Use Tax on Automobile Demonstrators Held for Resale
Michigan Court of Appeals Issues Split Decision
SALT Tax Alert , August 4, 2006

On August 1, 2006, the Michigan Court of Appeals issued a published decision in the consolidated Betten use tax cases involving automobile demonstrators held for resale. The issue was whether new and previously owned vehicles purchased by dealerships for resale and used by dealership employees before the vehicles were resold were subject to use tax imposed under the Use Tax Act, MCL 205.91, or whether the vehicles fell within the resale exemption to use taxation under MCL 205.94(1)(c).

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In 2003, the Court of Appeals issued an unpublished decision that previously owned vehicles purchased for resale, used for demonstration purposes, and ultimately resold were not subject to a use tax, including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 to periods 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 Since this opinion was unpublished, it was not legal precedent and the Michigan Department of Treasury continued to assert that use tax was due on demonstrator vehicles that exceeded the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.

The Betten Decision

The Court of Appeals ruled that vehicles held for resale and ultimately resold qualify for the resale exemption. However, the Court also ruled, despite the resale exemption, that vehicles used before being resold for purposes other than the allowed demonstrator units or for public or parochial school driver education are subject to use tax beginning with the effective date of the Use Tax Act amendment in 2002. Unless overturned by the Michigan Supreme Court upon appeal by Betten or the Michigan Department of Treasury, the Court of Appeals published decision in Betten provides binding precedent.