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.


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.


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.


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).

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