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Don’t get between the Illinois Department of Revenue and use tax


 Use tax may be owed on vehicles purchased in other states.

Motor vehicles sold in a state to a nonresident may be exempt from that state’s sales tax. However, strict rules govern that exemption in all states that provide it, and departments of revenue frequently verify the validity of these exempt transactions. Recently, for example, the Illinois Department of Revenue audited and ultimately took a buyer to court over such a transaction.

In order for an exemption to be valid, the vehicle must be titled in another state, and a drive-away permit must be issued to the vehicle at the time of purchase. Alternatively, the nonresident purchaser can put registration plates on the vehicle upon returning to their home state. According to the Illinois Retailers’ Occupation Tax Act, “The issuance of the drive-away permit or having the out-of-state registration plates to be transferred is prima facie evidence that the motor vehicle will not be titled in this State.” However, “if the vehicle remains in Illinois for more than 30-days, its use may be subject to tax.”

In the case at hand, an out-of-state corporation purchased a Ford Flex in Illinois via the company’s attorney, a resident of Illinois. At the time of purchase, the company provided all necessary documents for a valid exemption. The vehicle was issued a drive-away permit, upon which it should have been driven away, out of the state.

In investigating the transaction, the Illinois Department of Revenue found that although the vehicle is not registered in Illinois, it was serviced in Illinois two months and again four months after the date of purchase. Furthermore, the title (issued from another state) was mailed to the attorney’s Illinois home address. According to the Department, “Tax is due on a vehicle in the state [if] it is being used not in the state it is registered.”

In the Department’s Notice of Proposed Audit Findings, it concludes that use tax is due on the vehicle because “the best available information” indicates that the company is, in fact, an Illinois resident both at the time of purchase and when the nonresident exemption was claimed (the presence of a resident employee — the attorney — is enough to establish residency).The Department assessed a tax liability of approximately $3,500 and informed the corporation that it could contest the notice. It did, arguing in the circuit court that it lacked substantial nexus with Illinois and that “use tax only applies to persons residing in or entities engaged in business in Illinois.” The circuit court found in favor of the corporation — “the tax and act are not applicable to plaintiff”— and the Department appealed.

The power of the Department

The Appellate Court disagreed, finding the Department of Revenue to be “empowered to administer and enforce the collection of the use tax through various means.” It determined that, in spite of the out-of-state corporation’s claims to the contrary, “the Department has jurisdiction and a duty to inquire, investigate and impose a use tax under the circumstances presented in this appeal.” The court further found that “circuit court should not have interfered” with the administrative proceedings undertaken by the Department of Revenue, and “the regulatory scheme established in the Act should be allowed to run its course free of judicial interference.” Read the court order, No. 1-15-2834 for additional details.

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Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.