Use Tax on Automobile Demonstrators Held for Resale — Michigan Supreme Court Rules on Betten Case
SALT Alert, June 2007


Background

The Use Tax Act provides an exemption for property purchased for resale, demonstration purposes, or lending or leasing to a public or parochial school for driver education. For dealers selling a new car or truck, the demonstration exemption is limited up to 25 units, with the number of exempt demonstration units based on the number of new cars and trucks sold during the current or preceding calendar year.

Effective March 27, 2002, the Michigan Legislature amended the Use Tax Act to provide a formula for determining the use tax base of new and previously owned vehicles held by a dealership for resale but not eligible for the exemption noted above.

In 2003, the Court of Appeals issued an unpublished decision that previously owned vehicles purchased for resale, used for demonstration purposes, and ultimately resold were not subject to a use tax,including units in excess of the allowed number of demonstration-exempt units, (Crown Motors of Charlevoix, Ltd. v. Department of Treasury,November 4, 2003, Docket No. 240555). The assessment at issue in this decision related toperiods before the 2002 amendment to the Use Tax Act. Since this opinion was unpublished, it was not legal precedent, and the Michigan Department of Treasury continued to assert that use tax was due on demonstrator vehicles that exceeded the statutorily allowed units, including both new and previously owned vehicles.

Michigan Supreme Court Ruling

On May 25, 2007, the Michigan Supreme Court in Betten Auto Center, Inc. et al. v.Department of Treasury, Docket Nos. 132343-132349, held that an automobile dealership’s purchases of vehicles that were held in inventory for resale, used by the dealership’s employees, and ultimately resold were exempt from the imposition of use tax under the resale exemption under M.C.L. 205.94(1)(c).The Court also vacated the remainder of the appellate court’s decision, which had held that any vehicles beyond the 25 allowable under the demonstration exemption that were used by the dealership’s employees after March 27, 2002 (the date the demonstration exemption was amended)would be subject to use tax based on the 2.5 percent of cost plus $30 per month calculation, not with-standing the resale exemption. Instead, the Supreme Court adopted the preceding trial court’s opinion, holding that no use tax was due. The Court reasoned that the “exemption for demonstration purposes” and the “purchased for resale” exemptions were independent of one another; and both provided exemptions from use tax upon satisfaction of applicable statutory criteria.

The state of Michigan has filed a motion for reconsideration of the Supreme Court ruling. It is unlikely that the Supreme Court will reconsider the outcome, but we should not ignore the possibility that they will, which could change the results.

What Does This Mean to You?

There is an opportunity to get significant refunds by amending past returns. Based on this holding, any use tax paid on demonstrators on past returns (still open under the four-year statute of limitations) is eligible for a refund. Also, anyone with a currently out-standing audit assessment that includes use tax on demonstrators should request that the amount be removed from their assessment.

We still don’t know the Michigan Department of Treasury’s position and whether they will take a narrow view of the opinion, thereby limiting potential refunds. However, you should not delay in amending returns to prevent the statute of limitations from expiring on earlier returns.

Likewise, if you currently have pending informal conference requests based on this issue, you should seek to have the final audit determination and corresponding informal conference cancelled.

Please contact us with questions or for more information on how this ruling impacts your dealership.



The information provided in this alert is only a general summary and is being distributed with the understanding that Plante & Moran, PLLC is not rendering legal, tax,accounting, or other professional advice or opinions on specific facts or matters and, accordingly, assumes no liability whatsoever in connection with its use.