Michigan Supreme Court: No Automatic Use Tax Exemption for Purchases from Michigan Sellers – Andrie v Treasury
The Michigan Supreme Court published Andrie, Inc. v Department of Treasury yesterday afternoon, a decision which affects any business client with significant purchases from Michigan sellers. The Court reversed the Court of Appeals on the issue whether a purchaser bears the burden of proving entitlement to the use tax exemption for purchases from a Michigan seller (see explanation below). The Tribunal and the Court of Claims were holding numerous use tax cases in abeyance pending the outcome of Andrie: If you have one of these cases, you need to look back at it now. If you don't have one of these cases, but you have business clients with significant purchases from Michigan sellers, you need to make sure they understand their responsibilities on audit.
If a Michigan seller has already collected and paid sales tax, it isn't appropriate for the purchaser to pay use tax. But what happens in a use tax audit? If a purchaser is going to take advantage of the use tax exemption for prior payment of sales tax, what does it have to establish? The sales tax prohibits Michigan sellers from advertising that there is no sales tax charged on a transaction. A seller can either state the tax separately or not, but it cannot advertise that there is no tax due. In April 2012, the Court of Appeals held that this provision gave purchasers an automatic exemption from the use tax on purchases from Michigan sellers, and that Treasury's only recourse was to demand payment of sales tax from the Michigan seller.
In reversing the Court of Appeals yesterday, the Supreme Court construed the language of the statute, which grants an exemption where the tax was "due and paid" on the retail sale. The Court held that the purchaser has to substantiate the payment of the tax to the seller, irrespective of the sales tax provision placing ultimate responsibility on sellers. Substantiation can come in the form of a receipt showing the tax as part of the price paid or in the form of an affidavit from the seller stating either that the transaction includes sales tax or that the seller paid sales tax to Treasury. In the Michigan Supreme Court's view, there is no double taxation, because the power remains in the purchaser's hands to prove prior payment of the tax and eligibility for the exemption.
Two years have passed since the Court of Appeals' published its decision. It may be time to review clients' substantiation to minimize their exposure. If a client has not been keeping proper substantiation due to the Court of Appeals' opinion, the earlier it learns of the Michigan Supreme Court's decision, the better chance it will have of obtaining substantiation from a seller.
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- Michigan Business Law Journal, Spring 2018
- Tax Advisory, May 16, 2018
- Tax Blog Post, April 6, 2018