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Restlessness permeates CATA seminar ono sales tax issues

November 16, 2010

A crowd of more than 100 people listened intently through the first hour of a CATA seminar examining sales tax issues faced by Illinois dealerships. But the audience grew audibly frustrated when discussion turned to Illinois Revenue Department audits and auditors that don’t always follow the department’s statutes.

Stanley Kaminski, a partner with the Chicago law firm, Duane Morris; and Mark Dyckman, a deputy general counsel of the revenue department, led discussion at the Dec. 21 presentation, which touched on about half of the meeting’s agenda of recent issues involving department rules, audits and litigation. Audience questions dominated the time allowed, and the CATA was asked to bring the pair back in an ongoing seminar series about tax matters.

Out-of-state purchasers

Tax liability for dealers essentially has been eliminated on transactions involving a fraudulent out-of-state purchaser—someone who lives in Illinois but poses as a Wisconsinite because of a vacation home in that state.

Record-keeping now involves just three documents:

• a copy of the purchaser’s non-Illinois driver’s license; or a copy of an out-of-state real estate contract, if the buyer is newly moved and has not yet obtained a new license;
• a copy of the drive-away permit; and
• a statement signed by the buyer, under penalties for perjury and fraud, that he is not an Illinois resident.

For persons found to be an Illinoisan, the revenue department pursues the buyer, not the dealer, for the taxes. "If you have those three documents," said Kaminski, "you’re golden."

But what of a snowbird, with residencies in Illinois and, say, Florida? Kaminski told the questioner not to issue a drive-away permit but to ship the vehicle to Florida, to exempt the deal from sales tax. He said delivering the vehicle overcomes the limits of drive-away permits.

Dealer cash

The speakers recounted a major change on dealer incentives that took effect last year. The 2008 regulations depict six distinct types of transactions. One type—money awarded by the manufacturer for the particular sale of a particular vehicle—is taxable. The other five are tax-exempt, like payments for stair-step programs, performance bonuses, and marketing and facility improvements.

"You have to look at what the incentive relates to," Dyckman said, to determine if it is taxable.

Trade-in credits

Advance trade-in credits, a device actually developed by the revenue department, and third-party trade-in credits also were discussed at length. Kaminski explained that a buyer can involve any number of advance credits in a transaction, or any number of third-party credits in a transaction, but not one of each.

That would stymie the following scenario, Kaminski said: A father trades in his vehicle today and wants to award the tax credit to his son, for a car the son will buy next week. Kaminski said the credit could be transferred only if both transactions occur at the same time. By putting off the second deal, the father’s credit becomes an advance credit, which cannot be transferred.

Aggressive auditors

Dyckman, who manages the revenue department’s attorneys involved in sales tax hearings, conceded that some field auditors are more aggressive than others and that not all auditors always interpret the statutes accurately.

Generally, if the dealer writes a check to the customer, the tax credit is reduced by that amount because the dealer in effect is buying all or part of the trade-in. ButDyckman said certain auditors interpret the statutes to indicate that ANY money returned to a customer reduces the traded-in vehicle’s tax credit. That would seem incorrect, in this scenario:

A man trades in a vehicle appraised at $20,000 and he wants to buy a new car for $30,000. The man also wants to remodel his basement, so he applies to a bank for a $20,000 loan, and the bank sends all $20,000 to the dealer. Because the dealer gave $10,000 back to the customer, the auditor said the trade-in’s value became $10,000.

Dyckman said the money given back to the customer should be recorded as "return of overpayment," to bolster the dealer’s defense in any audit.