Michigan Sales Tax Auditor Shake-Up in the Used Car Industry
Our law firm has seen it all in terms of state tax audits in the Midwest. In a recent audit, the State of Michigan began shaking down used car dealers in a similar pattern as the Illinois Department of Revenue and other state taxing authorities.
Audit Target: Used Car Sales
State auditors kicked the tires on used car sales and found Michigan could be missing out on millions of dollars in taxes by not looking harder at the value of the vehicles.
Car buyers must report the sales price when they register it with the Secretary of State. There’s a 6 percent tax on the price or the value of the vehicle, whichever is higher. Vehicle transfers between family members typically are exempt.
Findings from the Audit
State auditors last week said they studied a sample of April car deals between private parties and found many vehicles appeared to be undervalued.
“We estimated that the department could have collected additional use tax revenue ranging from $9.2 million to $36.5 million per year if it strengthened its procedures for verifying values,” the audit said.
Secretary of State’s Role
Secretary of State spokesman Fred Woodhams said it’s up to Michigan’s tax agency, the Treasury Department, to later determine if a sales price or value doesn’t appear reasonable.
“We don’t inspect the vehicle for damage or how the mechanical parts are operating,” Woodhams said. “It doesn’t make sense for staff at the counter to ascertain the value. We accept the sale price as reported.”
Treasury Department’s Response
Spokesman Terry Stanton said he’s barred by law from disclosing how often the Treasury Department challenges a used car deal. He said the department relies on the Secretary of State to flag a sale that looks fishy.
“We do not have staff whose sole responsibility is checking this documentation. … We are working with (the Secretary of State) to develop a process that would better ensure appropriate collection of use tax on such sales,” Stanton said.
Frequently Asked Questions
How does Michigan determine the sales tax on used car sales?
Michigan imposes a 6% use tax on the sales price or the fair market value of a used vehicle, whichever is higher. The reported sales price is typically accepted at face value unless it raises red flags during audits.
Why is Michigan auditing used car sales more aggressively now?
Michigan state auditors have identified potential revenue losses due to undervalued vehicle sales reported by private parties. In response, they are increasing scrutiny to ensure that appropriate use tax is collected on these transactions.
What role does the Secretary of State play in vehicle sales tax collection?
The Secretary of State processes the registration of used vehicles based on the sales price provided but does not verify the vehicle’s condition or value. It’s the Treasury Department’s responsibility to investigate questionable valuations later.
Can the Treasury Department challenge a used car sale price?
Yes, the Treasury Department can challenge a sales price if it appears unreasonably low. However, they currently do not have dedicated staff for this and are working with the Secretary of State to improve procedures.
Are vehicle transfers between family members exempt from Michigan sales tax?
Yes, transfers between family members are generally exempt from Michigan’s 6% use tax on vehicle sales. This exemption does not apply to sales between unrelated parties.
