Michigan: New Exemption for Trade-in Vehicles
- Sales Tax News
- Nov 8, 2013 | Gail Cole
Updated, 1.14.2014: Senate Bill 90, signed into law as Act 234 of 2013, creates a similar system for use tax on "the difference between trade-in and purchase price for motor vehicles and titled watercraft."
The governor calls the plan “good for Michigan residents” and “good for Michigan’s auto industry, an important part of Michigan’s economic engine.” He said it will “make Michigan’s tax structure fairer while fueling our continued comeback.” Michigan is currently “one of only six states that charges sales tax on the full price of a vehicle when buyers trade in their current models.”
Automobiles and RVs
The bills amend the General Sales Tax Act to reflect the following changes:
- Effective December 15, 2013, up to $2,000 of the agreed-upon value of a trade-in is exempt from sales tax when it's used as part payment of the purchase price of a new or used motor vehicle or new or used recreational vehicle, so long as that value is “separately stated on the invoice, bill of sale, or similar document given to the purchaser.”
- The exemption limit will increase by an additional $500 each year, beginning January 1, 2015. This will end if the “recently enacted Medicaid expansion legislation is repealed.”
- “Beginning in January 1 in the year in which the exemption exceeds $14,000, and each January 1 thereafter, there would be no limitation on the agreed-upon value used as part payment.”
The sales tax exemption also applies to sales of watercraft. There is no phase-in period for watercraft—the full exemption takes effect immediately. “Beginning November 15, 2013, credit for the agreed-upon value of a titled watercraft used as part payment of the purchase price of a new titled watercraft or used titled watercraft if the agreed-upon value is separately stated on the invoice, bill of sale, or similar document given to the purchaser.”
Sales tax revenue in FY 2013-14 is expected to drop by an estimated $24.6 million. This impacts the School Aid Fund. Beginning in FY 2014-15, the added exemption values are expected to remove an additional $6 million (approximately) from Wisconsin’s annual sales tax revenue. Once fully implemented, the exemption on motor vehicle trade-ins is expected to cost between $250 and $450 million, annually.
Tit for tat
The exemption impacts Michigan’s reciprocal agreements with a number of states, “whereby Michigan and the reciprocal state each collect and retain sales tax on vehicles purchased in their respective state, even in instances when the vehicle will be titled and registered in the other state.” Specifics are available in the summary of Senate Bill 89.
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