amounts associated with the purchase of Vehicle 2. On two (2) separate occasions, one telephonically and one in-person, with representatives of the Department's Taxpayer Assistance Walk-up window (NAME2), and the Department's Central Registration Division, Sales Tax (NAME3), it was confirmed that COMPANY1accurately completed the ST-556 and properly handled the transaction. NAME1 was fully compensated for all sales taxes to be collected on the Vehicle 2 purchase as part of their COMPANY2 repurchase package. COMPANY1did not receive a trade-in as the NAME1 Vehicle I title was conveyed directly to COMPANY2as expressly required by COMPANY2. Below is a brief chronology of COMPANY1's transactions with the NAME1, and more specific information relating to COMPANY2's Replacement of NAME1’s Vehicle 1 by COMPANY2and NAME1's subsequent purchase of Vehicle 2 from COMPANY1. The instant request relates to a question whether Vehicle 1 should have been utilized on the ST-556 as a trade-in associated with the purchase of Vehicle 2

COMPANY/NAME
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March 18, 2025
reducing the tax obligation due with the return. COMPANY1 reasonably believes that the ST-556 was filed accurately. Where documents are provided to Department in documenting the transaction, those documents are identified by an Exhibit Number, which are attached to this request. Brief Chronology of NAME1 Customer Transactions 1. 2. 3. 4. 5.

6.

7.

In August 2022, NAME1 purchased Vehicle 1, a new MAKE/MODEL1, from COMPANY1. See Exhibit 1. During the first year of ownership NAME1 had mechanical issues with Vehicle 1 and discussed returning Vehicle I to COMPANY2 Company as a "lemon law" vehicle. In September 2023, COMPANY2 made a "Repurchase" offer of Vehicle 1 which NAME1 rejected. See Exhibit 2. In May 2024, COMPANY2 made a "Replacement" offer for Vehicle 1 which NAME1 accepted. See Exhibit 3. COMPANY2's offer included the following: a. Replacement Vehicle 2 Invoice ....................................$$$ b. Add Documentary Fees ...............................................$$$ c. Add Sales Tax on Full Vehicle 2 Purchase ......................$$$ d. Add Registration License and Title Fees ........................$$$ e. Add Additional Fees .....................................................$$$ f. Total Due to Dealer ....................................................... $$$ g. Less Customer Responsibility (Mileage) ........................ $$$ h. Less Customer Responsibility-(Upgrade 2024 from 2022)
$$$
i. Net Amount COMPANY2 Due to Dealer ......................... $$$ COMPANY2 refunded to NAME1 the full amount of Illinois sales tax due on Vehicle 2 purchase. a. COMPANY2Provided COMPANY1with a check in the amount of
$$$ and COMPANY1functioned as a "Repurchase Facilitator" in COMPANY2's resolution with NAME1. COMPANY2provided a Packet of Required Documents of NAME1 Including the following (See Exhibit 4). a. Customer Power of Attorney indicating Vehicle 1 is being repurchased and returned to COMPANY2. b. Title i. Instructions indicated title must be reassigned to COMPANY2 ii. Current Registration

COMPANY/NAME
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March 18, 2025
iii. Customer POA
iv. Dealer POA
v. Odometer Disclosure Statement
vi. Repurchase Vehicle Property Control Form
vii. Owners Driver's License
viii. Completed Vehicle Inspection Form
8.
9.
10.
11.
12.

NAME1 executed title documents specifically transferring Vehicle 1 title to COMPANY2. NAME1 purchased Vehicle 2 from COMPANY1. See Exhibit 5. COMPANY1completed the ST-556 for Vehicle 2 indicating there was no trade in and no trade in credit. See Exhibit 6. NAME1 paid State of IL sale tax on the Vehicle 2 purchase ($$$). See Exhibit 6. NAME1 asserts that ST-556 was completed incorrectly and that NAME1 is entitled to "additional" tax monies, claiming that Vehicle 1, transferred and returned to COMPANY2, was a "trade-in."

COMPANY2respectfully seeks written clarification from the Illinois Department of Revenue in the form of a private letter ruling that the abovedescribed transaction representing the purchase of Vehicle 2 and the accompanying ST-556 was completed accurately. Kindly direct your response to the undersigned on behalf of COMPANY2. Your assistance is greatly appreciated. DEPARTMENT’S RESPONSE: For the purpose of the Department’s response the named designated parties will hereinafter be referred to as follows: COMPANY2 (“Manufacturer”), COMPANY1 (“Dealer”) and NAME1 (“Purchaser”). The New Vehicle Buyer Protection Act (“Lemon Law”) is set forth at 815 ILCS 380/1 et seq. Section 3(a) provides that, “[i]f after a reasonable number of attempts the seller is unable to conform the new vehicle to any of its applicable express warranties, the manufacturer shall either provide the consumer with a new vehicle of like model line, if available, or otherwise a comparable motor vehicle as a replacement, or accept the return of the vehicle from the consumer and refund to the consumer the full purchase price or lease cost of the new vehicle, including all collateral charges, less a reasonable allowance for consumer use of the vehicle….”

COMPANY/NAME
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March 18, 2025
The Retailers’ Occupation Tax Act (“the Act”) imposes a tax on persons engaged in the business of “selling at retail” tangible personal property. See 35 ILCS 120/2; 86 Ill. Adm. Code 130.101. “Sale at retail” means any transfer of the ownership of or title to tangible personal property to a purchaser, for the purpose of use or consumption, and not for the purpose of resale. 35 ILCS 120/1. The sales tax is measured by the seller’s gross receipts from its sales made in the course of such business. See 35 ILCS 120/2-10; 86 Ill. Adm. Code 130.101. “Gross receipts” means all the consideration actually received by the seller, except the value of 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 86 Ill. Adm. Code 130.425(a). The phrase “like kind and character” includes, but is not limited to, the trading of any kind of motor vehicle on the purchase of any kind of motor vehicle. See 86 Ill. Adm. Code 130.425(b). Although the phrase “like kind and character” is liberally construed, no tradein credit may be taken for that portion of the purchase price of a new automobile representing a settlement which the purchaser has obtained from an automobile manufacturer pursuant to the New Vehicle Buyer Protection Act. See 86 Ill. Adm. Code 130.425(h). In the situation that you have described the Purchaser accepted the Manufacturer’s replacement offer for the defective Vehicle 1. Pursuant to the terms of the replacement agreement for Vehicle 1, the Manufacturer paid an agreed amount to the Dealer to be applied towards the purchase of the replacement vehicle i.e., Vehicle 2. The Purchaser executed documents reassigning title to Vehicle 1 to the Manufacturer. The Dealer completed the ST-556 for Vehicle 2 indicating there was no trade in and no trade in credit. The Illinois sales tax laws contain no exemption for that portion of the purchase price of a new car which represents a cash repurchase settlement from a manufacturer made under provisions of the Illinois New Vehicle Buyer Protection Act or similar legislation. Gross receipts include all of the receipts that a dealer receives from whatever source. This includes both receipts that are provided by the customer and also any receipts provided by a manufacturer as part of a rebate or allowance program. See Keystone Chevrolet v. Kirk, 69 Ill. 2d 483 (1978). The trade-in exception only applies where the property being traded-in is of like kind and character. Proceeds of a cash repurchase settlement paid by a manufacturer to a retailer under provisions of the Illinois New Vehicle Buyer Protection Act are not considered of like kind and character to qualify as a trade-in for a vehicle. See 86 Ill. Adm. Code 130.425(h). I hope this information is helpful. If you require additional information, please visit our website at https://tax.illinois.gov/ or contact the Department’s Taxpayer Information Division at (217) 782-3336. Very truly yours,

COMPANY/NAME
Page 6
March 18, 2025
Thomas Grudichak
Associate Counsel
TG:slc