RICK SNYDER GOVERNOR Mr. James T. Brown

STATE OFMICHIGAN DEPARTMENT

OF TR A NSPORTAT

I ON LANSING December

8, 2015 Airport Compliance
and Management Analysis Federal Aviation Administration 800 Independence Avenue, SW Washington, D.C. 20591 Dear Mr. Brown:

KIRK T. STEUDLE DIRECTOR Subject: Action Plan for the Use of Certain State Sales and Use Tax Revenue from Aviation Fuel In accordance with the Final Policy Amendment issued by the Federal Aviation Administration (FAA) on November

7, 2014 (FAA Final Policy), the State of Michigan presents this "action plan" with regard
to the use of certain state sales and use tax proceeds from the sale and use of aviation fuel. The key component

of this action plan
is the implementation

of a tax

· revenue "offset" approach consistent with the FAA's July 17, 2015 guidance responding

to questions posed
to the FAA by the State of Michigan.
To establish this aspect of its action plan, legislation ha s been introduced and is actively moving through the legislative process

to redirect

a portion of state sales and use tax revenue from the State General Fund into designated funds within the State Aeronautics Code to be used solely for aviation purposes. This action plan also explains the history of Michigan's sales and use taxes, describes Michigan

' s privilege tax on aviation fuel, provides

a brief summary
of the cunent funding challenges
for the state's aviation program, and includes supporting documentation. Hi
s torical Background

on Michigan's Sales and Use Taxes Under the Michigan Constitution

of 1908, Michigan was authorized

to levy

a sales tax of up to 4 percent.

It was not until the enactment

of Public Act 167 of 1933, however, that Michigan levied its first sales tax on retail sales of tangible personal property. The initial sales tax levy was at a rate of 3 percent. Several years later, Michigan began levying

a use tax on the use, storage,
or con

s umption of tangible personal property

in the state by enacting Public Act 94 of 1937. The initial use tax levy was at a rate of 3 percent.
In 1954,

a constitutional amendment was adopted that reduced the maximum sales tax rate from

4 to 3 percent. The sales and use taxes continued

to be levied
at the 3 percent rate until

a 1960 constitutional amendment, effective January

1, 1961, permitted the imposition

of sales and use taxes at the rate of 4 percent. Under this constitutional authority, Michigan immediately began impo

s ing and collecting sales tax (Public Act

1 of 1960) and use tax (Public Act 219 of 1962) under the new

4 percent rate

. Consistent with these impositions, Michigan ratified
its current Constitution

in 1963, which (until 1994) authorized

a maximum sales tax rate of 4 percent. Michigan has been imposing and collecting sales and use taxes at the 4 percent rate ever since.

E f fective May
1, 1994, Michigan voters approved

a constitutional amendment (i.e., SJR
S of 1993 ratified

a s "Proposal A") that required the imposition

of both

a sales tax and use tax at the "additional rate of 2%" and LH

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• ( 5 1 7) 3 3 5-9 26 3Mr. James
T. Brown Page

2 December

8, 2015 established

a maximum combined sales tax rate of 6 percent. Effective May
1, 1994, Michigan began imposing both: (1) The sales and use taxes at the 4 percent rate in effect since the 1960s; and (2) The sales and use taxes at the additional

2 percent rate approved

in 1994 through the enactment

of Public Acts 325 and 326 of 1993.
It should be noted that the Michigan use tax has always been imposed

at the same rate as the sales tax and that all Michigan sales taxes are levied by the State of Michigan, and Michigan law does not permit the levying of local sales taxes. While originally adopted
as exclusively

a state tax, the
6 percent use tax was recently divided into the "state share tax" and the "local community stabilization share tax" by Public Act 80 of 20 14 (Public Act 80), which became effective October

1, 2015.

1 The key purpose
of Public Act 80 was to reimburse local units of government (through the local community stabilization share tax) for the amount
of estimated revenue lost due to previously enacted personal property tax exemptions. Dividing the 6 percent state use tax into

a state portion and
a local p011ion (levied by
a state-wide local authority) was necessary

to avoid having these reimbursement payments

go through the annual state appropriations process. Thus,

a new local use tax is levied by that authority beginning October

1, 2015, and the rate of that tax (which will fluctuate year-to-year

in order to generate

a certain specified amount of revenue for the local units of government) reduces the rate component

of the state share tax by an equivalent amount. Because the use tax base and
6 percent rate were not altered when the tax was split into these two components, consumers will not notice the change. They will continue

to pay a 6 percent rate on all transactions that were subject

to the single state use tax, but part of the proceeds will now be considered local tax receipts and not be subject
to state appropriation

. For more information,
see attached constitutional
and statutory provisions (both cul1'ent and historical) and Michigan Attorney General Opinion No 4694 (issued June 18, 1970). (Attachments
1-5) Constitutional
and Statutory Dedication

of Sales and Use Tax Revenue State sales and use tax revenue

in Michigan

is constitutionally

and statutorily emmarked

to several funds. Of the revenue generated
by the state sales tax levied
at the 4 percent rate, 36.3 percent

is earmarked

to revenue sharing for local governments
and 60 percent

is earmarked to the School Aid Fund (SAP). The remaining

3 . 7 percent of state sales tax revenue raised by the 4 percent rate is deposited into the State General Fund, except that 27.9 percent of one percent generated from automotive-related
sales
is deposited into the Comprehensive Transportation Fund

. Of the revenue generated
by the use tax levied
at the 4 percent rate that is state funds (i.e., the state share),

a p011ion

is required by statute
to be deposited into the SAF in an amount equal to the revenue loss from the State Education Tax and certain school operating millages attributable

to property tax exemptions
for certain commercial
and industrial personal property

as a result of the enactment

of Public Act 80 of 2014. The remainder

is deposited

in the State General Fund. One hundred percent of the sales and use tax revenue collected

at the additional 2 percent rate enacted

in 1994
is constitutionally dedicated

to the SAF. The revenue generated by the use tax that constitutes
the local community stabili

z ation share tax is not credited

to the state treasury, but is deposited

in the treasury of the state-wide local authority established under 1 Public Act 80 relates exclusiv

e ly to the use tax, so it has no impact on sales taxes levied on aviation fuel. Further, it
i s important

to note that any revenue from use taxes on aviation fuel (both from the state share and the local community stabilization share)

i s estimated

to be negligible, and we are not aware of any other local taxes being imposed and/or collected
on aviation fuel.Mr. James T. Brown Page

3 December

8, 2015 Public Act 80 to be used by that authority

to compensate individual local governments

for lost revenue resulting from tax exemptions

of personal propetty

. See Const. 1908, as amended, Article 10, §23; Const. 1963, Article

9, §§8 and 11; MCL 205.93, MCL 205.75; MCL 205.111. (Attachments 6-8) "Grandfathered"

and "Non-Grandfathered"
Sales and Use Taxes The federal airport revenue use requirements

[49 USC 47107(b) and 49 USC 47133],

as interpreted

by the FAA Final Policy, establish that the tax proceeds

a state receives from

a tax on aviation fuel not in effect on December
30, 1987, are not eligible for "grandfathered" status. To the extent that the tax proceeds the State of Michigan receives from its state sales and use taxes might be subject

to the federal airport revenue use requirements,

the State of Michigan believes that the state tax proceeds received from the sales and use taxes imposed

at the rate of 4 percent qualify for thi s "g randfathered

" status, because they were imposed (and revenue was collected under them) prior to December 31, 1987

. On the other hand, to the extent that the proceeds from such taxes may be subject

to the federal airpmt revenue use requirements,

the state's revenue received from the sales and use taxes imposed and collected
on aviation fuel at the additional rate of 2 percent will not qualify for "grandfathered" status, becau se th ese taxes were not imposed and collected until 1994. As noted above, howe ver, the revenue from the sales and
u se taxes imposed

at the additional rate of 2 percent enacted
in 1994 is constitutionally dedicated

to the SAF rather than for airport purposes. Importantly,

the State of Michigan does

n ot believe that the enactment

of Public Act 80 affects the grandfathered

sta tus of any portion of the u se tax. Prior to the enactme
nt of Public Act 80, the use tax rate that could be impos ed on aviation fue

l under Michigan

l aw was capped

at 6 percent. After the enactment

of Public Act 80, there

i s no change
in the maximum use tax rate that can be imp osed on aviation fuel; it is still capped
at 6 percent. Because the full
6 percent rate was levi ed prior to the enac tment of Public Act 80, taxpayers will not n o tice any difference in the effective tax

r ate.
2 As previously noted, the effect of Public Act 80 was to annually divide the 6 percent state use tax rate (beginning October

1, 20 15) into both

a "state share tax" and

a " loc al community

s tabilization share

t ax" each fiscal year while maintaining

the total

6 percent rate. The local community stabi lizati on share tax is
l evie
d by a lo ca l authority whose jurisdiction encompasses

the ent ire State of Michigan (individual municipalities cannot

l evy the tax)

, and that state-wide authority will levy the ta x at the same rate throughout
the entire state. To illu

s trate the computation
and methodology under Public Act 80 for the fiscal year 2015-2016, th e 6 percent use tax rate will be comprised

of both the local community stabilization share tax rate "ca lculated
by [Trea sury]

..
. sufficien

t to generate $96,100,000.00

in revenue"
for the statewide local authority

to use to compensate individu

a l local governments

for lo st revenue resulting from tax exemptions

of personal property and the state share tax rate, which will be equal to 6 percent minus
th e rate calculated
for the local community stabilization

s ha re tax

. 3 Th

i s action plan

is based on the characterizations explained above concerning

the "grandfathered

" sta tus of the various components ofthe sales and use taxes

. 2 See MCL 205.93(7) ("T he total combined rate ... sha ll not exceed the constitutional
limi

t of 6% under section 8 o f article IX of the sta
t e constitution

of 1963"). 3 See e.g., MCL 205.93(5) (a).Mr. James T. Brown Page

4 December

8, 2015 Legislative Proposal (Tax "Offset" and Revenue Dedication
for Aviation Programs) As indicated above, the State of Michigan

is actively pursuing legi

s l atio n to address the FAA Final Policy, and such legislation

is a key component

of this action plan. Due to the constitutional limitations
on redirecting any sales and use tax revenue collected from such taxes at th e additional

2 percent rate imposed since

1 994 and the fact that sales and use tax is repmied to the State of Michigan
by taxpayers
on an aggregate (versus commodity-by-commodity
basis), the legislative proposal implements what the FAA has characterized

in the document entitled "State of Michigan Aviation Fuel Tax Questions and Answers" posted by the FAA on July 17, 2015, as an "offset" approach. Specifically,
the State of Michigan will require retailers and others using aviation fuel that have

a sales and/o r u se tax liability

to file an "informational return" with the Michigan Depatiment

of Treasury
on a quarterly basis that will provide the data necessar

y to determine

h ow much sales a nd use tax revenue the State of Michigan has collected from the retail sale or taxable use of aviation fuel. Compliance with this filing requirement will follow established

p r act ices of tax collection and enforcement including, but not limited to, penaltie

s for failing or refusing

to file the informational retmn, audits, and discovery projects. With the data repmied
by taxpayers

in their informational returns

, the Michigan Department

of Treasury will determine
the amount that equals the sales and use tax collections derived from aviation fuel retail sales, purchases, and
u ses from the sales and use taxes imposed

at the additional

2 percent rate imposed since

1 994 and dedicate and redirect that amount every calendar quarter from the State General

F und (from unallocated sales and use tax revenue collected from such taxes imp osed

a t the 4 percent rate) to separate statutorily

- created funds that exclusively serve state aviation programs. Annual reconciliations
will be performed

by the Michigan Department

of Treasury

to ensure that the proper amount of tax revenue

is directed toward the aviation programs. Accordingly, under the legislati ve proposal, the state sa le s a nd use tax revenue redirected from the State General Fund
w ill be dedicated and redirected

to the state aviation program

in the following manner: • 35 percent
to the cunently established State Aeronautics Fund. • 65 percent
to a newly created fund named the "Qualified Airport Fund

. "

4 In general, the

f unds deposited every calendar quarter
in the "Qualified Airport Fund" will be disbursed

to the operator
of each "Qualified Airpoti"

to be used in the following order of priority:
(1) To pay the next scheduled payments
on revenue bonds issued by the operator
of the "Qualified Airport"

to finance cap ital improvements

to

l and ing areas of the "Qualified Airpol1,"

5 and (2) To defray costs of capital improvements

to landing areas of the "Qualified Airpoti."

A " Qualified Airpoti"

is defined

in the legislative proposal

as an airport loca

t ed in Michigan, other than

a military airpmi that has 10,000,000

or more enplanements

in any 12-month period. This a rran gement allows for ass

i stance
in proportion

to need and is justified from

a state policy 4 T h e new "Qualified Airport Fund"

is created under the proposed

l egis la t ion. 5 Under the proposed

le gislation, capital improvements

to "landing areas" inclu de, but are not limited to, runway

a nd t ax
i way design, construction,

r epair or rehabilitation

, lighting, drainage sys

t ems

, l and acqui

s iti on, airfield roadways, n oise mitigation
sys

t ems, deicing pads, and surve illan ce systems

a t the "Qualified Air por t."Mr.JamesT.BrownPage5December8,2015standpointbythefactthattheairportfromwhichasignificantmajorityofsalesandusetaxrevenuesonaviationfuelarederived(basedonestimatedgallonsofaviationfuelsoldi.e.,DetroitMetroAirpmi)willalsobethemajorrecipientoftheredirectedtaxproceeds.Moreover,thisarrangementsignificantlybenefitsotherairportsintheStateofMichiganbyallocating35percentoftheredirectedanddedicatedfundstotheStateAeronauticsFund,whichbenefitsallairportsintheStateofMichiganandstateaviationprogramsgenerally.Intheeventthatthereismorethanone"QualifiedAirport"inthestate,thenthedisbursementswillbemadetoeachinproportiontothenumberofgallonsoffuelsoldattherespectiveairports.Becausetheproceedsarederivedfromstatetaxesandfundthestate'saviationprogram,theStateofMichiganhasdiscretionastohowtoallocatethoseproceedsforaviationpurposes.6TheStateofMichiganhasdeterminedthatthe35/65percentallocationfairlybalancestheneedtoprovidelong-termfundingforthestate'saviationprogramsoverall,whileprovidingasignificantbenefittoDetroitMetroAirport(giventhatitisthepredominantsourcefromwhichthesalestaxesarederived,anditisalsobyfarthestate'slargestairpot1).7Itisestimatedthatthesalestaximposedonretailsalesofaviationfuelattheadditional2percentrateineffectsince1994,cunentlygeneratesbetween$12and$15millioninsalestaxrevenueannually.Usetaxrevenuederivedfromusesofaviationfueltaxedattheadditionalrateof2percentrateimposedsince1994,isestimatedtobenegligible.TheStateofMichiganbelievesthattheapproachdescribedabovesatisfiestherequirementintheFAAFinalPolicy"todevelopreportingrequirementsandtrackingsystemsfordiscreteinformationonaviationfueltaxrevenues."Furthermore,therewillbenoadministrativecostschargedforthecollectionandallocationoftheapplicableproceedsthatwillbededucted.Theimplementationperiodcontemplatedbythelegislativeproposalisasfollows:salesand.usetaxdatareceivedfromtaxpayersfrominformationalreturns(dueJuly2016)basedontheApril-June2016taxperiods,withthefirstquarterlydisbursementsintotheStateAviationFundand"QualifiedAirpotiFund"beginningOctober1,2016.Thisimplementationperiodreflectsthestate'scurrentinabilitytomeasureactualsalesandusetaxrevenuefromaviationfuelandthetimeframenecessaryto.develop,distribute,receive,andprocesstheinformationalreturnsauthorizedundertheproposedlegislation.Accordingly,aspermittedundertheFAAFinalPolicy,theStateofMichiganrequestsatransitionperiodofapproximatelyone(1)yearfromthedateofthisletterinordertoimplementthisactionplanandtheassociatedlegislation.8TheproposedlegislativeapproachwillrequireactionbytheMichiganLegislaturetoamendtheStateAeronauticsCode,MCL259.1etseq.,theGeneralSalesTaxAct,MCL205.51etseq.,andtheUseTaxAct,MCL205.91etseq.,andthatlegislativeactionisalreadyunderway.See6"ProceedsfromaStatetaxmayalsobeusedforaStateaviationprogram."79FR66287(Nov.7,2014).7Asnotedabove,theusetaxproceedsareexpectedtobenegligible,sotherelevantproceedsarethoseentirelyfromstatesalestaxes.Assuch,theStateofMichiganbelievesthattheparticularpercentagestobeallocatedbetweenthevariousfundsunderthelegislativeproposaldonotconflictwiththeFAAguidanceissuedonJuly9,2015,becausethesalestaximposedinMichiganisimposedexclusivelybytheStateofMichiganandnotbyanylocaljurisdiction.ThisdistinguishesthecircumstancesinMichiganwiththefactspresentedbytheStateofGeorgia(whichdealtwithtaxes"imposedbyalocaljurisdiction[e.g.,acountyormunicipality"])towhichthatguidancewasbased.8Theoneyeartransitionperiodisbasedontheassumptionthatthelegislativeproposalwillbeenactedwithintheupcomingweeksormonths.Iftheenactmentisdelayed,theStateofMichiganmayamendthisactionplantorequestadditionaltimeforitstransitionperiod;subjecttothelimitsprescribedintheFAAFinalPolicy.Mr. James T. Brown Page

6 December

8, 2015 attached bills which passed the Michigan Senate on December

3, 2015, as examples
of active legislation intended

to implement this action plan.

9 (Attachment

9) State of Michigan Aviation Fuel Privileg

e Tax In addition

to sales and use taxes, the State of Michigan also imposes

a privilege tax at the rate of 3 cents per gallon on aviation fuel sold or used in producing

or ge nerating power for propelling aircraft using the aeronautical facilities
on Michigan lands and waters

. 10 Airline operators who show proof (within

6 months
of purchase) that they are operating interstate
on scheduled operations
are entitled
to claim

a refund of
1 Yz cents per gallon.

11 Because this tax h as been impo se d at the same rate since at lea st 19 57, the State of Michigan believes that it should be considered "grandfathered" under the FAA Final Policy.

12 Notwithstanding

s uch grandfathered status, the framework establi shed by Michigan law ensures that 100 percent of the proceeds from this tax are credited

to the State Aeronautics Fund in furtherance

of the State of Michigan's aviation program. For example, the Michigan Constitution provides,

in relevant part, that "a ll specific taxes

..
. imposed directly
or indirectly
on fuels sold or used ... to propel aircraft
... shall, after the payment
of necessary collection expenses,

be used exclusively for transportation pwposes

as set forth
in thi s section .... 100 percent of the specific taxes ... imposed directly
or indirectly
on fuels sold or used to propel aircraft

..
. , after the payment
of necessary collection expenses

..
. shall be used exclusively for the transportation pwposes of comprehensive transportation pwposes

as defined by law.
13 More specifically and regarding the State Aeronautics Fund, the Michigan Aeronautics Code expressly declares that

" [ a] ll money received from aviation fuel taxes

..
. shall be paid int o the state treaswy and credited

to this fund."

14 Concerning funds credited

to the State Aeronautics Fund, the Michigan Aeronautics Code states that "a ll money
in and currently credited

to the state aeronautics fund ... [is to be u sed

] for carrying out the purposes and provisions

of this act, and to meet the expenses
of the department... However, funds appropriated under this section
or subsequently made available

s h a ll not be expe nded upon any aviation project that is not carried out under the superv

i sion and direction
of the department."

15 In addition, Michigan law: (i) prohibits

a person from purchasing fuel for re sa le that has been identified
on a shipping paper or invoice
as aviation fuel unless the person

i s regi stered with the Michigan Department

of Treasury;
(ii) establishes that fuel upon which the privilege tax has been imposed shall be identified
on the shipping paper or invoice
as aviation fuel and sold only for aviation purpos es; 9 Because the

l egisla

ti on must

s till be passed by the Michigan House of Representatives,

and may be am e nded furt h er, the State of Michigan will

s upp lement this action plan in the future once the final

l eg islation

is passed

a nd s igned into law by the Governor

. 1 0 MCL 259.203(
I). This
is a sta te (not loca l) tax. II fd. 12 See 1957 PA 123 attac hed hereto as Attachment

10

. Although this tax ha s been in place since the enactment
of 1945 PA 327, historical

t ext could not be retrieved

, so the

1 957 language was provided. Furthermore,

the amendments

to MCL 259.203
by 2000 PA 404 and 2008 PA 25 were either non-substantive

o r added subsect ion (2) relating
to the exemption
for leaded racing fuel. These public acts are attached her eto as Attachments

11 a nd 12. 13 Co n st.l963, art 9, §9. 14 MCL 259.34;

It
i s well-established under Michigan law th at the use of the term "shall"

in a statute or constitution generally indicates mandatory action. People

v. B e ll, 276 Mich App 342, 347 (2007). 15 MCL 259

. 35.Mr. James T. Brown Page

7 December

8, 2015 and (iii) requires that the seller of the fuel obtain

a statement from the purchaser that the fuel will only be sold or used as aviation fuel. 16 A knowing violation
of these requirements constitutes

a felony under Michigan law. 17 Based upon the legal framework described above, the State of Michigan believes

th at its u se of tax proceeds from the privilege tax imposed under Section 203 of the Michigan Aeronautics Code fully complies with the federal airport revenue use requirements under 49 USC

4 71 07b and 49 USC 47133 and is con

s istent with the FAA Final Policy. Noth

i ng in the legi

s lative proposal would affect the imposition
of, or dedication
of revenue from, this privilege tax on avia tion fuel. Michigan's Aviation Program (Scope and Current Revenue Challenges) Michigan

is a block grant state operating under agreement with the FAA to support

a system of 235 public use airpo11s,

as identified

in the Michigan Airport Sy ste m Plan, including

1 large hub, 17 commercial service airports (of which

9 are essenti

a l air service),

10 large general aviation airports, and over 200 smaller facilities. Given the scope of Michigan's aviation system, the State of Michigan, airp011s and
u se rs have worked cooperatively toward enhancing revenues over the past several years, but have been unable
to find support for
a long-term solution. For example, the Michigan Legislature enacted Public Act 226 of 2012 to address cettain critical needs of the aviation system. However, Act 226 contained

a $10 million cap and was only applicable
for the fiscal year ending September
30, 2013. The Michigan Legislature
has not enacted similar legi

s lation to fund state aviation programs following the sunset of Act 226. The proposed legislative approach

is not only

a means
to ensure compliance with the federal airport revenue use requirements,

but also

a long-term solution

to address the needs of existing aviation programs and to assist the state's largest airp011, Detroit Metro Airport. We believe that the action plan presented

in this letter
is consistent with the federal airport revenue use requirements (including
the FAA Final Policy) and will benefit

a ll of the airports

in the Michigan Airport System Plan. Please contact me at 517-335-9568, ifyou have questions

or need additional information

. Attachments 16 MCL 207

. I 094(1 )-(2). 17 MCL 207 .I 094(5).
Sincerely, Michael
G. Trout Executive Administrator Office of Aeronautics