On February 24, 2010, an Alabama Administrative Law Judge (“AL J”) held that a supplier of automobile parts that transferred title to equipment to its customer, and subsequently leased the equipment back for a nominal amount of money, was not subject to sales tax. Mercedes-Benz US Int’l, Inc. v. State of Alabama Dep’t of Revenue, No. S. 09-519 (Ala. A.L.J. Feb. 24, 2010).
Mercedes-Benz and its suppliers entered into agreements whereby the suppliers were required to purchase required tooling equipment, transfer title to the tooling to Mercedes-Benz, and lease the tooling back from Mercedes-Benz for $1.00. An addendum to the written agreement stated that title would pass to Mercedes-Benz when the tooling equipment vendor delivered the tooling to the supplier. At the hearing, it was acknowledged that the sole reason for transferring title from the supplier to Mercedes-Benz was to protect the tooling equipment from the supplier’s creditors in the event of the supplier’s bankruptcy or other financial difficulties. Despite holding legal title, Mercedes-Benz never possessed or used the tooling equipment; its suppliers did. Because it did not enter into a retail sale for the tooling equipment for Alabama sales tax purposes, Mercedes-Benz argued that it was not liable for the sales tax. Consequently, it argued that the suppliers were liable for Alabama use tax on the tooling equipment.
The suppliers had exclusive possession and use of the tooling equipment in Alabama. In addition, they were not in the business of selling tooling at retail. Therefore, the AL J concluded that the transactions between Mercedes-Benz and its suppliers did not involve taxable retail sales. This case represents an example of courts looking at the substance, rather than the form, of transactions for sales and use tax purposes. While form is still relevant (and important), courts more frequently are examining the form of the transaction to determine sales and use tax consequences.