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Sold vehicle is headed overseas; is sale subject to sales tax, or not?

November 16, 2010

The weakening U.S. dollar makes goods sold in this country attractive to foreign buyers, including car shoppers. Many area dealers are reporting an upswing in sales to persons who intend to take their vehicle out of the country.

Whether such a transaction is subject to Illinois sales tax boils down to a simple matter: where the foreign customer takes possession of the vehicle.

If the customer takes delivery of the vehicle in Illinois, it is a taxable sale—even if he says he intends to transport it out of the country. The logic, of course, is that if consumers believed they could beat the tax simply by pledging to ship the vehicle abroad say, next week, then everyone would pledge that.

Sales tax can be avoided only if, following the sale, the dealer delivers the vehicle directly to a freight forwarder who arranges for the item to be transported out of the country. Any paperwork the freight forwarder offers the dealer should be retained in the deal jacket, not sent to Springfield; auditors will want to review it to justify the tax exemption.

Dealers can leave it to the customer to coordinate things with the freight forwarder, just as long as it is the dealership that delivers the vehicle to the freight forwarder. Typing "freight forwarder, Chicago," into an Internet search engine generates about 12 outfits in the area to choose from.

When completing the Form ST-556 for the transaction, tax-exempt sales are treated in Section 5. To claim the exemption, check Box F Other, and write "Delivered to Freight Forwarder" in the space provided.

Another instance of a vehicle sale to a foreign customer that qualifies as tax-exempt is one to a foreign consulate, diplomat, consular officer, or staff member who provides an active tax-exemption card issued by the U.S. State Department.