Approved: January 8, 1991
USE TAX EXEMPTION ON
TRANSFER OF A VEHICLE, ORV, MOBILE HOME, AIRCRAFT, SNOWMOBILE, OR
WATERCRAFT TO OR FROM A BUSINESS
RAB-91-1. This bulletin explains the circumstances
under which the transfer of a vehicle, ORV, mobile home,
aircraft, snowmobile, or watercraft to or from a business can be
exempt from use tax.
Statute
Section 3 of the Use Tax Act, MCL 205.93; MSA 7.555(3),
states, in pertinent part:
(3) The following transfers or purchases are not subject
to use tax:
(c) When a vehicle, ORV, mobile home, aircraft,
snowmobile, or watercraft that has once been subjected to the
Michigan sales or use tax is transferred in connection with
the organization, reorganization, dissolution, or partial
liquidation of an incorporated or unincorporated business and
the beneficial ownership is not changed.
This statutory language imposes three requirements that must
be met in order to gain exemption from use tax on the transfer.
They are:
- "has once been subjected to the Michigan sales or
use tax"
- "transferred in connection with the organization,
reorganization, dissolution, or partial liquidation of an
incorporated or unincorporated business"
- "beneficial ownership is not changed".
If all three requirements are met, the transfer will be exempt
from use tax.
Discussion
The phrase "has once been subjected to the Michigan sales
or use tax" means that Michigan sales or use tax must have
been paid by the transferrer on the purchase of the property, or
that the property must have been exempt from Michigan sales and
use tax when the transferrer purchased it.
The phrase "transferred in connection with the
organization, reorganization, dissolution, or partial liquidation
of an incorporated or unincorporated business" means that
the transfer must take place as part of one of the following
activities:
1. Organization
Webster's New World Dictionary, Third College Edition,
(1988), p 594, defines organize as "to bring into being;
establish [to organize a corporation]."
U.S. Treasury Regulation 1.248-1(b)(1) defines the term
"organizational expenditures" as being "those
expenditures which are directly incident to the creation of the
corporation [business]."
2. Reorganization
Webster's New World Dictionary, Third College Edition,
(1988), p 1137, defines reorganization as "a thorough
reconstruction of a business corporation, comprising a
considerable change in capital structure, as effected after,
or in anticipation of, a failure and receivership."
Black's Law Dictionary, Fifth Edition, (1979), p
1167, defines reorganization as "A major change in the
capital structure of a corporation [business] that leads to
changes in the rights, interests, and implied ownership of
the various security owners."
3. Dissolution
Webster's New World Dictionary, Third College Edition,
(1988), p 397, defines dissolution as "the termination,
as of a business, association, or union."
Black's Law Dictionary, Fifth Edition, (1979), p
425, states that dissolution of a corporation "is the
termination of its existence as a body politic," and
that dissolution of a partnership "is the relation of
the partners caused by any partner ceasing to be associated
in the carrying on as distinguished from the winding up of
the business.
4. Partial Liquidation
Black's Law Dictionary, Fifth Edition, (1979), p
839, defines partial liquidation by stating "A partial
liquidation occurs when some of the corporation's assets are
distributed to its shareholders (usually on a prorata basis)
and the corporation continues doing business in a contracted
form. Distributions of cash or property beyond the amount of
earned surplus of a corporation is a partial
liquidation."
Note: These definitions are provided only for the purpose of
illustration. Although many of the definitions deal specifically
with corporations, the concepts apply equally to all types of
business entities, incorporated or not. Where the business is, in
fact, a corporation, the transfer will be exempt from tax if the
transaction occurs in connection with the type of change in the
corporate structure which would necessitate a filing, other than
an annual report, with the Corporation and Securities Bureau. See
Letter Ruling 79-11.
The Department of Treasury will follow the accounting concept
that the transfer must take place in exchange for stock or other
ownership interest in the business enterprise. A simple sale of
an asset to or from an owner for a consideration other than
ownership interests in the business enterprise would not
constitute an exempt transaction as defined in the above-noted
transfers (A through D).
The meaning of the phrase "beneficial ownership is not
changed" can also be found in Black's Law Dictionary,
Fifth Edition, (1979), p 142, where "beneficial
ownership" is defined as "One who does not have title
to property but has rights in the property which are the normal
incident of owning the property."
Procedures
If it is not clear that the conditions have been met to
qualify the transaction as an exempt transfer, tax should be paid
at the time of transfer. For vehicles, ORVs, snowmobiles, and
watercraft, the tax should be paid at a Michigan Secretary of
State office. For mobile homes the tax should be paid to the
Michigan Department of Commerce, Mobile Home Commission, or its
agent. For aircraft the tax should be paid directly to the
Michigan Department of Treasury.
If it is later determined that the transfer was, in fact,
exempt, a refund may be requested by writing:
Michigan Department of Treasury
Sales, Use and Withholding Taxes Division
Technical Unit
Lansing, Michigan 48922
Treasury will answer questions concerning the taxability of
these transfers. Please telephone (517)373-3190.
Examples
- In November 1990, John Doe forms and organizes a
corporation of which he is the sole shareholder. In
November 1990, John Doe transfers his vehicle (on which
he had paid Michigan sales tax) to the corporation in
exchange for shares of stock.
This transfer would be exempt. Michigan tax had once been
paid, the transfer was in connection with the
organization of a corporation, and there was no
beneficial change in ownership.
- XYZ Corporation was formed in 1977, with Ellen Taxpayer
as the sole shareholder. In July 1990, Ellen Taxpayer
transfers her ORV (on which she had paid Michigan tax) to
the corporation in exchange for shares of stock.
This transfer would be taxable. Michigan tax had once
been paid, and there was no beneficial change in
ownership. However, the transfer was not in connection
with the organization, reorganization, dissolution, or
partial liquidation of the corporation.
- ABC Corporation is a wholly owned subsidiary of Big
Corporation. ABC Corporation is dissolved in December
1990. ABC Corporation transfers a watercraft (which was
purchased in 1987 and on which Michigan tax was paid at
that time) to Big Corporation in December 1990.
This transfer would be exempt. Michigan tax had once been
paid, the transfer was in connection with the dissolution
of a corporation, and there was no change in beneficial
ownership.
- Ted One and Ted Two are in the process of organizing and
starting a partnership in which they will each have a
fifty percent interest. Ted One owns an aircraft on which
he had paid Michigan tax when he acquired it. Ted One
transfers the aircraft to the partnership as an
investment in the business. This transaction would be
exempt from tax. Title to the aircraft was transferred to
the partnership in connection with the organization of an
unincorporated business.
- Same facts as the preceding example except that Ted One
adds Ted Two's name to the title rather than transferring
the aircraft to the partnership. In this case, the rules
governing transfers among individuals would control the
taxability of the transfer. At the time Ted Two's name is
added, the transfer is taxable at the four percent tax
rate on fifty percent of the fair market value of the
aircraft. (See
Revenue Administrative Bulletin 1990-37.)
- Sam Weekend operates a business as a sole proprietorship.
The business owns a vehicle upon which Michigan tax was
paid. The business was formed in 1988 and will continue
in operation. In September 1990, the vehicle is
transferred to Samantha Weekend, Sam Weekend's daughter.
This transfer is exempt. A business operated as a sole
proprietorship is not a separate legal entity, therefore
the vehicle is owned by Sam Weekend as an individual.
Transfers by individuals to their children are
specifically exempt from tax.
- Same facts as in example 6, except that Sam Weekend is
the sole shareholder of a corporation. In this instance,
the transfer to Samantha Weekend is taxable because there
is no exempt relationship between the corporation and
Samantha, and because the transfer was not made in
connection with organization, reorganization dissolution,
or partial liquidation of the business.
- Weekday Corporation sells a vehicle for $10,000 to a
shareholder owning one hundred percent of the
corporation's stock. The corporation had paid Michigan
tax when the vehicle was originally acquired. This
vehicle is the only vehicle sold by Weekday Corporation
during the previous twelve months.
This transfer would be taxable on the full $10,000 sales
price or the fair market value, whichever is greater. (See
Revenue Administrative Bulletin 1990-4, Use Tax Base for
Vehicles, Aircraft, Watercraft, Mobile Homes, Off-Road
Vehicles, and Snowmobiles.) This transfer represents
nothing more than a sale. There was no change in
ownership interests of the corporation in exchange for
the vehicle. A determination concerning whether there was
a change in beneficial ownership is of no consequence in
analyzing this transaction.
- The same facts as the preceding example, except the
transfer is not a sale for $10,000 in cash and is not in
exchange for ownership interests in the corporation.
Rather, the transfer is made in lieu of wages.
This transfer would also be taxable on the full fair
market value of the vehicle. This type of transaction
represents payment of a wage in a medium other than cash.
- The same facts as those in example 8, except the sale
represents the sixth vehicle sold within the previous
twelve months.
Weekday Corporation would owe sales tax on the
transaction as described in Revenue
Administrative Bulletin 1990-15, Sales Tax Sales of
Automobiles by Leasing Companies and Others Not Licensed
by Secretary of State. Use tax would not be due,
because there is an exemption when Michigan sales tax has
been
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