Just over three years ago, Illinoisans cheered the changes to the motor vehicle leasing law that were to lead to tax savings for lessees and level the playing field with other state's leasing laws.^[1]As lessors worked through the Act's clunky definition of "qualifying motor vehicle" and scrambled to implement the necessary system changes, they likely paid little attention to the Act's imposition of post-lease charges knowing such charges were at least three years away. ^[2]Now, as the first wave of three-year leases comes to an end, lessors can no longer afford to overlook these changes.   

Prior to 2015, Illinois taxed the entire capitalized cost of a leased motor vehicle, less any applicable trade-in credit. Effective January 1, 2015, Public Act 98-628 amended Illinois' definition of "selling price" to include the amount due at lease signing, plus the total amount of payments over the term of the lease. The Act also eliminated trade-in credits used to reduce the selling price of a motor vehicle and the tax remained due at the time of the lessor's acquisition of the motor vehicle. The tax must be paid before the Secretary of State will issue the title^{. [3]} The tax is reported on the Illinois ST-556-LSE (Retailers' Occupation Tax) or the RUT-25-LSE (Use Tax).   

Of significance, the amended definition of "selling price" also includes additional taxable amounts from lease transactions for excess wear and tear, excess mileage, and lease payments not otherwise reported on the original return ("post-lease charges"). This additional tax is to be remitted on Illinois Form LSE-1.  

In light of these changes, lessors should be aware of some of the following legal and practical issues that may result: 

(1) According to the Illinois Department of Revenue ("IDOR"), lessors should use the tax rate identified on the vehicle's original return (ST-556-LSE or RUT-25-LSE) when reporting tax due on any post-lease charges on Form LSE-1^.[4] This rate should be used regardless of whether the vehicle has changed locations during the lease and now may be subject to a different tax rate. IDOR's recommendation potentially raises sourcing and tax rate issues. 

(2) The 2015 change is further complicated by Illinois' treatment of true leases. Unlike most jurisdictions, in Illinois, the lessor of the motor vehicle is deemed to be the user of the vehicle and is the party subject to use tax on its acquisition of the vehicle. Thus, under Illinois law, a lessor should never issue a resale certificate to the motor vehicle vendor.^[5] In light of Illinois' treatment of leases, it is surprising to learn that the Act characterizes the post-lease charges as a ROT to be collected by the lessor. Specifically, "the lessor who purchased the motor vehicle assumes the liability for reporting and paying the tax on those amounts directly to the Department in the same form (Illinois Retailers' Occupation Tax, and local retailers' occupation taxes, if applicable) in which the retailer would have reported and paid such tax if the retailer had accounted for the tax to the Department."^[6]  (emphasis added). Consequently,this language turns the post-lease charges into a ROT obligation for the lessor.  This treatment runs afoul to Illinois' treatment of true leases by requiring the lessor to act as a retailer and collect the tax from the lessee. 

This treatment raises additional concerns regarding home rule authorities, who adopt Illinois' definition of "selling price", imposition of a titled use tax on the lessor. For example, Cook County titled use tax is imposed on the "user" who is defined as "any person whose name is on the tangible personal property title or registration."^[7] In a lease transaction, the motor vehicle title holder is the lessor. Thus, it is impossible to reconcile the County's definition (and Illinois' treatment of leases in general) with the Act's characterization of post-lease charges as a ROT where the lessor willcollectthe tax from the lessee. 

(3) Of significance, home rule authorities are prohibited from imposing ROT (i.e sales tax) on titled property.^[8] Conversely, there is no restriction on home rule authorities from imposing a use tax on titled property.  For example, both the City of Chicago and Cook County impose a tax on titled property^.[9] Notably, Chicago has an agreement with IDOR that requires any dealer located in Cook County or a surrounding collar county to collect applicable Chicago titled use tax at the time of the retail sale and report the tax on the state form ST-556-LSE.^[10] Conversely, Cook County does not have a similar type of agreement with IDOR and the titled use tax must be paid directly to Cook County and remitted on a separate Cook County return. 

So what issues should lessors be aware of in home rule jurisdictions?

First and foremost, there is a question of whether the home rule authorities have the authority to collect the tax imposed on post lease charges. Both Chicago and Cook County adopt the State's definition of "selling price."^[11] Thus, because the post-lease charges are arguably subject to ROT under the State's definition, there is a strong inference the home rule jurisdiction do not have authority to enforce the collection of such tax under Article VII, Section 6 of the Illinois Constitution of 1970 and the home rule authorities delegated by the General Assembly.^[12]

Second, even if the home rule authorities have the authority to impose the titled use tax on post-lease charges, there is the practical issue of compliance. For example, if a lessor purchases a vehicle from a Chicago dealer, the dealer must report the Chicago titled use tax on the ST-556-LSE. Accordingly, when the lease ends, the lessor would remit Chicago titled use tax on post lease charges on the LSE-1 when it uses the rate from the original ST-556-LSE form. However, when a vehicle moves into Chicago during the term of the lease, and Chicago titled use tax was not due on the original ST-556-LSE, the lessor now becomes obligated to remit the applicable Chicago titled use tax on a separate Chicago titled use tax return. The lessor would also have the responsibility to remit tax on post-lease charges at the conclusion of the lease. Unfortunately, in this situation, the Chicago tax cannot be remitted on the LSE-1, because per IDOR's instruction, it must use the rate on the original ST-556-LSE return^.[13] However, Chicago does not currently have a form where a lessor can report tax on post-lease charges so it is unclear how lessors can comply, or alternatively, whether Chicago is aware of potential limitations in enforcing its titled use tax on post-lease charges. 

Conversely, Cook County has published a form for lessors to report titled use tax on post-lease charges.^[14] Again, this doesn't solve the question of whether the County has the constitutional authority to impose the tax, but at the very least, it has issued a form to report the tax, if legally due^.[15] 

Due to its unique treatment of leases, the State of Illinois can be a source of headaches for lessors. While Illinois had the good intention of leveling the competitive field of leasing motor vehicles when it amended its definition of "selling price", it neglected to consider the compliance challenges faced by lessors and constitutional ramifications by characterizing the post-lease charges as ROT. Absent guidance from the State or home rule authorities on these issues, lessors can expect more confusion and compliance uncertainty, and unfortunately, more headaches.    

_{[1] Ill. P.A. 98-628.} 

_{[2] The provisions discussed in this article do not apply to all motor vehicles. Specifically, "qualifying motor vehicles" are defined as: (1) first division motor vehicles; and (2) second division vehicles that are self-contained motor vehicles designed or permanently converted to provide living quarters for recreational, camping, or travel use, with direct walk through access to the living quarters from the driver's seat; motor vehicles of a van configuration designed to transport not less than 7 and not more than 16 passengers; and motor vehicles having a gross vehicle weight rating (GVWR) of 8,000 pounds or less.  Notably, this Act carved out terminal rental adjustment clause ("TRAC") leases and truck tractors and semi-trucks which are often used to transport persons or property across state lines.} 

_{[3] This tax treatment is sometimes referred to as an accelerated rental tax, or "ART."}

_{[4] See Department of Revenue Informational Bulletin, FY-201503 (December, 2014).}

_{[5] The lessor, however, is permitted to enter into a private agreement with the lessee for the reimbursement of its tax costs, but it should never identify "tax" on a lessee invoice.} 

_{[6]35 ILCS 120/1, 35 ILCS 105/2}

_{[7] Cook County Ord. 74-271.}

_{[8] 55 ILCS 5/5-1006; 65 ILCS 5/8-11-1.}

_{[9] Chi. Code § 3-28-010; Cook County Ord. § 74-272. Note, other home rules impose a titled use tax, for example, City of Springfield. Springfield Code, Article V § 100.42 - 100.999.}

_{[10] Chi. Code. § 3-28-036; 65 ILCS 5/8-11-6(c).}

_{[11] Chi. Code § 3-28-303; Cook County Ord. § 74-271.}

_{[12] Ill. Const. Art. 7 § 6; 55 ILCS 5/5-1006; 65 ILCS 5/8-11-1}

_{[13] It has come to our attention that if the same rate is not used on the forms, the LSE-1 will be rejected.} 

_{[14] Schedule C of the Cook County Titled Use Tax Return.}

_{[15] Notably, we have learned that the County may send notices directly to the lessee for the collection of Cook County titled use tax. However, in light of Illinois' treatment of leases and the discussion above, this treatment is impermissible.}