REVENUE ADMINISTRATIVE BULLETIN 2020-11

SALES TAX - SALES OF AUTOMOBILES BY LEASING COMPANIES AND OTHER SELLERS NOT LICENSED BY SECRETARY OF STATE

Approved:  August 7, 2020

Replaces Revenue Administrative Bulletin 1990-15         

 

Pursuant to MCL 205.6a, a taxpayer may rely on a Revenue Administrative Bulletin issued by the Department of Treasury after September 30, 2006, and shall not be penalized for that reliance until the bulletin is revoked in writing. However, reliance by the taxpayer is limited to issues addressed in the bulletin for tax periods up to the effective date of an amendment to the law upon which the bulletin is based or for tax periods up to the date of a final order of a court of competent jurisdiction for which all rights of appeal have been exhausted or have expired that overrules or modifies the law upon which the bulletin is based.

 

RAB-2020-11. This Revenue Administrative Bulletin establishes guidelines for the taxability of the retail sale of vehicles by leasing companies and persons other than a vehicle dealer licensed with the Secretary of State. 

Summary of Law

A person who sells automobiles in the ordinary course of business is subject to the sales tax licensing requirements of the General Sales Tax Act, MCL 205.51 et seq (“Act”).  Indeed, section 3(1) of the Act, MCL 205.53(1), provides, in pertinent part:

[I]f a person engages or continues in a business for which a privilege tax is imposed by this act, the person shall, under rules the department prescribes, apply for and obtain from the department a license to engage in and to conduct that business for the current tax year.[1]

Rule 1 of the General Sales and Use Tax Rules provides further clarification of this licensing requirement: 

A Michigan sales tax license shall be obtained by every person selling tangible personal property at retail.  A person shall not engage or continue in a business taxable under the sales tax law without securing a license, regardless of the amount of sales or the manner of obtaining goods for sale.[2] 

Licensing Requirement

Leasing companies are generally engaged in two separate and distinct businesses: (1) the leasing of automobiles; and (2) the selling of used automobiles.  A leasing company – and any other seller not licensed as an automobile dealer by the Secretary of State – is presumed to be in the business of making retail sales when selling or offering for sale 3 or more used vehicles in the previous 12 months. This includes, but is not limited to, a bank or financial institution, a business disposing of automobiles used as company cars, auctioneers selling from a fixed location as described in Rule 3 of the Specific Sales and Use Tax Rules,[3] a business selling a leased vehicle to an employee of the business, a lessor selling a leased vehicle to the vehicle's lessee or a third party, and a business selling vehicles rented on a daily basis.  Leasing companies and other non-licensed sellers of automobiles may therefore be required to obtain a sales tax license, file sales tax returns, and remit sales tax to the Department of Treasury when making sales of motor vehicles.  

A vehicle dealer licensed as such by the Secretary of State must remit sales tax to the Secretary of State branch office when submitting form RD-108 Application for Title and Registration, even when making sales of leased vehicles.

Determining the Tax Due on Vehicle Sales 

The liability for sales tax in Michigan falls upon the seller for the privilege of making retail sales in Michigan.[4]  While sellers are obligated to remit sales tax for any taxable sale of a motor vehicle, purchasers should nonetheless receive confirmation from the seller that sales tax was paid on the purchase price of that vehicle. The purchaser must present this confirmation to the Secretary of State at the time of registration in order to verify the retail sale of the vehicle and the collection of sales tax on that sale.  The information may be provided to the purchaser in any format by the seller.  

Generally, retail sales where delivery and subsequent use of the vehicle will occur outside of Michigan are not subject to tax. In cases where the retail sale of the vehicle occurs in Michigan, the amount of tax to be collected and remitted by the seller is determined in the following scenarios: 

  1. Retail sales of vehicles for registration in Michigan

Leasing companies or other sellers not licensed as dealers by the Secretary of State must remit sales tax on the gross proceeds (selling price) of any vehicle sold at retail and registered in Michigan.  Sellers not licensed as dealers by the Secretary of State are not eligible for any trade-in deduction in determining the sales price of that vehicle.[5] Any sales tax owed must be remitted by the seller on the appropriate tax return filed with the Department of Treasury.  

b.   Retail sales of vehicles for registration outside of Michigan  

Michigan sales tax is generally imposed on the sales price of any transaction in which a vehicle is sold at retail and registered in Michigan.  In some cases, vehicles sold at retail in Michigan may be eligible for a special 14 day in-transit permit that allows the purchaser to transport the vehicle to the purchaser’s home state for registration.[6] Where an in-transit permit is used to transport the vehicle to another state, Section 2a of the Act, MCL 205.52a, requires the Michigan sales tax otherwise imposed on that sale to be reduced by a formula based, in part, upon the amount of use tax that will ultimately be due upon registration in that other state.[7] Reciprocal agreements between states authorize a credit for sales tax previously paid to another state and, thus, provide a use tax credit for any sales tax collected in Michigan.  For purchasers who will use an in-transit permit to transport the vehicle to another state, the primary consideration under Section 2a is the existence of such a credit in the purchaser’s home state.  

i.     Retail sales where an in-transit permit is used to transport the vehicle to a state that does not provide a use tax credit for sales tax paid in Michigan (i.e, nonreciprocal state or exempt state)

States without reciprocity impose use tax on the vehicle even though sales tax may have been paid in Michigan and without any offsetting credit for sales tax paid in Michigan.  Under Section 2a, no Michigan sales tax is imposed on retail sales of vehicles that will be registered in nonreciprocal states and jurisdictions. Nonreciprocal states and jurisdictions include: 

Arkansas

Maryland

North Carolina

South Dakota

District of Columbia

Mississippi

Oklahoma

West Virginia

Georgia

Nebraska

South Carolina

 

 

Similarly, a use tax credit is not provided in states that will not impose use tax upon registration of the vehicle in that state.  Michigan sales tax is not collected on the retail sale of any vehicle that will be registered in a state that does not impose sales or use tax on vehicles registered in that state.[8]  These states include: 

Alaska

Montana

Oregon

Delaware

New Hampshire

New Mexico

 

For example, assume a vehicle is sold at retail by a Michigan lessor to a resident of Delaware.  Although the purchase was completed in Michigan, the purchaser intends to register the vehicle in Delaware and further intends to use an in-transit permit for that purpose.  Because Delaware does not impose use tax upon titling and registering the vehicle, no Michigan sales tax should be collected at the time of retail sale. 

ii.    Retail sales where an in-transit permit is used to transport the vehicle to a state that will provide a use tax credit for sales tax paid in Michigan (i.e., reciprocal states)

If a purchaser is registering the vehicle in any state other than those listed above, then a use tax credit will generally be available for the sales tax paid in Michigan.  In these cases, Michigan sales tax should be collected on the lesser of the amount of Michigan sales tax due on the retail sale or the amount of tax imposed by the purchaser’s home state. In computing the tax due in the other state, the sales price may be reduced by the trade-in deduction allowed under the respective laws of that state.[9] 

Facts. In 2019, a vehicle is sold at retail by a non-licensed dealer in Michigan for $15,000 to a nonresident who will use an in-transit permit for titling and registration in Indiana.  The value of a trade-in at the time of sale was $7,500; Indiana allows a 100% trade-in deduction.

 

Indiana Tax

 

Michigan Tax

Gross Proceeds

$15,000

 

$15,000

Less:
Trade-in Deduction


($7,500)

 


N/A*

Tax Base

$7,500

 

$15,000

Tax Rate

7.0%

 

6.0%

Tax Due

$525

 

$900

Solution. The seller should collect and remit $525 in tax at the time of sale in Michigan.  The purchaser will receive the same as a credit against the use tax due upon titling and registering the vehicle in Indiana. 

*Sellers not licensed as a dealer by the Secretary of State are not authorized to claim a trade-in deduction under MCL 205.51(d)(xii).

 

If the purchaser is taking the vehicle to Canada or another country (including U.S. territories), the Michigan 6% sales tax on the gross proceeds must be collected at the time of the retail sale.

Examples 

1.   Leasing companies who provide long-term leases to their customers sell the vehicles at the end of the lease period. The vehicle may be sold to the lessee or to a third party. The retail sale of vehicles by the leasing company is subject to 6% sales tax on the gross proceeds. 

2.   Many businesses provide short-term leases (per day or week, etc.) to their customers. These lessors may lease a vehicle for a day, la truck to be used for hauling large items, or a motorhome for use on vacations. Inventory vehicles are sold regularly and on a continuing basis. Retail sales of these vehicles are subject to 6% sales tax on the gross proceeds.

3.   Utility companies often have a fleet of vehicles for use by company employees. Sometimes a specific vehicle may be sold to a company official. Sales tax is due on the gross proceeds when these vehicles are sold at retail and removed from the fleet. This includes retail sales to company employees.

4.   Partnerships (or professional corporations) lease vehicles to the partners (or owners) or other employees. When these vehicles are sold at retail to partners, owners, employees, or others, 6% sales tax is due on the gross proceeds.

5.   Auctioneers selling vehicles and/or other property from their fixed location are deemed to be retailers, regardless of the frequency of the vehicle sales and whether they are licensed as vehicle dealers by the Secretary of State. Auctioneers who are not licensed by the Secretary of State must pay sales tax on retail sales of vehicles through returns filed with the Department. Auctioneers who are licensed by the Secretary of State are required to pay sales tax at Secretary of State branch offices by using form RD-108 Application for Title and Registration.

6.   A business only sells 2 vehicles at retail within the previous 12 months and has no other sales of tangible personal property.  That business is not presumed to be in the business of making retail sales of vehicles and is not required under the Act to obtain a license and collect and remit sales tax on those retail sales.  Purchasers will instead be required to pay use tax to the Secretary of State at the time of registration of the vehicles in Michigan.  See Mich Admin Code R 205.13(2); 205.54(2); 205.135(1).

7.   A person sells at retail 3 used vehicles within the previous 12 months but did not make those sales as part of a business operation.  Because those sales are not made in the context of a business, that person may submit evidence to rebut the presumption that a sales tax license is required, and that sales tax must be collected.  Purchasers will instead be required to pay use tax to the Secretary of State at the time of registration of the vehicles in Michigan.


[1] MCL 205.53(1).

[2] Mich Admin Code R 205.1(1).

[3] Mich Admin Code R 205.53.

[4] MCL 205.52(1); See also Andrie Inc v Dep’t of Treasury, 496 Mich 161, 169 (2014).

[5] See MCL 205.51(d)(xii) (allowing credit “for the agreed-upon value of a motor vehicle or recreational vehicle used as part payment of the purchase price of a new motor vehicle or used motor vehicle or recreational vehicle purchased from a dealer”) (emphasis added).

[6] See MCL 257.226(9)(b).

[7] MCL 205.52a. That section provides that for sales where an in-transit registration is obtained that: 

[T]he tax imposed under this act shall be reduced by the sum of the following amounts:

(a) The use tax imposed on the vehicle by the state to which the vehicle was removed and in which it is registered.

(b) The amount obtained, even if negative, by subtracting the sales tax that would have been imposed on the vehicle by the state to which the vehicle was removed and in which it is registered if the vehicle had been purchased in that state, from the tax otherwise due under this act.

[8] See id.

[9] MCL 205.51(d)(xii)(C)-(D).