Revenue Administrative Bulletin 2020-20
USE TAX EXEMPTION ON TRANSFER OF A VEHICLE, ORV, MANUFACTURED HOUSING, AIRCRAFT, SNOWMOBILE, OR WATERCRAFT TO OR FROM A BUSINESS
Approved: December 3, 2020
Replaces Revenue Administrative Bulletin 1991-1
RAB-2020-20. This RAB explains the circumstances under which the transfer of a vehicle, off-road vehicle (ORV), manufactured housing, aircraft, snowmobile, or watercraft to or from a business can be exempt from use tax if made in connection with an organization, reorganization, dissolution, or partial liquidation of a business.
Section 3(1) of the Use Tax Act provides, in pertinent part:
(1) There is levied upon and there shall be collected from every person in this state a specific tax,…, for the privilege of using, storing, or consuming tangible personal property in this state at a total combined rate equal to 6% of the price of the property….
Further, section 3(2) of the Use Tax Act states, in pertinent part:
(2) The tax imposed by this section for the privilege of using, storing, or consuming a vehicle, ORV, manufactured housing, aircraft, snowmobile, or watercraft shall be collected before the transfer of the vehicle, ORV, manufactured housing, aircraft, snowmobile, or watercraft, except a transfer to a licensed dealer or retailer for purposes of resale that arises by reason of a transaction made by a person who does not transfer vehicles, ORVs, manufactured housing, aircraft, snowmobiles, or watercraft in the ordinary course of his or her business done in this state.
Finally, section 3(3)(c) of the Use Tax Act states, in pertinent part:
(3) The following transfers or purchases are not subject to use tax:
(c) If a vehicle, ORV, manufactured housing, 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.
MCL 205.93(3)(c) imposes three requirements that must be met to be eligible for the exemption:
1. The property must have already “been subjected to the Michigan sales or use tax.”
2. The property is “transferred in connection with the organization, reorganization, dissolution, or partial liquidation of an incorporated or unincorporated business.”
3. The "beneficial ownership [of the property] is not changed.”
Because taxpayers bear the burden of proving entitlement to any tax exemption under the Use Tax Act, taxpayers claiming the exemption under Section 3(3)(c) must maintain evidence establishing each of the requisite statutory elements. In this regard, satisfactory evidence conforms with the following:
- The property has already “been subjected to the Michigan sales or use tax.”
The first general requirement for the exemption is that the property “has once been subjected to the Michigan sales or use tax.” This means that Michigan sales or use tax must have been paid by the transferor on the purchase of the property, or that the property must have been exempt from Michigan sales and use tax when the transferor purchased it. Taxpayers must maintain evidence that sales or use tax has been paid, or that the previous purchase was exempt, to substantiate the exemption claim under Section 3(3)(c).
Property may sometimes be purchased and subjected to tax in a state other than Michigan. If that property is thereafter brought into Michigan and subject to the use tax, a partial or complete exemption may be available based upon the tax paid to that other state. For purposes of the exemption under Section 3(3)(c), if the transferor has previously claimed an exemption from Michigan tax for tax paid to another state, then the property will be regarded as having “once been subjected to” the Michigan sales or use tax. Consider the following example:
- Corporation A is a Michigan business that purchases a vehicle in Ohio and pays tax at the 5.75% sales tax rate levied in Ohio. It registers the vehicle in Michigan, claims the reciprocity exemption for tax paid to Ohio, and pays the remaining Michigan tax due (.25%). Corporation A later dissolves and, in connection with that dissolution, transfers the vehicle to Jane Doe, who is a Michigan resident and the sole owner of Corporation A. The vehicle has “once been subjected to” tax in Michigan because Corporation A claimed a reciprocity exemption at the time it registered the vehicle in Michigan. Because the transfer was also part of a dissolution and beneficial ownership did not change, the transfer to Jane Doe is exempt under Section 3(3)(c).
- The property is “transferred in connection with the organization, reorganization, dissolution, or partial liquidation of an incorporated or unincorporated business.”
The second statutory requirement for the exemption is that the property must be “transferred in connection with the organization, reorganization, dissolution, or partial liquidation of an incorporated or unincorporated business.” Due to the various forms and business types that exist, combined with the technical rules and factual possibilities regarding the organization, reorganization, dissolution, and partial liquidation of each type of business, this section cannot exhaustively cover the factual possibilities related to each form of incorporated or unincorporated business. Instead, this section provides general guidance and examples that taxpayers may apply to their own unique circumstances. Taxpayers seeking additional guidance may contact the Department using the contact information provided within this Bulletin.
As used in this context, the term “organization is generally understood to refer to “the act or process of organizing or of being organized.” Organized, in turn, is defined as “having a formal organization to coordinate and carry out activities.” As used in the statute, therefore, property is eligible for the exemption if it is transferred in connection with the act or the process of formally establishing a business.
Contributions of property in connection with the formal organization of a business, as evidenced by the articles of incorporation, articles of organization, operating agreement, partnership agreement, or other internal document accounting for each owner’s contributions to the business, will therefore qualify. If no formal business records identify any type of property to be contributed during formation, then the taxpayer may be required to produce evidence that the property was, in fact, transferred in connection with the organization of a business. Property transferred to a business within 6 months from the date of organization will be presumed to have been in connection with the organization of the business. The date of organization will be based upon publicly filed articles of incorporation and other similar documents for incorporated entities and based upon the operating agreement or other similar internal documentation for unincorporated entities.
As an example, property transfers done in connection with the organization of a business may include, but are not limited to, the following facts and circumstances:
- The contribution of property to a newly formed partnership solely in consideration for a partnership interest.
- The transfer of property to a corporation solely in consideration for the shares of its initial stock offering.
- The contribution of property to a newly formed limited liability company upon its organization solely in consideration for a membership interest.
- Any other transfer of property to a business formed within the preceding 6 months in which the only consideration received by the transferor is an ownership interest in that business.
Reorganization is generally defined as “the act or process of reorganizing: the state of being reorganized; especially: the financial reconstruction of a business concern.” In a business context, a reorganization typically involves the continuation of an existing business, notwithstanding major changes to its capital structure, assets, operations, personnel structure, or business plan, including a merger with another business. A “reorganization” of a business therefore includes, but is not limited to:
- The restructuring of a business pursuant to a bankruptcy filed under the Bankruptcy Code;
- Mergers or other acquisitions authorized by state law involving the transfer of property to or from the parent organization;
- Transfers of property made as a part of a reorganization of a business pursuant to Internal Revenue Code (IRC) 368; or
- Conversion from one form of business entity into another as authorized by law.
A mere change in the ownership of stock of a corporation does not constitute a reorganization of the business for purposes of the exemption. Taxpayers bear the burden of demonstrating that the transfer of property was made in connection with a business reorganization. Acceptable evidence may include formal documentation of the reorganization through corporate articles of incorporation or any documentation otherwise required to be filed by law.
For businesses, dissolution generally refers to the act or process of winding up the business affairs or the termination of all business operations. Dissolution can occur in many factual contexts and may occur pursuant to operation of law or pursuant to the terms of a partnership agreement, operating agreement, or other internally binding document. Moreover, depending on the particular corporate form used, a business may need to publicly declare the dissolution through formal dissolution documents filed with certain state or federal agencies.
As general examples, transfers in connection with the “dissolution” of a business may include, but are not otherwise limited to:
- Property that is transferred in the act or process of ending a partnership caused by the withdrawal of one of the partners from the partnership;
- Property that is transferred pursuant to the voluntary termination of a corporation or other business entity, as long as the property transfer is consistent with the terms of the operating agreement governing the termination of the business and the distribution of property in connection with that termination;
- Property that is transferred to or from the business that is to be dissolved in a merger or acquisition authorized by state law; or
- Property that is transferred as a part of a voluntary or involuntary liquidation of the business under the Bankruptcy Code.
Taxpayers must maintain evidence sufficiently demonstrating that the transfer was made in connection with the formal dissolution of the business.
D. Partial Liquidation
A “partial liquidation” refers to a business liquidation in which assets are distributed to certain owners while the business continues to operate, albeit in a restricted form. A “partial liquidation” can take various forms according to the type of business at issue, and the facts and circumstances of any distribution will govern the applicability of the exemption. Generally, distributions done in connection with a partial liquidation of a business are likely to include distributions of property that represent a return of capital to an owner. This may also include distributions of property specifically regarded as a liquidating distribution under the IRC. Bona fide sales of business assets, regardless of whether the consideration for that sale is in the form of cash or stock, are not treated as a partial liquidation of the business, and the same is true for any property distributions that represent the owner’s share of current or accumulated profits. In other words, facts that are likely to support a partial liquidation include a distribution of property that is regarded as a liquidating distribution under the IRC, a distribution of property that facilitates a reduction or termination of a shareholder’s ownership interest, or a distribution of property that represents a partial restriction of the business operations.
- The “beneficial ownership is not changed.”
The final statutory requirement is that “the beneficial ownership is not changed.” Whereas the term “beneficial ownership” is an undefined term, its common legal meaning refers to “one enjoying the benefit of property of which another is the legal owner.” A change in beneficial ownership occurs when any individual or entity receiving the benefits associated with the ownership of the property changes as a result of the transfer of the property.
The analysis regarding a change in beneficial ownership generally requires careful consideration of the users and beneficiaries of ownership of the property both prior to and after the transfer at issue. While this will generally be a factual inquiry, in some cases it can be presumed that the transfer does not result in a change in beneficial ownership, such as where the property is transferred between an owner and a business that is under that owner’s sole and exclusive control. This includes transfers involving sole proprietorships, single member LLCs, and wholly owned (100%) corporations. In other cases, taxpayers may need to maintain evidence establishing that the users and beneficiaries of the property are not changed as a result of the transfer.
For example, consider the following scenarios related to beneficial ownership:
- Individual A is a sole member of an LLC and uses a vehicle titled in the name of the LLC in its business operations. In connection with a dissolution of the LLC, the vehicle is transferred to Individual A. In that case, beneficial ownership will not change as a result of the transfer because Individual A retained the essential benefits of ownership of the vehicle both before and after the transfer.
- Parent Corporation A is the sole owner of all shares of stock in Corporation X and Corporation Y. In connection with a business reorganization, the fleet of vehicles owned by Corporation X are transferred to Corporation Y. Because both Corporation X and Corporation Y are owned by the same parent corporation, the beneficial ownership does not change in the transfer of the vehicles.
- Partnership AB transfers a vehicle as part of a liquidating distribution to Partner A who, after the transfer, uses that property exclusively for personal use. Prior to the transfer, the vehicle was generally used by both partners as part of the general operations of the partnership business. Even though Partner A retains beneficial ownership both prior to and after the transfer, beneficial ownership changes as because Partner B no longer receives any benefits related to ownership of the asset as partnership property.
For transactions that do not qualify for the exemption, tax must be computed in accordance with the relevant provisions of the Use Tax Act and Streamlined Sales and Use Tax Revenue Equalization Act (Equalization Act). Collectively, these Acts essentially require tax to be computed and paid on the greater of either the “purchase price” or the “retail dollar value” at the time of the transfer. RAB 2017-26 provides additional detail on the computation of tax due under these respective Acts. In computing tax under these Acts, a partial or apportioned exemption is not authorized for any transfer of property that does not qualify for the exemption under Section 3(3)(c) of the Use Tax Act.
If it is not clear at the time of the transfer that the conditions have been met to qualify the transaction as an exempt transfer, tax should be paid at that time. For vehicles, ORVs, manufactured housing not affixed to realty, snowmobiles, and watercraft, the tax should be paid to the Michigan Secretary of State. 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, then a refund may be requested by writing:
Michigan Department of Treasury
Tax Technical Services – Business Taxes
P.O. Box 48909
Lansing, Michigan 48909-8198
For any questions concerning the taxability of certain transfers, taxpayers should contact the Department of Treasury’s Tax Technical Services – Business Taxes at (517) 636-4357.
- In November 2019, John Doe forms and organizes a corporation of which he is the sole shareholder. In November 2019, 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.
- Assume the same facts of #1 but, instead, John originally decided to operate that business as a sole proprietorship. Because a sole proprietorship is not a discrete legal entity, John would retain ownership of the vehicle despite its subsequent use within the business. In other words, John could begin to use the vehicle for business purposes in November 2019 without having to transfer title. Because the vehicle would not be transferred in this case, there would be no taxable transfer of the vehicle and an exemption analysis is not necessary.
- XYZ Corporation was formed in 2007, with Ellen Taxpayer as the sole shareholder. In July 2018, Ellen’s friend, Sarah, transfers her ORV (on which she had paid Michigan tax) to the corporation in exchange for shares of stock in XYZ Corporation. This transfer would be taxable. Although Michigan tax had once been paid, there was a change in beneficial ownership and the transfer was a bona fide asset sale not done 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 as evidenced by Certificate of Dissolution filed by ABC Corporation on December 15, 2019. Based on the corporate bylaws, ABC Corporation was required to transfer all assets, including a watercraft (which was purchased in 2014 and on which Michigan tax was paid at that time), to Big Corporation on the date of dissolution. This transfer would be exempt. Michigan tax had previously been paid, the transfer was in connection with the dissolution of a corporation, and there was no change in beneficial ownership.
- Bill and Ted are friends in the process of organizing and starting a partnership in which they will each have a 50% interest. Bill owns an aircraft on which he paid Michigan tax when he acquired it. In accordance with the terms of the partnership agreement, Bill adds Ted’s name to the title for the aircraft. Like Bill, Ted will use the aircraft as a part of the partnership’s regular business operations. The transaction would be taxable because, by adding Ted’s name to the aircraft pursuant to the partnership agreement, the beneficial ownership of the property changes. By adding Ted’s name to the title, Bill transfers a 50% interest in the vehicle; therefore, the transfer is taxable at the six percent tax rate on fifty percent of the retail dollar value of the aircraft at the time of the transfer (See RAB 2017-26).
- Sam Weekend is the sole member of an LLC. The business owns a vehicle upon which Michigan tax was paid. The business was formed in 2017 and will continue in operation. In September 2019, the vehicle is transferred to Ellen Taxpayer. The transfer would not be exempt under MCL 205.93(3)(c) because beneficial ownership changes and it was not made in connection with the 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 transfer would be taxable on the full $10,000 sales price or the fair market value, whichever is greater, (See RAB 2017-26) because the transfer represents a bona fide asset sale rather than a transfer made in connection with the organization, reorganization, dissolution, or partial liquidation of the business.
- Assume the same facts as in #7, except Weekday Corporation transfers the vehicle to the shareholder as a return of capital. That is, the distribution of property is not a distribution of profits for the year. This is a property transfer made in connection with a partial liquidation and, therefore, exempt under MCL 205.93(3)(c).
- In connection with the formation of Weekend LLC, Jasmine transfers a vehicle worth $15,000 (upon which sales tax was previously paid) in exchange for a 25% ownership interest. The vehicle will generally be used in carrying out the activities of the business by each of the 3 other members of the business. While the transfer was made in connection with the organization of the business and sales tax was previously paid on the vehicle, the transfer is taxable because it results in a change in beneficial interest. The use and ownership of the vehicle by other members of the LLC results in a change in beneficial ownership in the vehicle.
 MCL 205.93(1).
 MCL 205.93(2)
 MCL 205.93(3)(c).
 For purposes of this RAB the term “property” means a vehicle, ORV, manufactured housing, aircraft, snowmobile, or watercraft.
 Andrie Inc v Treasury Dep’t, 496 Mich 161, 171 (2014) (“The burden of proving entitlement to an exemption rests on the party asserting the right to the exemption.”).
 For purposes of computing tax due under the Streamlines Sales and Use Tax Equalization Act (Equalization Act), MCL 205.171 et seq, transactions that are exempt under either the General Sales Tax Act or the Use Tax Act are exempt. MCL 205.179(2). See RAB 2017-26 for additional information on the computation of tax under the Equalization Act.
 MCL 205.93(3)(c).
 MCL 205.94(1)(e).
 Merriam-Webster, <https://www.merriam-webster.com/dictionary/organization> (accessed October 30, 2020).
 Merriam-Webster, <https://www.merriam-webster.com/dictionary/organized> (accessed October 30, 2020).
 Merriam-Webster, <https://www.merriam-webster.com/dictionary/reorganization> (Accessed October 30, 2020) (emphasis added).
 Cf. Black's Law Dictionary (11th ed.) (“A restructuring of a corporation, as by a merger or recapitalization, in order to improve its tax treatment under the Internal Revenue Code.”).
 See e.g., MCL 450.1745; MCL 450.1746; MCL 450.4707; and MCL 450.4708.
 LR 1979-11 (“A change in ownership of corporate stock is not considered a reorganization of the corporation.”).
 Corporations, limited liability companies, and limited partnerships must file Certificates of Merger. See e.g., MCL 450.1707(1); MCL 450.4703(1); and MCL 449.1210(4).
 See Merriam-Webster, <https://www.merriam-webster.com/dictionary/dissolution> (accessed October 30, 2020) (defining dissolution as “the act or process of dissolving: such as…the dissolving of an assembly or organization”). Also, see IRC 302(e) (treating as a partial liquidation any distribution not essentially equivalent to a dividend which occurs pursuant to a plan and which may be attributable to the corporation’s ceasing of conduct).
 See e.g., MCL 450.1801 and MCL 449.29.
 See e.g., MCL 450.1803(2) and MCL 450.4804(1).
 Black’s Law Dictionary (11th ed.) (defining “partial liquidation” as “a liquidation that does not completely dispose of a company’s assets; esp., a liquidation occurring when some corporate assets are distributed to shareholders (usu. on a pro rata basis) and the corporation continues to operate in a restricted form”)
 IRC 302.
 MCL 205.93(3)(c).
 Merriam-Webster, <https://www.merriam-webster.com/dictionary/owner> (accessed October 30, 2020); cf. Black's Law Dictionary (11th ed.) (defining a “beneficial owner” as “one recognized in equity as the owner of something because use and title belong to that person, even though legal title may belong to someone else.”).
 LR 86-14.
 MCL 205.92(f).
 MCL 205.179(1).
 Tax on manufactured housing that is affixed to realty is paid to the Department of Treasury.
 MCL 205.93(2).
 A sole proprietorship is a business conducted by a single owner without the formation of a separate legal entity. The lack of a separate legal entity is the defining feature of a sole proprietorship and distinguishes it from other single-owner/shareholder businesses that are operated through the creation of a legal entity (i.e., single-member LLC, S-Corp with one shareholder, etc.). For general information, the US Small Business Administration (SBA) has additional information on various business entity types at www.sba.gov.