Michigan has updated its guidance on the sales and use tax treatment of leases to address the lease of a school bus including an operator (bus driver) to a public school district.
The updated guidance applies to transactions where a private-sector contractor enters into an agreement with a public school district to provide transportation for students to/from school and school-authorized activities using buses that were purchased by the contractors exempt from sales tax and leased to school districts.
In Michigan, in general, if an operator is provided along with property and the operator is necessary for the equipment to perform as designed, then the transaction is a service and is not a “lease” of property.
Per the state’s updated guidance, a notable difference between the general definition of a “lease” and the definition of a “lease” applicable to the state’s exemption for the lease of a school bus is that a lease for the purpose of the school bus exemption does not include the exception for when leased property is supplied along with the operator of that property.
As a result, if a transaction includes the provision of a school bus along with a driver, the transaction will not be disqualified from being a “lease” for purposes of the school bus exemption. The transaction will be considered exempt from sales and use tax.
This guidance provides a good example of the nuances of lease transactions and how the taxability of a lease can be affected by different factors. (Revenue Administrative Bulletin 2023-13, Michigan Department of Treasury, August 15, 2023)