Revenue Administrative Bulletin 1988-39

Approved: June 10, 1988

SALES AND USE TAXES - LESSORS

(Replaces Position Paper SUW 84-006)

RAB-88-39. The Michigan Department of Treasury has established the following guidelines for the taxability of lessors as defined in the General Sales and Use Tax Acts and the General and Specific Sales and Use Tax Rules.

Lessors of tangible personal property have an option of remitting tax on their rental activity as a Lessor/Consumer or Lessor/Retailer. In order to operate as both, complete and accurate records must be kept documenting the leasing history of the tangible personal property. If proper records are maintained, a lessor/consumer purchasing for lease to an exempt organization may be treated as a lessor/retailer for that transaction. [Klochko Equipment Rental Co., Inc. v Michigan Department of Treasury, 3 MTT 242 (1984)].

Lessor/Consumer

1. Is subject to Michigan sales or use tax on all purchases of tangible personal property to be leased in Michigan as well as the purchase of tangible personal property used in the business. [Sales Tax Act, MCL 205.51(b); Use Tax Act, MCL 205.92(f)]

1. If purchased in Michigan, sales tax will be paid at the time of the purchase.

2. If purchased in another state or country, Michigan use tax will be due on the purchase of tangible personal property leased in Michigan.

2. Cannot use the exemption of the lessee when purchasing tangible personal property.

Note: In Michigan, the charter of aircraft or watercraft is a service. (Charter is defined as the rental of tangible personal property with crew or person that retains control of the property.) All purchases of tangible personal property by a charter service are taxable.

Lessor/Retailer

1. Must obtain a Use Tax Registration with the Michigan Department of Treasury.

1. Will be allowed to purchase tangible personal property for lease or rental, tax-exempt.

2. Will be allowed to purchase tangible personal property for repair or replacement parts in connection with property that is leased, tax exempt.

2. Is liable for use tax on the total rental receipts. This includes all charges, even though separately itemized by the lessor to the lessee for the leased property. [Sales Tax Act, (MCL 205.51(g); Use Tax Act, MCL 205.92(f)]:

Note: Examples of separate billings include:

• Insurance charges (except personal accident liability insurance)
• Property tax billing
• Maintenance and repair charges
• Delivery charges
• Interest charges
• Ad valorem tax, such as license plate fees that are based on value as opposed to license plate fees based on weight.

3. Is not liable for Use Tax when leasing to a qualified exempt lessee (agricultural producer, industrial processor, government agency, nonprofit entity, church, school, out-of-state lessee, * etc.).
   
   
4. When a lessee has the option to purchase service or maintenance from a third party, but purchases the service or maintenance from the lessor, the billing would not be included in the use tax base when a separate charge is made for the service. [RCA Service Co. Division, RCA Corp. v Michigan Department of Treasury, 135 Mich App 807; 355 NW2d 679 (1984)]
   
   If the service or maintenance contract is necessary or incidental to complete the performance of the lease, the separate charge is taxable (as stated in item 2 above).
   
   
5. "One-way" leasing companies will remit use tax in Michigan on tangible personal property when the lease originates in Michigan.
   
   
6. A manufacturer of tangible personal property who also leases the manufactured property must register and collect use tax on the rental receipts, since they have not "purchased" the tangible personal property that they lease.

Lease for Release (Third-Party Leasing)

When Michigan sales or use tax has been paid or collected by the lessor, the subsequent lease is tax exempt. [Kal-Aero, Inc. v Michigan Department of Treasury, 123 Mich App 46; 333 NW2d 171 (1983)]

Examples: Company A (lessor); Company B (lessor); Company C (lessee)

1. Company A, a lessor/consumer, pays tax on the purchases of tangible personal property. The subsequent lease to Company B then to Company C is exempt from tax.
   
   
2. Company A, a lessor/retailer, purchases exempt for lease. Company A provides the seller with a valid claim for exemption, including their Sales Tax License or Use Tax Registration Number. Company B, a lessor/consumer, pays tax on the purchases of tangible personal property. The subsequent lease to Company C is exempt from tax.
   
   
3. Company A, a lessor/retailer, purchases tax-exempt for lease. Company B is also lessor/retailer and purchases tax exempt for lease. Company B provides Company A with their Sales Tax License Number. Company B collects tax from Company A on a lease-back.

Lease Purchase Agreements

A 4% Michigan sales tax is due on the sale (buy-out) of tangible personal property that was purchased in connection with a lease agreement. [Sales Tax Act, MCL 205.51(d)] The rental and subsequent sale are two separate transactions for Sales and Use Tax purposes.

The entire consideration agreed to by the buyer and seller must be a part of the price, including interest or carrying charges for the rental period. [Sales Tax Act, MCL 205.51(g); Use Tax Act, MCL 205.92(f); The Earle Equipment Co. v State of Michigan, Department of Treasury, 136 Mich App 536; 358 NW2d 16 (1984)]

Financial Institutions

Retaining title for a leasing company is not a "true lease" of tangible personal property. A financial institution is not a lessee or liable for the tax.

However, the financial institution is liable for the tax when it retains title and receives payments from a lessor for the tangible personal property.