House Republicans Seeking to Repeal “trade-in” Tax

In a little-publicized move, the Illinois General Assembly enacted legislation in spring 2019 to cap the “trade-in credit” that has, up until now, partially relieved the burden of sales taxes on people buying new or used motor vehicles in Illinois.  This burden can be substantial.  In an Illinois jurisdiction where sales tax is imposed at a rate of 9%, for example, purchasing a new $40,000 motor vehicle will generate an additional sales tax of $3,600.  This bill is typically added to the financing package for the car or light truck, and the buyer must cover it in his or her monthly payments.

Until spring 2019, new-vehicle buyers and their dealers had a recourse to reduce this tax bill.  For purposes of calculating sales tax, the value of a vehicle being traded in was subtracted, or ‘credited,’ from the price of the purchase at the time of the transaction.  If the buyer of the $40,000 motor vehicle were trading in a vehicle with a trade-in value of $15,000, the transaction would generate a sales tax base of $25,000, not $40,000.  Trade-in credits could be used to reduce the sales tax burden on a new-vehicle purchase by hundreds of dollars per transaction.

An obscure provision written into the omnibus SB 690 capital revenue bill, has now capped the vehicle sales tax trade-in credit at $10,000.  Under the new law, if the buyer of a new vehicle presents a used vehicle with a trade-in value of $15,000, the trade-in credit for sales tax purposes is capped at $10,000.  Instead of being able to subtract $15,000 from the size of the transaction for sales tax purposes, the dealer and the purchaser can now only subtract $10,000.

HB 3890 and HB 3891 would compel the State to value trade-ins at their true market value, and allow dealers and their customers to subtract all of the trade-in credit from the price of the car for purposes of sales tax calculation.