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Indiana tax rate 7%, but Illinois limited to collecting 6.25%

November 16, 2010

The April 7 edition of this newsletter reported that the sales tax rate to charge Indiana dealers who buy a vehicle in Illinois grew April 1 from 6.00 to 6.25 percent.


In fact, the Indiana state sales tax increased that day to 7.00 percent, and therein lies the rub for Illinois dealers handling residents of eight "non-reciprocal" states: The tax is treated as a use tax, and an Illinois statute caps the use tax that can be collected at 6.25 percent.


Indiana won’t title the buyer’s car unless the full 7.00 percent tax has been paid, so Illinois dealers must advise their customers to settle the remaining 0.75 percent tab directly with the Indiana Revenue Department.


An Illinois Revenue Department spokeswoman said that if Illinois dealers attempt to collect the entire 7.00 tax, only 6.25 percent would be applied to the purchase, and the other 0.75 percent would vaporize into other ledgers—and won’t be refunded. The Indiana customer would still be approached by his home state for the outstanding 0.75 percent tax. 


She suggested Illinois dealers who are upset by the quirk should appeal to their state legislators to change the statute.