Revenue Administrative Bulletin 2022-17

“Tax on the Difference”—Excluding the Value of Certain Trade-Ins From the Total Amount of Consideration When Determining “Sales Price”

Approved: October 25, 2022

RAB 2022-17.¹ The General Sales Tax Act (GSTA) imposes tax on retail sales of tangible personal property at a rate of 6% of the “sales price” of the property.²  The complimentary Use Tax Act (UTA) imposes tax on the storage, use, or consumption of tangible personal property and certain enumerated services in Michigan at a rate of 6% of the “purchase price” of the property or taxable service.³  As a general rule the tax base, e.g., “sales price” or “purchase price” includes the total amount of consideration for which tangible personal property or services are sold, leased or rented, whether paid in the form of cash, credit, property or services.⁴  For many types of transactions, though, this general rule is only the starting point in determining the tax base.  The statute identifies specific inclusions (additions) into the tax base and exclusions (deductions) from the tax base.⁵  This RAB addresses one of these exclusions, the so-called “tax on the difference” exclusion for certain “trade-ins.”⁶

Beginning in 2013, the definitions of “sales price” and “purchase price” were amended to exclude certain amounts attributable to the agreed upon value of eligible motor vehicles, recreational vehicles, and titled watercraft used as partial payment for the purchase of similar property from a dealer⁷ if the agreed upon value of the trade-in is separately stated on the invoice, bill of sale, or similar document given to the purchaser.⁸

Over time questions have arisen about the operation of the “tax-on-the-difference” rules.  This RAB addresses those questions.

Issues

I. What vehicle qualifies as a “motor vehicle” or “recreational vehicle” for purposes of the exclusion?

II. What qualifies as a “watercraft” for purposes of the exclusion?

III. What type of property must be exchanged as partial payment to qualify for the exclusion?

IV. What amount may be excluded for the agreed upon value of traded-in motor vehicles, recreational vehicles, and titled watercraft?

V. Is more than one vehicle eligible for the exclusion in the same purchase transaction?

VI. Is the exclusion only applicable when the selling party is a dealership?

VII. Is a motor vehicle, recreational vehicle, or titled watercraft with negative equity eligible for the exclusion?

VIII.  Does the exclusion apply to leases or rentals?

Conclusions

I. What vehicle qualifies as a “motor vehicle” or “recreational vehicle” for purposes of the exclusion?

Any new⁹ or used vehicle that meets the Michigan Vehicle Code’s (MVC) definition of “motor vehicle” is eligible for the exclusion under the General Sales Tax and Use Tax Acts.  The MVC defines “motor vehicle,” with some exceptions, as “every vehicle that is self-propelled…”¹⁰  Aside from automobiles in general, this definition also includes snowmobiles and off-road vehicles (ORVs), but excludes electric bicycles, personal mobility enhancing equipment, commercial quadracycles, electric carriages, and electric skateboards. 

Any vehicle that meets the MVC’s definition of “recreational vehicle” qualifies for the exclusion.  The MVC defines “recreational vehicle” as:

a new or used vehicle that has its own motive power or is towed by a motor vehicle; is primarily designed to provide temporary living quarters for recreational, camping, travel, or seasonal use; complies with all applicable federal vehicle regulations; and does not require a special highway movement permit under section 719a to be operated or towed on a street or highway. The term includes, but is not limited to, a motor home, travel trailer, park model trailer that does not require a special highway movement permit under section 719a (MCL 257.719a), or pickup camper.  [Section reference inserted.]¹¹

II. What qualifies as a “watercraft” for purposes of the exclusion?

Neither MCL 205.51 nor MCL 205.92 defines the term “watercraft.” However, the exclusion only includes “titled watercraft,” not just any “watercraft.”  As a practical matter, any transaction involving a trade-in of watercraft titled with the Michigan Secretary of State triggers the exclusion, even if only voluntarily titled as opposed to compulsory titling.  Part 803 of the Natural Resources and Environmental Protection Act, 1994 PA 451, covers “Watercraft Transfer and Certificate of Title.”  MCL 324.80304 provides:

Subject to section 80320(4), and except as provided in section 80306, a person shall not sell or otherwise dispose of a watercraft without delivering to the purchaser or transferee of the watercraft a certificate of title with such assignment on the certificate of title as is necessary to show title in the purchaser.

MCL 324.80301(c) defines “watercraft” as:

a contrivance used or designed for navigation on water, including a vessel, boat, motor vessel, steam vessel, vessel operated by machinery either permanently or temporarily affixed, scow, tugboat, or any marine equipment that is capable of carrying passengers, except a ferry.

However, MCL 324.80302(1) excepts the following from Part 803’s requirements:

(a) A boat from a jurisdiction other than this state temporarily using the waters of this state.

(b) A boat whose owner is the United States, a state, or political subdivision thereof.

(c) A ship's lifeboat.

(d) Watercraft less than 20 feet in length that do not have permanently affixed engines unless the owner, lessee, or operator voluntarily wishes to become subject to this part.

(e) Watercraft documented by an agency of the United States government.

For most transactions, it will be clear from the titling whether the trade-in qualifies for the exclusion of MCL 205.51(1)(d)(xi).

III. Which type of property must be exchanged as partial payment to qualify for the exclusion?

Titled watercraft. The exclusion for titled watercraft12 only applies to a titled watercraft used as partial payment for a new or used titled watercraft sold by a watercraft dealer.  A motor vehicle or recreational vehicle used as partial payment for a titled watercraft, and vice versa, does not qualify for the exclusion.

Motor vehicles. The exclusion for motor vehicles applies to a new or used motor vehicle used as partial payment in exchange for a new or used motor vehicle or recreational vehicle sold by a dealer as that term is defined in the Michigan Vehicle Code.

Recreational vehicles. For transactions occurring before January 1, 2019, the exclusion for recreational vehicles applies to a recreational vehicle used as partial payment in exchange for a new or used motor vehicle or recreational vehicle sold by a dealer as that term is defined in the Michigan Vehicle Code.  For transactions occurring on or after January 1, 2019, the exclusion does not apply to a recreational vehicle used as partial payment in exchange for new or used motor vehicles; it only applies if a recreational vehicle is exchanged for another new or used recreational vehicle.

IV. What amount may be excluded for the agreed upon value of traded in motor vehicles, recreational vehicles, and titled watercraft?

Titled watercraft.  There is no limit to the agreed upon value that may be excluded for aa titled watercraft that is used as partial payment for the purchase of another titled watercraft.¹³

Motor vehicles and recreational vehicles before January 1, 2019.  The exclusion limit for the agreed upon value of a motor vehicle or recreational vehicle used as partial payment for a new or used motor vehicle or recreational vehicle for transactions occurring before January 1, 2019, is the lesser of the agreed upon value or:¹⁴

• For transactions occurring January 1, 2016, through December 31, 2016: $3,000
• For transactions occurring January 1, 2017, through December 31, 2017: $3,500
• For transactions occurring January 1, 2018, through December 31, 2018: $4,000

Motor vehicles on and after January 1, 2019. The exclusion limit for the agreed upon value of a motor vehicle used as partial payment for a new or used motor vehicle for transactions occurring on or after January 1, 2019, is the lesser of the agreed upon value or:

• For transactions occurring January 1, 2019, through December 31, 2019: $5,000
• For transactions occurring January 1, 2020, through December 31, 2020: $6,000
• For transactions occurring January 1, 2021, through December 31, 2021: $7,000
• For transactions occurring January 1, 2022, through December 31, 2022: $8,000
• For transactions occurring January 1, 2023, through December 31, 2023: $9,000
• For transactions occurring January 1, 2024, through December 31, 2024: $10,000
• For transactions occurring January 1, 2025, through December 31, 2025: $11,000
• For transactions occurring January 1, 2026, through December 31, 2026: $12,000
• For transactions occurring January 1, 2027, through December 31, 2027: $13,000
• For transactions occurring January 1, 2028, through December 31, 2028: $14,000
• For transactions occurring January 1, 2029, and later: No limit to the agreed upon value

Recreational vehicles on and after January 1, 2018.  Beginning January 1, 2018, there is no limit to the agreed upon value that may be deducted for the agreed upon value of a recreational vehicle that is used as partial payment for the purchase of another recreational vehicle.¹⁵

V. Is more than one motor vehicle eligible for the exclusion in the same purchase transaction?

No.  The language of the statute limits the exclusion to the value of a single trade-in.  Although it is arguable that each vehicle in a multiple-vehicle trade in is “a motor vehicle or recreational vehicle used as part payment of the purchase price,”¹⁶the language – a titled watercraft, a motor vehicle or recreational vehicle -- is drafted in the singular.

VI. Is the exclusion only applicable when the selling party is a dealership?

Yes. The exclusion for motor vehicles and recreational vehicles is only available if a “dealer,” as defined by MCL 257.11 of the Michigan Vehicle Code, is the seller.¹⁷ The exclusion for titled watercraft is only available if the seller is a watercraft dealer.

VII. Is a motor vehicle, recreational vehicle, or titled watercraft with negative equity eligible for the exclusion?

Yes. When a dealer accepts a trade-in vehicle or watercraft with negative equity, it may pay off the customer’s loan on the trade-in and then finance the difference between the loan amount it paid off and the amount of the trade-in, in addition to financing the new vehicle or watercraft. When a dealer accepts a trade-in motor vehicle or recreational vehicle with negative equity, the dealer may claim the exclusion up to the lesser of the agreed-upon value of the trade-in vehicle or, if applicable, the capped amount discussed above. When a dealer accepts a titled watercraft trade-in with negative equity, the dealer may claim the exclusion up to the agreed-upon value of the trade-in watercraft. The invoice, bill of sale, or other similar document must clearly state the amount representing the agreed-upon value of the trade-in vehicle or watercraft. The dealer may not claim the exclusion for any amounts that are not attributed to the value of the trade-in vehicle or watercraft. For example, if the agreed-upon value of a vehicle trade-in is $1,000, but the dealer also agrees to pay off a loan balance of $5,000, the dealer may only claim the exclusion for $1,000.   Likewise, if there is positive equity, the agreed-upon value of the trade-in is eligible for the exclusion.  For example, if the agreed-upon value of a vehicle trade-in is $1,000, but the dealer agrees to pay off a loan balance of $900, the dealer may claim the exclusion of $1,000 and is not limited to an exclusion of $100 for the positive equity in the vehicle.

VIII. Does the exclusion apply to leases or rentals?

No, the exclusion does not apply to leases or rentals.¹⁸