New tax on car sales needs to be changed

On Jan. 1, a law signed by Gov. Pritzker in June 2019 went into effect that will allow only $10,000 of a motor vehicle's trade-in value to be applied toward the sales tax liability of a new vehicle. Previously, the whole value of a trade-in was applied to the new vehicle's purchase price. The resulting tax liability was the difference between the new vehicle's purchase price and the value of the trade-in. The original rationale for this credit was that the purchasers already paid state and local sales taxes on trade-ins when they originally purchased them.

Here's an extreme example of the effect of this new law. A person purchased a new car in Chicago for $35,000 with no trade-in and paid 10.25% sales tax on that purchase ($3,587.50). However, in two months. they decide that the car is not right for them; so, they return to the dealer to trade-in their car on a different model, also priced at $35,000. The dealer generously offers them $30,000 on their trade-in. In 2019, the buyer would have paid sales tax on the $5,000 difference between the new car price and the trade-in value ($512.50). However, in 2020, they will pay sales tax on the difference between the $35,000 sales price and the $10,000 trade-in cap ($2,562.50).

At the completion of these transactions, the buyer will have only one car. However, they would have paid total sales taxes of $6,150 ($3,587.50 plus $2,562.50), for an effective sales tax rate of 17.57%.

Two bills (HB3890 and 3891) to reverse this new law were introduced in September 2019. Neither bill has progressed beyond the Rules Committee. It will probably require a vehicle buyer with a trade-in valued over $10,000 to file a class-action law suit.

Randy Harris

Campton Hills