United States: Michigan Supreme Court Holds Use Tax Exemption Not Available To Purchaser That Failed To Prove Sales Tax Paid

The Michigan Supreme Court has held that a purchaser of tangible personal property was not entitled to an exemption from Michigan use tax for sales tax paid because it failed to prove that sales tax was both due and paid.1 In reversing the Michigan Court of Appeals, the Michigan Supreme Court explained that the burden of demonstrating entitlement to this exemption rested on the taxpayer seeking the exemption. Because the purchaser did not submit any evidence that sales tax was paid, the purchaser did not carry its burden and was not entitled to the use tax exemption.

Background

Andrie Inc., a Michigan corporation engaged in marine construction and transportation, purchased fuel and other supplies for its business. Some of these items were purchased from sellers in Michigan. During a use tax audit that covered November 1, 1999 through July 31, 2006, the Michigan Department of Treasury reviewed Andrie's purchases of tangible items. Where the auditor determined an item was subject to use tax, the auditor required that Andrie prove that sales tax was paid. If Andrie produced a receipt showing that it had paid sales tax to the retail seller, the Department applied a statutory use tax exemption for sales tax paid. However, if Andrie could not prove that sales tax had been paid by itself or the retail seller, the Department assessed use tax on the property. Under this approach, the Department imposed use tax on fuel and supply purchases that Andrie made in Michigan from Michigan-based retail sellers where the invoice did not list sales tax as a separate line item.

As a result of the audit, the Department determined that Andrie had understated its use tax by nearly $400,000. Andrie paid the assessments under protest and filed suit in the Michigan Court of Claims. In its complaint, Andrie argued that it could rely on a Michigan statutory requirement that sales tax be included in the price of the goods purchased regardless of whether the sales tax was separately stated.2 The Court of Claims held that Andrie was entitled to a partial refund of use tax for purchases that were subject to sales tax. According to the Court, Andrie did not have an obligation to prove that the retail sellers remitted sales tax because Andrie was entitled to a presumption that sales tax is included in the price of goods purchased. The Court of Appeals affirmed the decision and held that "the mere fact that a transaction is subject to sales tax necessarily means that the transaction is not subject to use tax."3 The Department appealed this decision to the Michigan Supreme Court.

Application of Sales and Use Tax

Michigan imposes a 6 percent use tax on the use, storage and consumption of all tangible personal property in the state.4 Also, Michigan imposes a 6 percent sales tax on the sale of all tangible personal property in the state.5 According to the Michigan Supreme Court, absent an exception, tangible personal property sold and used in Michigan is subject to both use and sales tax. The legal responsibility for use tax is imposed solely on the consumer,6 but the legal responsibility for sales tax is imposed on the retail seller.7 Michigan law allows the retail seller to pass the economic burden of the sales tax to the consumer and collect the tax at the point of sale.8

An exemption from use tax applies to "[p]roperty sold in [Michigan] on which transaction a tax is paid under the general sales tax act . . . if the tax was due and paid on the retail sale to a consumer."9 This statutory language was instrumental to the Michigan Supreme Court's decision.

Taxpayer Not Entitled to Use Tax Exemption

In determining that Andrie was not entitled to the use tax exemption, the Michigan Supreme Court explained that the exemption statute requires sales tax to be both due and paid before the use tax exemption applies. Accordingly, the Department properly assessed use tax on purchases within Michigan where Andrie failed to provide evidence that sales tax was actually paid at the time of sale.

Andrie unsuccessfully argued that use tax can never apply to property on which sales tax should be paid. The Court clarified that payment of the sales tax is mutually exclusive with payment of use tax, but the potential applicability of the taxes to a particular item of tangible personal property is not mutually exclusive. The conclusion that the terms of the use and sales tax statutes allow them to be applied to the same property does not violate the legislative effort to avoid double taxation. The taxpayer is the beneficiary of the use tax exemption and has the ability to ensure that it is not taxed twice. Thus, any double taxation that may occur would be a result of the taxpayer failing to obtain proof from the retailer that sales tax had been paid.

The Court rejected Andrie's argument that it was entitled to a presumption that sales tax is included in the price paid to a retailer when its receipts do not list sales tax as a separate item. This presumption would entitle a purchaser to the exemption whenever sales tax is merely due without meeting its burden of showing the tax was actually paid. The plain language of the use tax exemption statute precludes a presumption that sales tax is always paid. The burden of proving entitlement to an exemption is on the party seeking the exemption. Because Andrie submitted no proof that it paid sales tax to the seller, or that the seller remitted sales tax to the Department, Andrie was not entitled to the exemption.

In support of its argument that there is a presumption that sales tax is paid, Andrie relied on a statute providing that "[a] person engaged in the business of selling tangible personal property at retail shall not advertise or hold out to the public in any manner, directly or indirectly, that the [sales tax] is not considered as an element in the price to the consumer."10 Furthermore, this statute does not prohibit the retail seller from reimbursing itself by adding sales tax to the sales price.11 However, this statute does not require the Court to recognize a presumption that sales tax is paid because it is an advertising statute that does not extend beyond a restriction on the representations to the public made by retail sellers. Because there is no statutory directive that a retail seller include sales tax in the price it charges purchasers, the statute does not establish a presumption that sales tax is always included in the purchase price. Although a retail seller has a legal obligation to remit sales tax even if it does not affirmatively shift the tax burden to the purchaser, this does not mean that the tax was paid by the seller so that the use tax exemption applies.

Dissent Would Presume Sales Tax Was Paid

One justice issued a detailed dissenting opinion that would provide consumers with a presumption that retailers actually paid sales tax if it was evident that sales tax was due under the statute. According to the dissent, this presumption is supported by Michigan law only placing the burden of paying sales tax on retailers and not on consumers. Under this approach, the state could rebut this presumption by producing evidence that the tax was not paid or the consumer erroneously believed that the transaction was exempt from sales tax. After the presumption is rebutted, the consumer would have the burden of proving that sales tax was paid or to establish that the consumer was entitled to some other exemption.

Response to Dissent

The majority opinion contained a section specifically addressing the dissenting opinion. The majority explained that the dissent failed to follow the rule of statutory construction because it would ignore the language in the exemption statute requiring that sales tax be paid. The dissent would allow the use tax exemption whenever sales tax is merely due and would reverse the case law12 establishing that the burden to prove entitlement to a tax exemption is on the person claiming the exemption. The majority explained that the consumer does not need a presumption that sales tax was paid because it always should be able to prove its entitlement to the exemption. For example, the consumer could bargain at the point of sale for a receipt that shows the inclusion of sales tax in the purchase price. Alternatively, the consumer could request an affidavit from the retail seller stating that sales tax was included in the sales price or remitted to the Department.

Commentary

Purchasers of tangible personal property that seek the use tax exemption for sales tax paid must carefully consider this Michigan Supreme Court decision. Under the rulings of the Michigan Court of Claims and Michigan Court of Appeals, Andrie could receive the use tax exemption without actually proving that sales tax had been paid. In practice, this approach would have greatly limited the application of the use tax. The Department potentially would have owed substantial refunds to purchasers. Therefore, the Michigan Supreme Court's decision to reverse the lower courts was not unexpected. However, Andrie may decide to appeal this decision.

As a result of this decision, the Michigan Supreme Court is requiring purchasers to prove sales tax was paid in order to receive the use tax exemption. As explained by the Court, the purchaser should bargain for a receipt at the point of sale showing that sales tax was included in the purchase price. If the purchaser does not obtain this receipt, the Court indicates that the purchaser can request an affidavit from the seller proving that the sales tax was paid. However, the Court also notes that the affidavit would be provided at the "grace" of the retailer. In some instances, this may require purchasers of tangible personal property to alter their purchasing procedures. Similar to Andrie, purchasers that cannot prove that sales tax was paid will be denied this exemption from use tax. One can expect that the Department will focus on the need for taxpayers to affirmatively prove that sales tax was actually paid in future use tax audits. The impact of the decision also could be significant for similarly situated taxpayers from the perspective of measuring the sales and use tax reserve under ASC 450 for tax contingencies.

Footnotes

1 Andrie Inc. v. Department of Treasury, Michigan Supreme Court, Dkt. No. 145557, June 23, 2014.

2 MICH. COMP. LAWS § 205.73(1).

3 Andrie Inc. v. Department of Treasury, 819 N.W.2d 920 (Mich. Ct. App. 2012).

4 MICH. COMP. LAWS § 205.93(1).

5 MICH. COMP. LAWS § 205.52(1).

6 Terco, Inc. v. Department of Treasury, 339 N.W.2d 17 (Mich. 1983).

7 Ammex, Inc. v. Department of Treasury, 603 N.W.2d 308 (Mich. 1999).

8 Id. See also MICH. COMP. LAWS § 205.73(1).

9 MICH. COMP. LAWS § 205.94(1)(a) (emphasis added by Michigan Supreme Court).

10 MICH. COMP. LAWS § 205.73(1).

11 Id.

12 Elias Bros. Restaurants, Inc. v. Department of Treasury, 549 N.W.2d 837 (Mich. 1996).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions