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Illinois Revenue Department examining dealers’ trade-in tax credits

November 18, 2010
By Dennis O’Keefe, CATA Legal Counsel

As you may be aware, the Illinois Department of Revenue is currently involved in numerous audits of automobile dealers.  The issue of tax credits routinely comes up in those audits.  The March 13, 2006, CATA Bulletin discussed the Department’s position that a third party trade-in cannot be used to offset the purchase where the trade-in and the purchase do not occur at the same time (i.e. an advance trade), especially as it relates to the actions of several captive credit companies creating new titling entities to facilitate lease securitization financing.

 

That issue notwithstanding, the CATA felt it important to provide the pertinent part of the Illinois Department of Revenue Regulations governing trade-ins.  Those rules can be found in 86 Ill. Admin. Code 130.455. Those regulations are as follows: 

 

a) Definitions:

         Advance Trade Credit means a trade-in credit earned as the result of the trade-in of a vehicle on the future purchase of a vehicle where the purchaser is contractually obligated to make a purchase within 9 months after the advance trade. 

        Dealer means any person engaged in the business of selling vehicles at retail. 

        Dealer Credit means an advance trade credit maintained on the books of the dealer where the purchaser is contractually obligated to make a purchase within 9 months after the advance trade. 

        Lease means a true lease of a vehicle for a term of more than one year. 

        Lessee means any person that acquires possession of a vehicle pursuant to a lease. 

        Lessor means any person engaged in the business of leasing vehicles to other persons. 

        Purchaser means any person, whether an individual consumer or a lessor, that purchases a vehicle from a dealer.

 

c) Use of Trade-in Credits

        (1) A dealer may reduce his gross receipts by the value of or credit given for a traded-in motor vehicle where: (Section 1 of the Act)

            (A) An individual trades a motor vehicle he owns on the purchase of a new or used motor vehicle;

            (B) A lessor trades a motor vehicle he owns on the purchase of a new or used motor vehicle for subsequent lease;

            (C) A lessor or other purchaser trades a motor vehicle owned by a prospective lessee or a third party where the prospective lessee or third party assigns the vehicle to the dealer and provides written authorization for the trade to the dealer, for the benefit of the lessor or other purchaser.  The written authorization provided by the prospective lessee or third party should be specific to the immediate transaction, identifying the vehicle to be purchased by the lessor or other purchaser. A prospective lessee or third party trade-in authorization may not be used in conjunction with an advance trade transaction; or

            (D) A motor vehicle is traded-in as described in subsection (c)(1)(B) or (c)(1)(C) of this Section, and the dealer executes the lease but assigns the lease to a purchasing lessor, if the following requirements are part of the transaction:

 

            (i) the lease agreement states that the lease and vehicle will be assigned to the lessor making the trade of the motor vehicle, and

            ii)         title is issued directly to the lessor making the trade of the motor vehicle and not to the dealer so that the dealer remains outside the chain of title.

        (2) A dealer may not reduce his gross receipts by the value of or credit given for a traded-in motor vehicle where: (Section 1 of the Act)

            (A) The dealer is the owner (meaning the dealer holds either title or certificate of origin) of the traded-in motor vehicle;

            (B) The trade-in vehicle was disposed of in a sales transaction predating the trade but was not identified by contract or written agreement as an advance trade-in vehicle as required in subsection (d) of this Section; or

            (C) The party holding title and offering the vehicle or vehicles for trade on behalf of another purchaser or lessor, as described in subsection (c)(1)(C) of this Section, would not be entitled to the isolated or occasional sale exemption if such vehicle or vehicles were sold by that party, rather than traded.

 

(d) Advance Trade-Ins

    A transaction may constitute an advance trade-in if, at the time the vehicle is traded to the dealer, the purchaser becomes contractually obligated to purchase one or more vehicles from the dealer within 9 months after the date of the advance trade-in transaction. Advance trade credits not used within the time specified expire and may not be used subsequent to the 9 month credit period. Advance trade credits are nontransferable. 

        (1) In order to apply the trade-in credit toward the purchase price of a vehicle, the documents recording the purchaser’s contractual obligation to purchase need not specify the make, model or purchase price of a vehicle to be purchased, only that the purchaser is under an obligation to purchase within the specified amount of time.

        (2) Advance trade-in credit given by the dealer to the purchaser in the amount of the value of or credit given for a traded-in vehicle at the time of the advance trade-in may be in the form of dealer credit or cash, and will not affect the purchaser’s ability to apply the advance trade credit toward the purchase of one or more vehicles, so long as the purchaser is contractually obligated to purchase a vehicle from the dealer within the time specified. In completing the transaction, the purchaser may pay the dealer cash or other consideration for the purchase price of a vehicle or vehicles purchased. (Section 1 of the Act)

        (3) Documentation evidencing an advance trade-in transaction must include the following: The contract establishing the value of or credit given for a traded-in vehicle, the obligation to purchase a vehicle, and the date of expiration of the advance trade-in credit; the bill of sale for the traded-in vehicle; and the appropriate sales or use tax return evidencing the purchase of the new or used vehicle and recording the application of the advance trade-in credit. Advance trade-in transactions may not be structured so that the purchaser is not the owner of the automobile offered for trade. (Section 1 of the Act)

 

PLEASE NOTE WELL, UNDER PARAGRAPH 130.455 (D) (3) IMMEDIATELY ABOVE, THE DOCUMENTATION THAT MUST BE RETAINED BY THE DEALER. 

 

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