Favorable Michigan Supreme Court Ruling on Demonstrator Vehicles

Favorable Michigan Supreme Court Ruling on Demonstrator Vehicles

Issue:
A recent Michigan Supreme Court ruling on May 25, 2007, restored the full exemption for automobile and truck dealerships’ demonstration vehicles. This overturns a previously held Michigan Court of Appeals decision to apply a reduced use tax rate on an automobile dealership’s demonstration vehicles in excess of the exempt 25 vehicles. The Supreme Court’s interpretation explains that the resale exemption includes all vehicles used as demonstrator vehicles while being held in inventory for resale without a reduced-rate exception, as previously interpreted by the Michigan Department of Treasury.

Companies (or Taxpayers) Potentially Affected:
All new and used automobile and truck dealerships would benefit from this ruling through recovery of taxes paid or finalization of pending protested assessments.

Background:
The Michigan General Sales and Use Tax Acts provide Michigan automobile dealers with an exemption for vehicles purchased for resale and demonstration purposes. Prior to March 27, 2002, the exemption contained no restrictions and was liberally applied.

An amendment to the demonstration exemption, enacted in March 2002, narrowed the application of the demonstration exemption to a formulary exemption, restricting the full exemption to the first 25 vehicles and applying a reduced 2.5 percent tax rate for demonstrator vehicles exceeding the 25 allowed.

In an unpublished decision, the Court of Appeals found that the purchase and use of preowned vehicles as demonstrator units that were ultimately sold were not limited to the 25-vehicle restriction defined in the demonstration exemption, because the intention of the purchase was for resale, regardless of the temporary demonstrator usage.

While the unpublished decision did not establish a legal precedent, the Department of Treasury continued to assess the use tax on demonstrator vehicles that were identified as exceeding the 25-vehicle limit.

The Court of Appeals in Betten Auto Center, Inc. et. al. v. Department of Treasury established a separation of the exemptions, affirming the Department of Treasury’s interpretation that the resale exemption did not apply to vehicles used as demonstrators.

The Supreme Court overturned the Court of Appeals in its recent decision, reasoning that the demonstration and resale exemptions are independent of each other. Each exemption provided relief from the use tax through statutory criteria that was clearly met through the transactions and, in fact, a dealership’s temporary usage of a vehicle for demonstration did not negate its resale exemption.

Taxpayers who either voluntarily paid the use tax on such vehicles or were assessed by the state of Michigan should consider filing amended returns or request that any pending assessments be reduced to reflect the exemption.

Contact:
If you have questions or comments about the Michigan Supreme Court ruling, contact Michael Hollowell at 574.236.8672 or mhollowell@crowechizek.com, or Malena Marshall at 614.365.2911 or mmarshall@crowechizek.com.

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Under U.S. Treasury rules issued in 2005, we must inform you that any advice in this communication to you was not intended or written to be used, and cannot be used, to avoid any government penalties that may be imposed on a taxpayer.