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December 23, 2015

COA says test vehicles with manufacturer’s license plates are “licensed for use on public highways” under former provision of Michigan’s Use Tax Act

The Michigan Court of Appeals held in Ford Motor Co v Department of Treasury, No. 322673, that test vehicles that are licensed and driven under manufacturer’s license plates are “licensed for use on public highways” and are thus not exempt from Michigan’s Use Tax Act (“UTA”) under former MCL 205.94(g)(i).
The Department of Treasury conducted a tax audit of Ford Motor Company and Ford Parts & Services Division’s (collectively, “Ford”) for July 1, 1993 through November 30, 2001.  Until 1999, the UTA provided a use tax exemption for property used in industrial processing, but stated that such property did not include vehicles “licensed for use on public highways.”  This exception to the exemption was amended in 1999 to exclude vehicles “bearing a manufacturer’s plate.”  Ford sent a letter to the Department asserting that its test vehicles, which displayed manufacturer’s plates while on the highway, were exempt from the use tax altogether and that it intended to file a refund for any taxes paid on those vehicles. The Department completed its audit and issued a final tax assessment of $10.7 million, which Ford paid under protest.  Ford sued, asserting that its test vehicles were exempt from the use tax.  Ford later amended its complaint to add a claim challenging the Department’s assessment of use tax on automotive parts independent Ford dealers sold to consumers under extended service plans. Ford argued that it was not liable to pay use tax on the automotive parts because it did not own, possess, use, store, or consume the parts.  In June 2009, Ford filed a complaint seeking a declaratory judgment in a separate action, alleging that in December 2008, the Department issued a second tax assessment for approximately $29 million in use taxes covering the same years at issue in the audit.
While 2009 action was pending, the court granted Ford’s motion for summary disposition with respect to the use tax on the automotive parts and ordering the Department to pay Ford’s attorney’s fees as the Department relied upon a frivolous defense.  Ford also filed a motion for summary disposition with respect to the Department’s assessment of use tax on its test vehicles. The court granted Ford’s motion, concluding that a manufacturer’s license plate was not a “license” because it could be used interchangeably among test vehicles.
The Court of Appeals held first that Ford’s test vehicles that were driven under manufacturer’s license plates were not exempt from use tax.  Specifically, the court noted that (1) Ford’s test vehicles were “licensed” because they were driven under manufacturer’s plates that authorized their use on public highway; (2) the fact that a manufacturer’s license plate is interchangeable has no effect on whether a vehicle displaying a plate becomes “licensed;” (3) the fact that Ford could not sell or lease the vehicles, or use them for purposes other than testing, did not mean that the vehicles were not licensed for use; and (4) the 1999 amendment could not be applied retroactively.  In addition, the court upheld the lower court’s award of attorney’s fees associated with the automotive parts, the 2009 action, and other related claims.

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