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Michigan lawmakers push through sales tax break for trade-in vehicles

  • Jan 19, 2018 | Gail Cole

 The Michigan legislature has overridden the governor's veto, changing the sales tax exemption allowed for trade-in vehicles.

Michigan was once one of few states to tax the full purchase price of a new vehicle when a trade-in was involved in the transaction. In most other states, consumers pay sales tax only on the difference of the value of the trade-in and the new vehicle. Not so in the heart of the American auto industry.

That changed in 2013 when Michigan Governor Rick Snyder signed legislation exempting the value of a trade-in car, boat, or recreational vehicle (RV) from the taxable purchase price of its replacement. At the time, the governor said Michigan residents deserved a tax break.

The exemption is being phased in gradually. Under the original plan, it applied only to the first $2,000 of the value of a trade-in, and was to gradually increase by $500 per year starting in 2015. Any remaining limit on the trade-in exemption was set to expire in 2039.

Last year, the legislature voted to speed up phasing in the exemption. Senate Bills 94 and 95 increase the sales and use exemption to $5,000 starting Jan. 1, 2019, and then up it by an additional $1,000 per year until the exemption exceeds $14,000. At that point, “there shall be no limitation on the agreed-upon value of the motor vehicle used as part payment.”

Gov. Snyder called the sales tax break “not fiscally prudent” and vetoed the bills in July 2017. On Jan. 17, the legislature voted overwhelmingly to override the veto. According to Senate Minority Leader Jim Ananich, who co-sponsored SB 95, the veto override “sends a strong message that we can’t just continue to balance the state’s budget on the backs of regular folks.”

This is historic: It’s one of only four legislative vetoes in 67 years. Perhaps that’s fitting, given Michigan’s strong ties to the auto industry.

In response to the legislature’s action, Gov. Snyder said, “Changing the tax code without a plan to pay for it challenges the conservative fiscal responsibility of the past seven years.” The accelerated exemption could reduce sales and use tax revenue by up to $300 million over the next 10 years.

Changing sales and use tax exemptions complicates sales and use tax compliance for businesses. Tax automation software simplifies it. Learn how it works.

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.