The Illinois General Assembly recently passed HB 2317, which, if signed by Governor Quinn, will subject motor vehicle leases of more than one year to Illinois Retailers’ Occupation (Sales) Tax on each lease payment. This is a significant change in the law which currently subjects motor vehicle lessors to Use Tax when the vehicle is acquired for lease (and not on each payment).  Motor vehicle leases of one year or less will generally continue to be subject to the Automobile Renting Occupation Tax.

Notably, this law would eliminate a trade-in credit for both the lessor (e.g., an advance trade-in credit), and for the lessee trading in a vehicle against the new lease, regardless of whether the trade-in value is assigned to the lessor by the lessee.

This change in the law would align Illinois with 47 other states that impose a sales tax on the lease payment stream.  It is also expected to generate additional revenue for the state since tax would be based on the lessee’s payments and not on the lessor’s cost when purchased.

If this legislation is enacted into law, we expect the Illinois Department of Revenue will issue guidance on a number of open issues, including the implementation of this law and whether or not there would be a transition rule addressing the utilization of pre-existing advance trade-in credits so such credits would not expire worthless.

The current effective date of this law is July 1, 2014.