Revenue Administrative Bulletin 1988-39
June 10, 1988
SALES AND USE TAXES -
(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)].
- 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)]
- If purchased in Michigan, sales tax will be paid at
the time of the purchase.
- If purchased in another state or country, Michigan
use tax will be due on the purchase of tangible
personal property leased in Michigan.
- 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.
- Must obtain a Use Tax Registration with the Michigan
Department of Treasury.
- Will be allowed to purchase tangible personal
property for lease or rental, tax-exempt.
- Will be allowed to purchase tangible personal
property for repair or replacement parts in
connection with property that is leased, tax exempt.
- 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
- 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
- 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.).
- 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).
leasing companies will remit use tax in Michigan on
tangible personal property when the lease originates in
- 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)
- 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.
- 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.
- 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
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
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.