Revenue Administrative Bulletin 1991-1

Approved: January 8, 1991

USE TAX EXEMPTION ON TRANSFER OF A VEHICLE, ORV, MOBILE HOME, AIRCRAFT, SNOWMOBILE, OR WATERCRAFT TO OR FROM A BUSINESS

RAB-91-1. This bulletin explains the circumstances under which the transfer of a vehicle, ORV, mobile home, aircraft, snowmobile, or watercraft to or from a business can be exempt from use tax.

Statute

Section 3 of the Use Tax Act, MCL 205.93; MSA 7.555(3), states, in pertinent part:

(3) The following transfers or purchases are not subject to use tax:

(c) When a vehicle, ORV, mobile home, aircraft, snowmobile, or watercraft that has once been subjected to the Michigan sales or use tax is transferred in connection with the organization, reorganization, dissolution, or partial liquidation of an incorporated or unincorporated business and the beneficial ownership is not changed.

This statutory language imposes three requirements that must be met in order to gain exemption from use tax on the transfer. They are:

1. "has once been subjected to the Michigan sales or use tax"
2. "transferred in connection with the organization, reorganization, dissolution, or partial liquidation of an incorporated or unincorporated business"
3. "beneficial ownership is not changed".

If all three requirements are met, the transfer will be exempt from use tax.

Discussion

The phrase "has once been subjected to the Michigan sales or use tax" means that Michigan sales or use tax must have been paid by the transferrer on the purchase of the property, or that the property must have been exempt from Michigan sales and use tax when the transferrer purchased it.

The phrase "transferred in connection with the organization, reorganization, dissolution, or partial liquidation of an incorporated or unincorporated business" means that the transfer must take place as part of one of the following activities:

1. Organization

Webster's New World Dictionary, Third College Edition, (1988), p 594, defines organize as "to bring into being; establish [to organize a corporation]."

U.S. Treasury Regulation 1.248-1(b)(1) defines the term "organizational expenditures" as being "those expenditures which are directly incident to the creation of the corporation [business]."

2. Reorganization

Webster's New World Dictionary, Third College Edition, (1988), p 1137, defines reorganization as "a thorough reconstruction of a business corporation, comprising a considerable change in capital structure, as effected after, or in anticipation of, a failure and receivership."

Black's Law Dictionary, Fifth Edition, (1979), p 1167, defines reorganization as "A major change in the capital structure of a corporation [business] that leads to changes in the rights, interests, and implied ownership of the various security owners."

3. Dissolution

Webster's New World Dictionary, Third College Edition, (1988), p 397, defines dissolution as "the termination, as of a business, association, or union."

Black's Law Dictionary, Fifth Edition, (1979), p 425, states that dissolution of a corporation "is the termination of its existence as a body politic," and that dissolution of a partnership "is the relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business.

4. Partial Liquidation

Black's Law Dictionary, Fifth Edition, (1979), p 839, defines partial liquidation by stating "A partial liquidation occurs when some of the corporation's assets are distributed to its shareholders (usually on a prorata basis) and the corporation continues doing business in a contracted form. Distributions of cash or property beyond the amount of earned surplus of a corporation is a partial liquidation."

Note: These definitions are provided only for the purpose of illustration. Although many of the definitions deal specifically with corporations, the concepts apply equally to all types of business entities, incorporated or not. Where the business is, in fact, a corporation, the transfer will be exempt from tax if the transaction occurs in connection with the type of change in the corporate structure which would necessitate a filing, other than an annual report, with the Corporation and Securities Bureau. See Letter Ruling 79-11.

The Department of Treasury will follow the accounting concept that the transfer must take place in exchange for stock or other ownership interest in the business enterprise. A simple sale of an asset to or from an owner for a consideration other than ownership interests in the business enterprise would not constitute an exempt transaction as defined in the above-noted transfers (A through D).

The meaning of the phrase "beneficial ownership is not changed" can also be found in Black's Law Dictionary, Fifth Edition, (1979), p 142, where "beneficial ownership" is defined as "One who does not have title to property but has rights in the property which are the normal incident of owning the property."

Procedures

If it is not clear that the conditions have been met to qualify the transaction as an exempt transfer, tax should be paid at the time of transfer. For vehicles, ORVs, snowmobiles, and watercraft, the tax should be paid at a Michigan Secretary of State office. For mobile homes the tax should be paid to the Michigan Department of Commerce, Mobile Home Commission, or its agent. For aircraft the tax should be paid directly to the Michigan Department of Treasury.

If it is later determined that the transfer was, in fact, exempt, a refund may be requested by writing:

Michigan Department of Treasury
Sales, Use and Withholding Taxes Division
Technical Unit
Lansing, Michigan 48922

Treasury will answer questions concerning the taxability of these transfers. Please telephone (517)373-3190.

Examples

1. In November 1990, John Doe forms and organizes a corporation of which he is the sole shareholder. In November 1990, John Doe transfers his vehicle (on which he had paid Michigan sales tax) to the corporation in exchange for shares of stock.
   
   This transfer would be exempt. Michigan tax had once been paid, the transfer was in connection with the organization of a corporation, and there was no beneficial change in ownership.
   
   
2. XYZ Corporation was formed in 1977, with Ellen Taxpayer as the sole shareholder. In July 1990, Ellen Taxpayer transfers her ORV (on which she had paid Michigan tax) to the corporation in exchange for shares of stock.
   
   This transfer would be taxable. Michigan tax had once been paid, and there was no beneficial change in ownership. However, the transfer was not in connection with the organization, reorganization, dissolution, or partial liquidation of the corporation.
   
   
3. ABC Corporation is a wholly owned subsidiary of Big Corporation. ABC Corporation is dissolved in December 1990. ABC Corporation transfers a watercraft (which was purchased in 1987 and on which Michigan tax was paid at that time) to Big Corporation in December 1990.
   
   This transfer would be exempt. Michigan tax had once been paid, the transfer was in connection with the dissolution of a corporation, and there was no change in beneficial ownership.
   
   
4. Ted One and Ted Two are in the process of organizing and starting a partnership in which they will each have a fifty percent interest. Ted One owns an aircraft on which he had paid Michigan tax when he acquired it. Ted One transfers the aircraft to the partnership as an investment in the business. This transaction would be exempt from tax. Title to the aircraft was transferred to the partnership in connection with the organization of an unincorporated business.
   
   
5. Same facts as the preceding example except that Ted One adds Ted Two's name to the title rather than transferring the aircraft to the partnership. In this case, the rules governing transfers among individuals would control the taxability of the transfer. At the time Ted Two's name is added, the transfer is taxable at the four percent tax rate on fifty percent of the fair market value of the aircraft. (See Revenue Administrative Bulletin 1990-37.)
   
   
6. Sam Weekend operates a business as a sole proprietorship. The business owns a vehicle upon which Michigan tax was paid. The business was formed in 1988 and will continue in operation. In September 1990, the vehicle is transferred to Samantha Weekend, Sam Weekend's daughter.
   
   This transfer is exempt. A business operated as a sole proprietorship is not a separate legal entity, therefore the vehicle is owned by Sam Weekend as an individual. Transfers by individuals to their children are specifically exempt from tax.
   
   
7. Same facts as in example 6, except that Sam Weekend is the sole shareholder of a corporation. In this instance, the transfer to Samantha Weekend is taxable because there is no exempt relationship between the corporation and Samantha, and because the transfer was not made in connection with organization, reorganization dissolution, or partial liquidation of the business.
   
   
8. Weekday Corporation sells a vehicle for $10,000 to a shareholder owning one hundred percent of the corporation's stock. The corporation had paid Michigan tax when the vehicle was originally acquired. This vehicle is the only vehicle sold by Weekday Corporation during the previous twelve months.
   
   This transfer would be taxable on the full $10,000 sales price or the fair market value, whichever is greater. (See Revenue Administrative Bulletin 1990-4, Use Tax Base for Vehicles, Aircraft, Watercraft, Mobile Homes, Off-Road Vehicles, and Snowmobiles.) This transfer represents nothing more than a sale. There was no change in ownership interests of the corporation in exchange for the vehicle. A determination concerning whether there was a change in beneficial ownership is of no consequence in analyzing this transaction.
   
   
9. The same facts as the preceding example, except the transfer is not a sale for $10,000 in cash and is not in exchange for ownership interests in the corporation. Rather, the transfer is made in lieu of wages.
   
   This transfer would also be taxable on the full fair market value of the vehicle. This type of transaction represents payment of a wage in a medium other than cash.
   
   
10. The same facts as those in example 8, except the sale represents the sixth vehicle sold within the previous twelve months.
    
    Weekday Corporation would owe sales tax on the transaction as described in Revenue Administrative Bulletin 1990-15, Sales Tax Sales of Automobiles by Leasing Companies and Others Not Licensed by Secretary of State. Use tax would not be due, because there is an exemption when Michigan sales tax has been