Internal Policy Directive 2003-1

September 30, 2003

Internal Policy Directive 2003-1
GENERAL SALES AND USE TAX ACTS:
INTERSTATE COMMERCE REQUIREMENT OF THE ROLLING STOCK EXEMPTION

LEGAL POLICY ISSUES

  1. When is an individual unit of rolling stock considered by the department to be used in interstate commerce?
  2. Is rolling stock that is used only in Michigan used in interstate commerce?
  3. Is rolling stock that is used to transport freight in Michigan used in interstate commerce if the freight continues on across the Michigan border in another truck or trailer?
  4. Does an individual unit of rolling stock have to be operated outside of the state at least 10% of the time to be considered used in interstate commerce?

LEGAL POLICY DETERMINATIONS

  1. To determine whether a particular unit of rolling stock is used in interstate commerce, the department must evaluate the facts, circumstances, and intent of the interstate motor carrier using the rolling stock.
     
  2. No. If rolling stock is only used in Michigan during the tax period at issue, it does not meet the interstate commerce exemption requirement. This interpretation is supported by a common understanding of the distinction between the terms interstate and intrastate. If the truck or trailer operates only in Michigan, it is not being used in interstate commerce.
     
  3. No. The fact that freight being transported in Michigan by a truck or trailer is ultimately transported across the Michigan border by another carrier or method of transport does not mean that the truck or trailer that transported the freight to the border is being used in interstate commerce. The rolling stock itself must be operated outside of the state (and be engaged in the business of carrying persons or property for hire across state lines) to be considered as used in interstate commerce. This interpretation is supported both by the common understanding of the distinction between the terms interstate and intrastate and by the requirement in the statutory definition of interstate motor carrier that the motor carrier travel outside of this state at least 10% of the time to be considered an interstate motor carrier. An interstate motor carrier is not defined as a motor carrier that ships a certain percentage of freight outside of the state, but one "whose fleet mileage was driven at least 10% outside of this state." Consequently, the rolling stock itself must be used outside of the state during the taxing period. Just how much out of state use is necessary is discussed below.
     
  4. No. The department has not historically had, nor does it currently have, a policy requiring that a particular unit of rolling stock be used outside of the state at least 10% of the time in order to qualify as use in interstate commerce. And while evidence that rolling stock has been used outside of Michigan 10% or more of the time is sufficient to meet the use in interstate commerce requirement, it is possible that less than 10% use outside of the state could also meet the requirement. However, an evaluation of all of the facts and circumstance will be necessary.

DISCUSSION

Overview

To be eligible for the rolling stock exemption in section 4r of the Sales Tax Act (MCL 205.54r) and section 4k of the Use Tax Act (MCL 205.94k), a taxpayer must comply with each of the following requirements:

  1. The taxpayer must be an interstate motor carrier, which is defined as "a person engaged in the business of carrying persons or property, other than themselves, their employees, or their own property, for hire across state lines, whose fleet mileage was driven at least 10% outside of this state in the immediately preceding tax year."
     
  2. The taxpayer must have purchased, stored, used, or consumed rolling stock, which is defined as "a qualified truck, a trailer designed to be drawn behind a qualified truck, and parts affixed to either a qualified truck or a trailer designed to be drawn behind a qualified truck."
     
  3. The rolling stock must be used in interstate commerce.

Because the terms interstate motor carrier and rolling stock are defined in the acts, it is generally clear when a taxpayer meets those requirements. However, because the term interstate commerce is not defined in the act, a question about the meaning of that term has been raised by a taxpayer. This Legal Policy Determination generally addresses the question of when rolling stock is used in interstate commerce.

Analysis

To determine whether an interstate motor carrier has used rolling stock in interstate commerce, the department must first determine whether the carrier intended to operate the rolling stock outside of the state while engaged in the business of "carrying persons or property . . . for hire across state lines." In evaluating intent, the department should consider all relevant facts and circumstances. Specifically, it may be helpful to consider the following questions:

  1. What is the interstate motor carrier's intended use of a particular unit of rolling stock? If facts and circumstances show an intent to use the rolling stock in Michigan only during the tax period, even if it was used outside the state in the past, the exemption may not apply. For example: An interstate motor carrier buys a qualified truck or trailer and uses it for several years in its long-haul interstate transportation business. The truck, trailer, and parts would be exempt during that time period. Later, the motor carrier expresses a new intent to use the truck or trailer as it nears the end of its useful life by assigning it to a Michigan terminal for use solely in short-haul intrastate transportation. This reassignment and the intent of the trucking company is recorded in their accounting records and it is also confirmed in discussions with our auditors. In this case, the intended new use of the truck or trailer solely in intrastate transportation would subject replacement parts used on the truck or trailer to tax. The exemption would not apply because the rolling stock was no longer used in interstate commerce.
     
  2. Has the interstate motor carrier used a particular unit of rolling stock outside of Michigan while carrying persons or property for hire across state lines on at least one occasion during the tax period at issue? Because a single trip outside of the state while engaged in the business of carrying persons or property for hire may suggest an intent to use the rolling stock in interstate commerce, a unit of rolling stock should be considered to be used in interstate commerce unless there is evidence showing a different intent. As a practical matter, if an interstate motor carrier uses a particular unit of rolling stock outside of the state even once, it would be unduly burdensome for the department to prove that the rolling stock does not meet the interstate commerce requirement. Consequently, if an interstate motor carrier provides evidence that a particular unit of rolling stock was used to carry persons or property for hire across state lines at least once during the tax period, the burden should shift to the department to show that the unit of rolling stock was not used in interstate commerce. For example, if there is evidence that a motor carrier is using a particular unit of rolling stock outside of the state once a year in order to claim the exemption, but there is also other evidence that conclusively shows an intent by the motor carrier to use the unit of rolling stock only in Michigan, the motor carrier should be denied an exemption for that truck or trailer and attached parts. Similarly, a motor carrier that uses a unit of rolling stock outside of the state for purposes other than engaging in the business of carrying persons or property for hire across state lines does not qualify as use in interstate commerce. For example, if an interstate motor carrier drives a unit of rolling stock into Indiana several times each year for repairs or fuel, that use does not qualify as use in interstate commerce.
     
  3. Is a truck or trailer that qualifies as rolling stock licensed for use in Michigan only or is it licensed for use in other states? Does the rolling stock have an International Fuel Tax Agreement (IFTA) decal? Evidence that a particular unit of rolling stock is not properly licensed or registered to operate or pay fuel tax in other states suggests that an interstate motor carrier may intend to use that truck or trailer in Michigan only.