Revenue Administrative Bulletin 1994-7

Approved: April 12, 1994

USE TAX TO BE APPLIED TO LEASES SPANNING THE
MAY 1, 1994 RATE INCREASE FROM 4% TO 6%

RAB-94-7. This bulletin explains the appropriate treatment of lease transactions where the term of the lease will span the May 1, 1994 use tax increase from 4% to 6%. The use tax rate as provided in this bulletin for varying situations will be applied unless the statutory exclusions contained in MCL 205.94e; MSA 7.555(4e) apply.

DISCUSSION

Michigan's use tax is levied on ". . . the privilege of using, storing or consuming tangible personal property in this state, . . ." MCL 205.93(1); MSA 7.555(3)(1), Section 2, provides the following definition:

"Use means the exercise of a right or power over tangible personal property incident to the ownership of that property including transfer of the property in a transaction where possession is given." [MCL 205.92(b); MSA 7.555(2)(b) Emphasis added.]

The Department will consider the point in time a completed lease transaction takes place as being the time at which tax will be imposed. The tax will be imposed at the rate then in effect.

A completed lease transaction will have three primary components for purposes of this bulletin. A completed lease transaction will be evidenced by: (1) a signed lease document, (2) payment of all lease amounts, and (3) delivery of the property.

Example 1.

A 24-month automobile lease is signed April 1, 1994 with payment of the first month's lease payment also April 1, 1994. The remaining 23 monthly lease payments are paid May 1, 1994 and after. The automobile is given to the lessee and the lease starts on April 1, 1994.

The first monthly lease payment is subject to 4% use tax, as that is the rate in effect when it is made. However, the remaining 23 monthly lease payments are subject to 6% use tax, as the three components of a completed lease transaction are not present with respect to these payments, and the rate effective May 1, 1994 is 6%.

Example 2.

A 24-month automobile lease is signed April 1, 1994 with payment of the entire amount of lease payments made in a lump sum on April 1, 1994. The automobile is given to the lessee and the lease starts on April 1, 1994.

The completed lease transaction takes place April 1, 1994 with respect to the entire lease, as all three components of a completed lease transaction are met. Therefore, the full lump sum payment made on April 1, 1994 is subject to 4% use tax.

Example 3.

A 24-month automobile lease is signed April 1, 1994 with payment of the entire amount of lease payments made in a lump sum on April 1, 1994. The automobile is given to the lessee and the lease starts on May 5, 1994.

The completed lease transaction takes place May 5, 1994, as that is the date that all three components of the completed lease transaction are met. Therefore, the vehicle was delivered and the lease began on May 5, 1994, and it is subject to 6% use tax.

Example 4.

A 24-month automobile lease is signed April 1, 1994 with payment of the first month's lease payment also on April 1, 1994. The remaining 23 monthly lease payments are paid May 1, 1994 and after. The automobile is given to the lessee and the lease starts on April 1, 1994. The lease contains a buyout option which is to be exercised, if desired, at the end of the 24-month lease.

The buyout option, if exercised, represents a separate and distinct sale transaction subject to sales tax. The sale at retail would take place after the sales tax rate changes from 4% to 6% (May 1, 1994), is not exempt under section 4e (see below), and would therefore be subject to 6% sales tax.

SECTION 4e

Public Act 326 of 1993 amended section 4e of the Use Tax Act. The amendment provides relief from the added 2% use tax rate for specific real property contracts and certain sales and lease agreements. The amendment specifically provided that the tax imposed at the additional rate of 2% also does not apply to bona fide sales or lease agreements made before March 15, 1994 if the agreement cannot be withdrawn or altered, or if it contains a fixed price not subject to change or modification of greater than 15%.

These specific statutory provisions would override any of the previously discussed interpretations. If a lease agreement is entered into prior to March 15, 1994, and it meets either of the other criteria, it would not be subject to the additional 2% tax rate. If it cannot be withdrawn or altered, it would not be subject to the additional 2% tax rate. If it contains a fixed price not subject to change or modification of greater than 15%, it would not be subject to the additional 2% tax rate. (See Revenue Administrative Bulletin 1994-3.)

Example 5.

A 24-month automobile lease is signed March 1, 1994. Payment of the first month's lease payment is made on March 1, 1994. The remaining monthly lease payments are paid on the first day of each of the following 23 months. The automobile is given to the lessee and the lease starts on March 1, 1994. The lease agreement cannot be withdrawn or altered.

All 24 monthly lease payments are subject to 4% use tax because the lease agreement cannot be withdrawn or altered. (Note that most lease agreements also contain a fixed price not subject to change or modification of greater than 15%.) The agreement meets the specific statutory exemption from the additional 2% use tax effective May 1, 1994.

Example 6.

A 24-month automobile lease is signed March 1, 1994 with payment of the first month's lease payment also on March 1, 1994. The remaining 23 monthly lease payments are paid April 1, 1994 and after. The automobile is given to the lessee and the lease starts on March 1, 1994. The lease contains a buyout option which is to be exercised, if desired, at the end of the 24-month lease. The buyout option price is a fixed price not subject to change or modification of greater than 15%.

The buyout option, if exercised, represents a separate and distinct sales transaction subject to sales tax. The sale at retail would take place after the sales tax rate changes from 4% to 6% on May 1, 1994. The buyout sale transaction would be subject to 4% sales tax because the sale (lease) agreement contains a fixed price not subject to change or modification of greater than 15%. The agreement meets the specific statutory exemption from the additional 2% sales tax effective May 1, 1994.

FOR ADDITIONAL INFORMATION

Questions can be addressed by calling (517)373-3190, or writing:

Sales, Use and Withholding Taxes Division
Michigan Department of Treasury
Treasury Building
Lansing, MI 48922

All pertinent facts must accompany any request for a ruling.