Published: September 1, 2023

Sales and Use Tax on Lease Transactions in Michigan

Historic buildings in Downtown Detroit, Michigan on a bright, clear Fall day with a blue sky and fluffy clouds.

Sales and use tax on lease transactions guidance in Michigan has been updated from previous guidance issued under RAB 2020-16. In August 2023, the Michigan Department of Treasury (“the Department”) issued Revenue Administrative Bulletin (“RAB”) 2023-13, which outlined how sales and use tax applies to lease transactions, and who is liable, as well as sales and use tax treatment of tangible personal property (“TPP”) acquired for lease or rental.

Tangible Personal Property: Lease Transactions Overview

RAB 2023-13 states that sales (or use) tax is due based on the sales price (or purchase price) of TPP, which is not eligible for an exemption, at the time the lessor acquires the property.  Alternatively, the lessor can elect to pay sales and use tax on the rental receipts from the lessee, which means the original acquisition would not be subject to tax. This is called a lessor election.

Lessor Election

To make a lessor election, the lessor must satisfy the following requirements:

  • The lessor must be in the business of leasing, which requires a profit motive.
  • The transaction must involve the rental of TPP (as opposed to the provision of a service)
  • The lessor must register with the Department to pay sales and use tax on the lease transaction, unless the lessor holds a sales tax license. 

If the lessor makes the election, the TPP is exempt from sales and use tax when the property is acquired. The lessor will complete a Michigan sales and use tax exemption certificate, provide a copy to the vendor, and keep one for themselves. If the lessor does not make the election, the TPP will be taxed when acquired, but the rental receipts will be exempt from sales and use tax. The lessor election is made by registering for use tax with the Department directly or via the Streamlined Sales and Use Tax Agreement. A lessor with a sales tax license does not need to register separately for use tax.

Lessor or Lessee: Who has the liability?

What is interesting to note here is that by making this lessor election, the lessee cannot be assessed use tax on the rental of TPP. Generally speaking, many states will look to the buyer or seller to satisfy a sales or use tax liability. Often it comes down to which party the state finds first. Here, the Department has acquiesced, based on a 2012 Court of Appeals case, and agrees that it will not assess the lessee for any use tax due on TPP being leased if the lessor does not charge the use tax to the lessee on the rental stream. If the lessor places the tax burden on the lessee, the tax must be separately itemized on the invoice or receipt.

There are two exceptions to this election. First, suppose the lessee provides an executed exemption to the lessor, and the lessee is not eligible to claim the exemption. In that case, the lessee, rather than the lessor, is liable for the unpaid tax. Second, a lessee may be liable for tax if the lease is not executed in Michigan and the lessor relinquishes control of the TPP when leasing the property from another state or country. 

If your company is leasing or renting property in Michigan, keep this updated guidance in mind, particularly if your lessor isn’t charging you tax on the rental stream. You just might be in a position to never have to worry about it. 


Musashi Auto Parts of Michigan Inc. vs Department of Treasury, Michigan Court of Appeals, Docket No. 305268 (December 13, 2012).